Reprint● How U.S. Farmer Cooperatives Recruit and Maintain

Qualified Board of Directors

● Also: Seeking the Best: Skills Needed for Effective Co-op Directors

Nominating, Electing and Compensating Co-op Directors

F o r e w o r dSuccess in business for today’s cooperatives is becoming increasingly complex, and it often hinges on the

quality of people governing the business. An immutable skill in this regard is people making accurate judg-ments about other people. It’s a very basic, but critically important, skill that no organization or business cantake for granted.

The need for being a good judge of people comes into play in numerous ways: deciding who serves on theboard; the board’s choice of management; the manager’s ability to hire good employees or to find the rightbusiness partners and major customers.

USDA conducted a survey in 2003 that focused on the ability of cooperative members and directors tomake "people judgments," including selecting, electing and compensating directors. A series of three articlesaddressed the procedural aspects of trying to have the best possible people to serve on cooperative boards.

The survey did not address the important issue of actually forming judgments about potential board candi-dates—specifically, what are the leadership traits that make excellent directors? When Rural Cooperativespublished the first article of the series, it included a companion piece by USDA Rural Development staff mem-ber James Wadsworth on that topic, which is also included in this reprint.

We hope the four articles included in this reprint help cooperatives secure the best individuals they can toserve on their boards.

—Bruce Reynoldse-mail: bruce.reynolds@usda.gov

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basisof race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital orfamily status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternativemeans for communication of program information (braille, large print, audiotape, etc.) should contact USDA’sTARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building,14th and Independence Avenue, SW, Washington, D.C. 20250-9410 or call (202) 720-5964 (voice or TDD). USDA isan equal opportunity provider and employer.

Cooperative Information Report 63Reprint December 2004

Rural Cooperatives / November/December 2003 1

By Bruce J. Reynolds,EconomistUSDA/RBS Cooperative Servicesbruce.reynolds@usda.gov

Editor’s note: This article is the first in aseries (to be continued in future months) onselecting and compensating directors.

rocedures for selectingcandidates for boards ofdirectors are seldom acentral topic of “bestpractices” seminars for

either cooperatives or investor-ownedfirms. But the recent wave of corporatescandals has moved this topic to centerstage, at least when it comes to invest-ing in corporations. Business journalsand other media are abuzz with recom-mendations for more democratic meth-ods of director selection.

Cooperatives are governed bydemocratic procedures, whichstrengthen trust and accountability.For cooperatives, it is important toidentify candidates with solid businessand planning skills and with good lead-ership traits. The current debate makesit an opportune time to review some ofthe alternative procedures agriculturalcooperatives use for selecting directors.

No single selectionprocedure fits all

There is no single “best practice”for finding excellent board candidates.Each cooperative must explore whatworks best for its members. Clearly,large membership cooperatives oftenneed a different procedure for candi-date selection than those with relativelyfew members. Candidate selection and

nomination are two parts of theprocess of getting qualified candidateson an election ballot. Selection is aprocess of deciding who should benominated, while nomination is the actof putting a candidate on the ballot.

Standard procedures for candidateselection and nomination often have tobe adapted to local conditions. Bylawsusually authorize more than one proce-dure for nominating candidates, butthey do not indicate which nominationmethods are used most frequently.

A survey was recently distributed tolearn more about how cooperativesselect and nominate candidates fortheir boards. It listed some of the com-mon procedures and provided blankspace for “other” methods to bedescribed. Several cooperativesdescribed additional procedures or sentcopies of policy statements related tothese matters. Responses were receivedfrom 433 cooperatives. A summary of

these alternatives and their potentialstrengths and weaknesses may offerideas to consider when reviewing yourco-op’s nomination practices.

Nominating committeeThe survey showed that a nominat-

ing committee is by far the most widelyused vehicle for selecting candidates.This method was used by 374 coopera-tives, or 86 percent of the respondents,but most also use other procedures. Anominating committee is responsiblefor finding the best available candidatesfrom a cooperative’s membership and isoften involved in other preparationsfor an election. For example, nominat-ing committees must prepare the ballot, which includes their nomina-tions and all others nominated by validmethods.

The strength of a nominating committee depends on the extent ofdeliberation and study that go into its

P

Co-ops fo l low more than one pathfor nominat ing board cand idates

Whether overseeing the business affairs of a local farm supply cooperative (above) or amulti-state regional, success means having a good board of directors. That requires a well-planned nominating process. Photo by Sandi White, courtesy Tennessee Farmers Cooperative

choices. Both directors and other mem-bers can share valuable insight about themembership when serving on a nomi-nating committee. Out of 376 coopera-tives re p o rting on nominating commit-tee composition, 163 (43 percent) useonly non-director members on the com-mittee. Another 131 (35 percent) use amix of directors and non-directors, while82 (22 percent) have only directors onthe nominating committee.

A director-only nominating com-mittee can operate without conflicts ofinterest when there are board vacanciesor when elections are staggered so thatthere are always some directors whoare not running. However, a potentialweakness of the board’s involvement isthat nominating committees may notbe formed when elections involveincumbent directors.

About two-thirds of the cooperativesreported that they do not have a policyrequiring that elections be contested,thus often allowing incumbents to rununopposed. Although many coopera-tives reported difficulty finding mem-bers willing to challenge popularincumbents, nominating committeesperform better if they are activelysearching and recruiting candidates forall elections.

Directors, as well as managers, haveexperience in knowing what capabili-ties are most needed on their board.Managers often work in an advisorycapacity with the nominating commit-tees. Directors have an appreciation forcertain attributes candidates wouldbring to the board. For those coopera-tives which disallow directors on thenominating committee, informationsharing between board and committeecan contribute to better candidateselections.

Determining who serves on thenominating committee is often anotherway for directors to exercise influence.Most non-directors are appointed tothe committee by directors.

Advantages of director influence oncandidate selection may become aweakness if applied without checks andbalances. Selecting for positive traits,such as a team player, may unintention-

ally screen out “devil’s advocate”-typedirectors—those who contribute byquestioning the status quo and whomay offer valuable new ideas. Anotherpossible weakness of director controlover candidate selection might occur ifmembers feel they have no real influ-ence on the process of who can beelected to the board.

These kinds of weaknesses haveinspired a manager of one rural electriccooperative to recommend “good rid-dance” to the nominating committee.1

Yet, there are ways to capture potentialstrengths and minimize perceivedweaknesses of nominating committees.For example, to address concerns bymembers of too much director controlover candidate selection, nominatingcommittees can be elected rather thanappointed. At least 20 cooperativesreported holding elections during theirannual meeting to select the nominat-ing committee.

Several cooperatives issue a formalrequest for volunteers for the commit-tee, and a couple reported using a random selection procedure to solicitnon-director volunteers to serve. Thepurpose of these efforts is to find waysto get more members involved in theprocess of candidate selection.

Nominations from the floorNominating committees didn’t

become the most widely used proce-

dure for selecting candidates until thelatter part of the 20th century. A simi-lar survey was last conducted by Coop-erative Services in 1949.2 At that time,only 19 percent of 962 respondentcooperatives used nominating commit-tees, while nominations-from-the-floorduring annual or district meetings wereused by 64 percent of co-ops (whichhas now fallen to 36 percent).

The strength of floor nominations isin having increased member access tothe candidate selection process. Itsimpact is likely to be greatest in coop-eratives that report having no nominat-ing committees, or which only occa-sionally use them, as was the case for39 cooperatives.

Weaknesses of nominations-from-the-floor mirror the strengths of nomi-nating committees. There is potentialfor too much spontaneity or lack ofstudy and deliberation about potentialcandidates. But in those cases wheremembers at annual or district meetingshave substantial familiarity with oneanother, nominations from the floorare unlikely to result in neglect of thebest candidates.

The shift over time from nomina-tions-from-the-floor to nominatingcommittees as the most commonlyused procedure may reflect the increas-ing complexity of business faced bycooperative boards. More cooperativeshave responded to this complexity by

2 November/December 2003 / Rural Cooperatives

• Nominating committee– Composed of different combinations of non-director members and

directors– Board appointments of non-director members of committee– At-large or district elections of non-director members of committee

• Nominations from the floor of annual or district meetings• Recruitment by directors• Member caucus at annual or district meetings• Nominations by mail• Ballot write-ins• Nomination by application• Associate board

Methods for selecting and recruitingcandidates for directors

reducing their use of spontaneous pro-cedures for selecting candidates.

Recruitment by directorsCandidate recruitment by directors

is widely reported. Although 157 coop-eratives reported such recruitment,some of it overlaps with the work ofnominating committees that includedirectors. However, recruitment bydirectors is a distinctive procedure forcandidate selection when nominatingcommittees are not used by a co-op, orwhen they are exclusively composed ofnon-directors. These conditions applyto 45 cooperatives in the survey.

Member caucusMember caucuses (usually held dur-

ing annual or district meetings) canengage much broader participation inthe nomination process than do nomi-nating committees. In contrast tonominations-from-the-floor, moretime is allotted for group delibera-tion. Although not listed as anoption in the survey, three coop-eratives reported using caucuses.

Usually, cooperatives do nothave both member caucuses andnominating committees. Whilemost cooperatives use the latterprocedure, it should be noted thatcaucuses are used by some relativelylarge membership cooperatives, so thata fairly substantial number of farmersparticipate in this method of candidateselection.

Nominations by mailA cooperative’s entire membership

can function as a virtual nominatingcommittee by soliciting nominationsby mail, or via a newsletter. Themechanics of this pro c e d u re vary, but,as an example, one cooperative mails aresponse card to each member tomake a nomination. All nominees list-ed on the re t u rned response cards areput on the ballot. Ballots are thenmailed to members. In the event of atie, a ru n - o ff election is held. Thep ro c e d u re is applied in each of thec o o p e r a t i v e ’s 22 districts.

The strengths of nominations by

mail are not only in having all mem-bers involved, but also in the opportu-nity for individuals to make nomina-tions without the pressures for groupconsensus that prevail in meetings. Apotential weakness for this procedure isthat it misses the benefits of group dis-cussion about potential nominees. Butfamiliarity with potential nomineesthat often exists in membership dis-tricts enables a nomination-by-mailprocedure to work well. Anotherpotential weakness is plurality voting,where a candidate might lose whenrunning against two or more con-tenders but would win in a one-on-oneelection against those same candidates.

Ballot write-insProvision is often made for writing-

in candidates on ballots when membersare dissatisfied with the official list of

nominees. Ballot write-ins can beregarded as more of a membershipright than a candidate selection proce-dure. It recognizes the right to vote forwho you want to, rather than beinglimited to the official nominees. It’sapplicable when using paper or otherforms of a written ballot that are dis-tributed by mail or at annual meetings.

Ballot write-ins are often disallowedwhen any number of nominations fromthe floor are included in the vote. Thenominations-by-mail procedure doesnot accept ballot write-ins becausemembers had their opportunity tonominate on the response card. Never-theless, many cooperatives have bylawsthat authorize ballot write-ins. Out ofthe survey response by 433 coopera-tives, 52 reported frequent use and 132have occasional use of write-in candi-dates on the ballot.

Nomination by applicationCooperatives generally prefer an

open process of candidate selection, inthe sense of not limiting any memberfrom running for the board. Similar tothe procedures of nominations fromthe floor and ballot write-ins, a mem-ber can be nominated without havingmajor name-recognition among themembership, and may even get on theballot primarily by self-selection. Anapplicant usually must submit pertinentinformation to the cooperative ornominating committee several weeksbefore the election.

In some cases, a signed petition by aspecific threshold number of membersis re q u i red. Its advantage over nomi-n a t i o n s - f rom-the-floor and ballotwrite-ins is that cooperatives often dis-tribute a “bio” on each candidate sothat members can use this inform a t i o n

to help them decide whom to votef o r. Frequent use of nomination byapplication was re p o rted by 26cooperatives, while 105 re p o rt e doccasional use.

Associate boardAn associate board is a practical

method for developing quality can-didates for directors. These mem-bers are usually young farmers who

stand out as good prospects and areeither appointed by directors or canapply to be confirmed by membershipvote. Associate boards participate inselected meetings of the board andmay have special committee assign-ments, with the primary objectivebeing that they gain experience forbecoming future directors. As a re-c ruiting pro c e d u re, this has some sim-ilarities with candidate re c ruitment byd i rectors, as well as being a membereducation program.

Although the survey did not specifyassociate boards as a candidate selec-tion pro c e d u re, 17 cooperativesre p o rted having this type of pro g r a m ,which suggests that it is re l a t i v e l yp o p u l a r. A possible limitation is inhaving to make choices in the pre s e n tabout directors for the future, in con-trast to a search pro c e d u re just prior

Rural Cooperatives / November/December 2003 3

In short, a nominatingcommittee can operateas if it were an off i c eof human re s o u rc e s .

to an election. But it is an eff e c t i v eway to develop a competent board andto boost newly elected directors alongthe learning curve faster thanwould normally occur.

Searching for candidatesP ro c e d u res for selecting coop-

erative director candidates arenot often scrutinized andchanged. There has been a grad-ual shift to pro c e d u res with moredeliberation and study of poten-tial candidates and slightly lessreliance on spontaneous methodsof selection. This change is indicatedby the rise of the nominating commit-tee and the decreased use of nomina-tions from the floor that occurre dbetween 1949 and 2003.

Increased use of nominating com-mittees reflects efforts to address someof the problems that many cooperativeshave encountered in finding memberswho have an aptitude for serving andwho are willing to serve. Many surveyparticipants reported the latter consid-eration as a major problem. When sub-stantially large numbers of membersare reluctant to serve, there is need formore advanced planning to search forpotential candidates and to hold discus-sions about the benefits of serving onthe board.

Candidate recruitment by directors

outside of nominating committee workhas also been driven by the need to find“willing and able” candidates. In addi-

tion, associate boards address theseproblems more head-on than the morespontaneous methods of candidateselection.

The weaknesses of nominatingcommittees are less in their designthan in their execution, part i c u l a r l ywhen their search process is too nar-ro w. The committee should not limitits considerations to a circle of friendsor be satisfied when it has found a“willing and able” candidate, but mustbuild a database of capable candidates.This exercise ought to be carried out,not only for board vacancies, but alsoto find challengers to the incumbentd i rectors. Nominating committeescould survey the membership for sug-gested candidates, as well as asking fori n f o rmation about members’ re l e v a n t

skills for serving on the board. Ins h o rt, a nominating committee canoperate as if it were an office of

human re s o u rc e s .Candidate selection procedures in

cooperatives will continue to be dri-ven by demand for skilled leadershipin carrying out the increasinglychallenging tasks of fiduciary dutiesand long-range planning. Further-more, difficult issues of businessethics accompany the growingfinancial complexity of today’s coop-eratives. In the wake of recent cor-porate financial scandals, business

ethics are receiving more emphasisoverall. In fact, investor-owned firmsare being urged to apply democraticprinciples to reform their director can-didate selection procedures. Goodadvice that has long been followed bycooperatives. ■

1 Avram Patt, “Here’s a Novel Con-cept: Get Rid of Your NominatingCommittee,” Cooperative BusinessJournal, NCBA, Aug/Sep 2002.

2 Nelda Griffen, H. N. We i g a n d tand K. B. Gard n e r, Selecting andElecting Directors of Farmers’ Coop-eratives. USDA/Farmer CooperativeS e rvice, General Report #14, 1955.(Note—the survey was taken in 1949,but the re p o rt was not published until 1955).

4 November/December 2003 / Rural Cooperatives

T h e re has been a gradual shift to

p ro c e d u res with moredeliberation and studyof potential candidates.

Rural Cooperatives / May/June 2003 5

By Bruce J. Reynolds,EconomistUSDA Rural Development/RBS bruce.reynolds@usda.gov

E d i t o r ’s note: This article is the second in at h re e - p a rt series on selecting and compen-sating directors. The first article discussedmethods cooperatives use to select and nominate board candidates (see page 21 of the November-December 2003 issue, on line at: www. ru rd e v. u s d a . g o v / r b s / p u b /openmag.htm.). This second article exam-ines election and member voting policies.

he critical trade-off incooperative voting poli-cies is the need to estab-lish sufficient voice formembers in electing

their directors, while at the same timep roviding for a certain amount of boardindependence from disruptive memberp re s s u res. Election and voting policiesa re designed to choose directors whowill exercise leadership in re c o n c i l i n gmember interests and prioritizing goalsthat will yield the most long-term ben-efits for membership as a whole.

Survey results of election and votingpolicies show different ways that coop-eratives have sought to establish lead-ership that both represents membersand achieves business success. The fol-lowing six policies influence this bal-ance:

• board size in relation to membership;

• term lengths;• term limits;• competitive elections; • outside directors;• member voting power.

Many of these policies have variouskinds of interrelations. For example, inthe first policy issue, the number ofboard seats is influenced by the size ofthe membership. As another example,cooperatives with the longest directorterms more often apply limits on thenumber of times a director can be re-elected. In addition, the much-debatedissue of member voting power centers

on whether larger producers shouldhave more votes than provided by aone member-one vote policy. Thispoint was raised in an article aboutpreparing for the future in the Nov-Dec 2003 Rural Cooperatives. A ques-tion for research is whether votingmethod influences a tendency foreither relatively large or small farmersto serve on cooperative boards ofdirectors. To help answer this question,data were collected on the farm size ofdirectors in relation to the member-ship as a whole.

Board sizeTable 1 reports the number of

director seats on cooperative boards,sorted by different membership sizeintervals. Seven-member boards arethe most popular board size, with nineand five-member boards being the nextmost popular sizes. Only in the largestmembership size interval, 3,000 andabove, are nine directors the most fre-quent board size (occurring in 16 outof 80 cooperatives).

Elect ion and vot ing po l i c ies of agr i cu l tu ra l cooperat ives

T

Table 1: Size of board of directors for 437 respondent cooperatives in2 0 0 3 , expressed as a percent of membership size intervals and in total.

Number of directors on respondent boardsMembers 5 7 9 : 6&8 >9 : Cooperatives

<800 13% 52% 19% : 6% 10% : 144

800-1,499 10% 35% 23% : 10% 22% : 107

1,500-2,999 8% 26% 25% : 6% 35% : 106

>3,000 9% 17% 20% : 15% 39% : 80

Total 11% 35% 22% : 8% 24% : 437

Election and votingpolicies are designedto choose directors whowill exercise leader-ship in re c o n c i l i n gmember interests andprioritizing goals…

6 May/June 2003 / Rural Cooperatives

As membership size increases, sodoes the frequency of boards withmore than nine directors (see column>9, table 1). For boards that exceednine directors, no particular board sizepredominates, being widely dispersedin the range from 10 to 51 directors.But the fact that nine directors is themedian for co-ops with 1,500 or moremembers shows that large organiza-tions also tend to restrain the size oftheir boards.

Table 2 reports the data for surveyrespondents that have only at-largedirectors (no districts), and for thosewith districts. There were 145 respon-dents without districts and 292 withdistricts. The latter generally havelarger boards, with a much higher per-cent having more than nine directors,while 48 percent of cooperatives with-out districts have a board size of 7directors. Another distinction, thoughnot reported in Table 2, is cooperativeswith membership districts where mem-bers, or delegates, elect only the direc-tor for their district (and perhaps oneor two at-large directors), vs. thosewhere directors are elected by district,but all members get to vote for alldirectors, regardless of which districtthey live in.

Term lengthsLength of board terms varied

between one to seven years, with threeyears being the overwhelmingly popu-lar choice. The survey results for thisquestion are reported in table 3. Theseven cooperatives with seven-yearterms are all in Tennessee, suggesting

that at the time these cooperativesorganized there, the state incorpora-tion statute may have specified thatparticular term length.

Term limitsLimits on the number of consecutive

times directors can serve (term limits)a re used by 154 cooperatives (35 per-cent), while 281 (65 percent) have nolimits on consecutive terms (based on435 responses). Te rm limits are now

m o re frequent than in the past, as indi-cated by comparison with the 1949 sur-v e y.1 In that surv e y, 76 cooperatives (8 percent) had term limits, while 827cooperatives (92 percent) let incum-bents run for election to board seats foran unlimited number of terms.

Furthermore, out of 31 respondentswith term lengths of one or two years(those in the first two columns of table3), none have term limits. This seems

only practical, since the incumbentshave to run for election so frequently.Three of the seven respondents havinga seven-year term prohibit directorsfrom running for a second term, butthe other four have no term limits.

Of the 154 cooperatives re p o rt i n gthe use of term limits, 149 also re p o rt-ed the maximum number of consecu-tive terms directors may serve. Four ofthese respondents prohibit election toconsecutive board terms, i.e., a one-t e rm limit. Table 4 re p o rts the numberof respondents with term limits. Ineach of six instances where co-ops limitd i rectors to five or six consecutivet e rms, the term length is three years.Many cooperatives allow members whohave reached the limit on consecutivet e rms to run again after they have beeno ff the board for one term.

Competitive electionsMany democratic organizations,

including some cooperatives, havenominating committees that follow the

recommendations of Robert’s Rules ofOrder in submitting only one candi-date for each board vacancy.2 However,cooperatives have traditionally beenadvised to run more than one candi-date per seat, usually by encouragingopen and flexible processes for nomi-nating candidates.3 About one-third(148) of respondent cooperativesrequire that at least two candidates runfor each board seat.

Table 2: Size of board of directors for 437 co-ops surveyed in 2003,expressed as a percent of co-ops without districts and with districts.

Number of directors on the boards

Cooperatives 5 7 9 : 6&8 >9

Without districts 17% 48% 22% : 5% 8%

With districts 7% 29% 22% : 10% 32%

Total 11% 35% 22% : 8% 24%

Table 3: Length in years of an elected term on the board, reported by 434c o o p e r a t i ve s , 2 0 0 3 .

Term length (years) 1 2 3 4 5 6 7

Number of cooperatives 19 12 382 9 4 1 7

Table 4: Single term and consecutive terms that members may serve onthe board, reported by 149 cooperatives with term limits, 2 0 0 3 .

Number of terms 1 2 3 4 5 6

Number of cooperatives 4 17 90 32 5 1

Rural Cooperatives / May/June 2003 7

There is no practical reason fornominating committees to limit theirselection and nomination to one candi-date per seat. Robert’s Rules have formore than a century been a useful pro-cedural guide, but their applicationsought to be flexible. The rules haveinfluenced some organizations to adoptgovernance policies that might beimpractical for many applied situa-tions, as noted by one scholar.4

One survey respondent from acooperative without an opposing can-didate requirement commented that itstill always has two candidates run forboard seats. Ten other respondentscommented that, although notrequired, they still make extra effortsto recruit second candidates, but donot always succeed.

Several respondents commentedthat two opposing candidates arepreferable, but finding members to runfor the board is difficult. Anotherrespondent mentioned that the coop-erative recently terminated the policy

of having at least two opposing candi-dates because “members got tired ofgetting beat” when running againstincumbents.

Outside directorsOne of the traditional re q u i re m e n t s

for directors is that they are membersof the cooperative. Various objectivescan be accomplished by re q u i r i n gcooperative boards to exclusively con-sist of members, with member contro lbeing especially important. Memberscan also establish control when aminority of non-members may serve ona board, so long as member dire c t o r scan exercise a majority under all votingand decision rules where more than asimple majority might be re q u i red.

In this surv e y, 18 cooperativesre p o rted having outside, or non-mem-b e r, directors with the power to voteon decisions. Two of the 18 coopera-tives define their outside board mem-bers as “public directors,” while 16cooperatives select outsiders to serv ef rom the general community of busi-ness leaders and professionals. Four ofthe 16 had more than one seat ontheir boards designated for outsided i rectors.

An equally impor-tant trade-off is tohave a board thatcan pursue indepen-dent deliberation,and not simplydeliver mandatesf rom their support-ers or districts.

Photo by Richard G. Biever, courtesy Indiana Statewide Association of RECs.

8 May/June 2003 / Rural Cooperatives

Some respondents commented thattheir bylaws permit outside directors,but that they did not exercise thatauthority. Others said they were study-ing the use of outside directors. In sur-veys completed by co-op managers,several wrote that having one seat onthe board designated for a non-mem-ber with special business or profession-al experience would be very helpful tomanagement.

Farm size and voting method Does a policy of one member- o n e

vote result in dispro p o rtionate influ-ence by relatively small farmers? Thisquestion can only be answered on acase-by-case basis, but the compositionof boards in terms of relative farm sizeis worth a look. The survey re s u l t sshow the extent to which boards aremade up of the largest farmers in ac o o p e r a t i v e ’s membership. There areno presumed advantages or disadvan-tages of directors having either large orsmall farms. Of course, the critical dis-tinction is diff e rences in patronage vol-ume, and farm size is only an appro x i-mation. But above all, electing the bestd i rectors possible is the key task.

The issue of member voting poweris often debated under the assumptionthat the one member-one vote proce-dure results in boards with under-rep-resentation for large farm operators(large volume patrons). Some arguethat proportional voting corrects suchimbalance, and feel that this method isused too infrequently. Out of the 379survey responses on the relative farmsize of directors, only 27 have propor-tional voting.

Table 5 reports the percent of direc-tors in the four quartiles (the smallest25% of members are in the 1st quar-tile). The percent of directors in thelargest and smallest halves for coopera-tives with proportional voting and forthose with one member-one vote arealso reported in table 5. Even thoughthe size of the two comparative groupsis lopsided, it shows that proportionalvoting resulted in more of the largerproducers being elected to boards ofdirectors. The 4th quartile of farm

operators by size held 37% of theboard seats in 27 proportional votingcooperatives, in contrast to 26% in the352 one member-one vote coopera-tives. Still, most one member-one votecooperatives also prefer to elect direc-tors from among the relatively largestfarmers in their membership. About63% of one member-one vote cooper-atives elect directors who are amongthe largest half of farm operating sizein the membership.

Policy by designDesigning policies for board elec-

tions and member voting can be a sim-ple matter of adopting commonlyre p o rted practices or implementing therecommendations from manuals suchas Robert ’s Rules. It can also be moredemanding when members take it uponthemselves to design a system thatreflects their values and, more specifi-c a l l y, try to balance attributes thatwhile creating some friction, caninduce more pre s s u res for superiorleadership. Election and voting policiesusually try to offer members goodchoices and enough influence from vot-ing so that elected directors will re p re-sent their interests. But an equallyi m p o rtant trade-off is to have a boardthat can pursue independent delibera-tion, and not simply deliver mandatesf rom their supporters or districts.

Another trade-off, discussed in thearticle on selecting candidates, involves

the importance of election and votingpolicies that support the developmentof strong team-building on the board.Yet, brought to an extreme, a cohesiveteam can be complacent and unrecep-tive to new ideas that challenge the sta-tus quo.

Election and voting policies usedmost frequently are not necessarily thebest. That evaluation has to be madein the context of each individual orga-nization. When members are involvedwith designing or revising their poli-

cies, a fresh and creative approach canmake the difference between the mere-ly functional and the achievement ofexcellence in the governance of coop-eratives.

1 Nelda Griffen, H. N. Weigandt and K. B.Gardner, Selecting and Electing Directors ofFarmers’ Cooperatives. USDA/FarmerCooperative Service, General Report #14,1955.

2 Henry M. Robert III, et al, Robert’s Rules of

Order. 10th edition, 2000, (1st edition, 1876) p.419.

3 Helim H. Hulbert, David Volkin, and NeldaGriffen, Bylaw Provisions for Selecting Directorsof Major Regional Farmer Cooperatives.USDA/Farmer Cooperative Service, General

Report # 78, 1960, p. 12-13.

4 Russell Hardin, Liberalism, Constitutionalism,and Democracy. Oxford University Press, 1999,p. 110.

Table 5: Percent of directors in farm size quartiles of the membership forc o o p e r a t i ves with proportional voting and with one vote per member.

Proportional voting One member-one vote

(27 co-ops) (352 co-ops)

Percent Percent1st quartile 9 122nd quartile 17 253rd quartile 37 374th quartile 37 26

100% 100%

Smallest half 26 37Largest half 74 63

100% 100%

Rural Cooperatives / July/August 2003 9

By Bruce J. Reynolds, EconomistUSDA Rural Developmentbruce.reynolds@usda.gov

Editor’s note: This article is the third in athree-part series on selecting and compen-sating cooperative directors. The first arti-cle was published in the Nov.-Dec. 2003issue, and the second part in the May-June2004 issue. These and other past issues canbe accessed online at:w w w. ru rd e v. u s d a . g o v / r b s / p u b / o p e n m a g . h t m .

ervice on the board ofdirectors of cooperativesinvolves a significantcommitment of time andmental energy. Some

members who would make excellentdirectors may not seek election to theboard because of these demands.Financial recompense may offset thereluctance of some members to serveas directors.

Cooperatives of a similar type, busi-ness volume and geographic locationtend to adopt similar policies as tomethod and amount of compensationfor directors. A recent survey identifiesd i ff e rences in the amounts and term sunder which director compensation ispaid. The survey identified three generaltypes of financial compensation: (1) per-meeting payment or per diem, (2) annu-al stipend or re t a i n e r, and (3) re i m b u r s e-ment of travel expenses. There were 419responses to financial compensationquestions. Farm supply (205) and grain(173) cooperatives were the pre d o m i-nant types of cooperatives that share dcompensation information. Severall a rge, high-value marketing cooperativesalso shared this inform a t i o n .

Only two of the surveyed coopera-tives indicated that no compensation ispaid to directors. Travel expense isoften negligible for directors of localcooperatives. Reimbursement is avail-able in 247 out of 419 survey coopera-tives. Twenty-five cooperatives covertravel expenses but do not pay any addi-tional compensation. Survey results forp e r-meeting and stipend compensation,

but not travel reimbursement policies,a re summarized below.

Compensation amounts are influ-enced by a cooperative’s volume ofsales. Responses are in three sales vol-ume intervals: $2 million to $26 mil-lion; $27 million to $89 million; $90million to $8 billion and for all respon-dents. The mode (the most frequentlyoccurring number), median and range

of compensation amounts, as well asthe number of cooperatives in eachsales-volume interval are summarized.The 27 cooperatives without per-meet-ing or stipend compensation areexcluded from the calculations of thesummary statistics.

Policies for directors and membersare established with an eye toward fair-ness and comparability with generalpractices of other cooperatives. Forthis reason, the mode — which mea-sures the most frequent or commonvalue — is an especially relevant sum-mary statistic. Furthermore, the“mode count,” or number of observa-tions represented by the mode, showsthe relative predominance of certaincompensation amounts. There are afew cases of ties for the mode (bimodalvalues), and several commonly usedcompensation values are almost as fre-quent as the mode. In fact, compensa-tion data are multi-modal in the sensethat there are different strings of iden-tical per-meeting rates or stipendamounts which cooperatives adopt.This multi-modal distribution of compensation is displayed in stem-and-leaf plots in an on-line report atthe NCR-194 Web site (http://www.a g e c o n . k s u . e d u / a c c c / n c r 1 9 4 / ) .

P e r-meeting compensationA per-meeting payment applies for

each day of a meeting’s duration. Mostco-ops re p o rted that their board meet-ings usually do not extend beyond oned a y. Many cooperatives have variationsin the payment amount for half day orfor evening meetings. A few coopera-tives mentioned that this payment wasonly for meetings attended and wast h e re f o re not automatic. Cooperatives

Compensat ing co-op d i rec to rs USDA study reveals wide range of pay plans

A stipend re c o g n i z e ss e rvice beyond boardmeetings, such as ad i re c t o r ’s role inhelping maintain ac o - o p ’s positive re l a-tions with membersand the public.

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10 July/August 2003 / Rural Cooperatives

often have monthly board meetings,but several have more than twelvemeetings per year, and for many co-opsthe number of meetings varies fro my e a r- t o - y e a r. There f o re, annual com-pensation is variable for cooperativeswith a per-meeting payment policy.

The mode per-meeting rate is$100 in the three sales groups. Thereis a tie at $200 for the mode in thel a rges sales class (Table 1). A doubleasterisk (**) indicates bimodal values,re p o rted in a footnote to the table.Also note that these per-meeting ratesummaries do not include higheramounts that are often paid to off i-cers of the board.

The median is $75, as compared tothe mode of $100, which suggests thatper-meeting rates less than the modeare also popular. In fact, 45 coopera-tives paid $50 and 42 paid $75 per-meeting, as compared to 63 paying$100. Per-meeting compensation isgenerally higher for directors of the 42cooperatives in the sales range $90million to $8 billion, as indicated by itsmedian of $150.

S t i p e n dThe term “stipend” describes fixed

annual payments as a method of com-pensation. Although stipends are oftenpaid-out monthly, the amount does notchange when greater or fewer meet-ings are held in any given year. Thismethod recognizes the fact that boardmeetings are not the only occasions fora director’s work.

Director compensation with astipend or fixed annual payment is lessfrequent than per- meeting payments,with only 69 cooperatives reportingthis method for non-officers of theboard (Table 2). Several cooperativespay these annual stipends to theirdirectors monthly and others make asingle payment. A stipend recognizes

service beyond board meetings, such asa director’s role in helping to maintaina cooperative’s positive relations withmembers and the public.

The stipend mode value is $1,200,which is paid by 17 of the respondingcooperatives. The median stipend is$900. Stipends of less than $1,000 arepaid to directors by 37 out of the 69cooperatives having a fixed annualcompensation. Note that a $1,200stipend is equivalent to the annualcompensation of cooperatives with aper-meeting rate of $100 and monthly

board meetings. However, severalcooperatives with a per-meetingmethod only pay for meetings attend-ed, whereas those cooperatives with anannual stipend, even if disbursed on amonthly basis, pay their directorsregardless of meeting attendance.

Compensation for board officersCompensation is often higher for

officers of the board. Furthermore,eight cooperatives provide compensa-tion only to board officers. The 300cooperatives with a per-meeting pay-ment include 52 that also pay stipendsto board officers. For the 248 coopera-tives that exclusively compensate witha per-meeting payment, 79 have ahigher per-meeting rate for the boardchair than for other directors. Themedian for the board chair is $100,which compares to $75 per-meetingpaid to non-officers of the board(Table 1).

Eighty responding cooperatives paystipends to board chairs, which include11 cases where they are not paid tonon-officer directors. In another 36cases, chair stipends are higher thanthe amounts paid to non-officer direc-tors. The median stipend for the boardchair is $1,000, compared to $900 fornon-officer directors.

B o a rd secretaries are paid higherp e r-meeting rates than non-off i c e rd i rectors in 52 cases, with a median of$95 as compared to $75. In addition,b o a rd secretaries receive per- m e e t i n g

Table 1: Pe r-meeting compensation for directors, reported for cooperatives insales ranges and in total, 2 0 0 3

Sales range* Co-ops Mode Mode count Median Range($ million) (No.) ($) (No.) ($) ($)2-26 145 100 31 75 4 – 40027-89 113 100 26 80 20 – 30090-8,000 42 ** ** 150 10 – 700Total 300 100 63 75 4 – 700

* Total sales in 2001 as reported by cooperatives in the RBS annual survey.** A two-way tie for the mode between $100 and $200 with each having 6 responses.

Table 2: Annual stipend for directors, reported for cooperatives in salesranges and in total, 2 0 0 3

Sales range* Co-ops Mode Mode count Median Range($ million) (No.) ($) (No.) ($) ($)2 - 26 40 1,200 7 735 150 – 6,00027 - 89 20 1,200 8 1,200 360 – 5,30090 -1,880 9 ** ** 1,200 480 – 25,000Total 69 1,200 17 900 150 – 25,000

* Total sales in 2001 as reported by cooperatives in the RBS annual survey. ** A two-way tie of 2 responses for $600 and for $1,200.

Rural Cooperatives / July/August 2003 11

payments in 10 cases when either nosuch payments are made, or stipendsa re paid, to non-officer directors. Infact, eight of those 10 have a per- m e e t-ing payment exclusively for the boards e c re t a ry.

Stipends for board secretaries arehigher than for non-officer directors in28 cases. In addition, there are eightcases where stipends are paid to boardsecretaries but not to non-officerdirectors. The median secretarystipend is $930, compared to $900 fornon-officer directors.

Combined compensation policyCombined or mixed compensation,

i.e., paying both a per-meeting amountand a stipend, was reported by only 15cooperatives for all members of theboard, while 88 cooperatives apply thispolicy exclusively to officers. Thesevariations for officers primarily applyto the board chair and secretary.Results for cooperatives with a mixedcompensation policy are summarizedin a more detailed report, available onthe NCR-194 web page.

A combined compensation policy ismore exacting than necessary for manycooperatives. Nevertheless, an exami-nation of the 88 cooperatives with acombined policy for officers revealsthe different economic purposes ofper-meeting payments vs. stipends thatare less evident when a single methodof compensation is used.

When cooperatives provide highercompensation for officers, the chair isusually the highest compensated posi-tion on the board. Yet, cooperativeswith a combined policy more often usea stipend to pay higher compensationto the board chair than a higher per-meeting payment. In contrast, a higherp e r-meeting rate is more fre q u e n t l yused to increase the compensation forb o a rd secretaries. This diff e rence mayreflect the fact that the added burd e nof secre t a ry work involves board meet-ings, whereas the chair not only hasm o re work in running the meetings,but may also be involved in a lot ofmember relations and public aff a i r swork. These kinds of services are often

d i fficult to track in terms of time spent,so are more accurately compensatedwith a stipend than a per-meeting rate.

Compensating non-member directorsFarmer cooperatives usually have

members exclusively as their directors,as indicated by the survey resultsshowing only 18 out of 437 with non-members on the board. Three of these18 cooperatives were incorporated inVirginia, where state statutes requirefarmer cooperatives — under certainconditions — to appoint a publicdirector. As discussed in the secondarticle of this series, several coopera-

tives were considering revisions intheir bylaws to allow appointment, ifnot election, of a non-member to theboard. If cooperatives increasinglydecide to place non-members on theirboards, especially if such non-membersare professionals or business leaders,the issue of paying higher compensa-tion will arise more often.

Only two of the responding coop-eratives with non-members on theirboards reported compensation abovewhat is paid to member directors.These cooperatives compete in high-value commodity industries and theirnon-member directors are selected forthe purpose of providing businessexpertise that would unlikely be avail-able from a board that included only

members. Each cooperative faces itsown set of challenges, and directorselection and compensation policiesmust take such individual circum-stances into account.

Although it is not unusual for manyprivately owned and publicly tradedcompanies to have the flexibility tocompensate directors diff e re n t l y, espe-cially high-profile public figures, coop-eratives operate with more constrainingbusiness objectives. In cooperatives, theemphasis on fair and equitable tre a t-ment gives some salience to the idea ofcompensating member and non-mem-ber board members the same.

Board excellencePolicies for selecting, electing and

financially compensating cooperativedirectors are the topics of this three-part series of articles. These topics allrelate to the goal in cooperative gover-nance of getting the best directors pos-sible to serve on the board.

The payments to directors —whether per-meeting, stipends or acombination — are intended to be afinancial compensation for the extratime and effort they give to their coop-eratives. In many non-cooperativebusinesses, directors often seem toreceive excessive compensation, as fre-quently reported in the news media.For cooperatives, the challenge is farmore to ensure that director paymentsare adequate, rather than one of keep-ing compensation in-check.

Some survey respondents comment-ed that even though they have policiesfor director candidate selection andencourage competition for board elec-tions, a large proportion of membersare unwilling to consider serving onthe board. Such member reluctanceraises a question about the adequacy ofdirector compensation.

The challenges of electing the bestdirectors possible involve diligence inreviewing and updating governancepolicies, attending conferences to dis-cuss best practices and participating insurveys that provide an opportunity forthe cooperative community to shareinformation. ■

If co-ops continue to place more non-members on theirb o a rds, the issue of paying highercompensation willarise more often.

12 Novemer/Decemer 2003 / Rural Cooperatives

By Jim Wadsworth, Program Leader, Educationand Member RelationsUSDA Rural Development

he Greek philosopher Diogenes is said to havewalked city streets, lantern in hand, looking foran honest man. While honesty is one qualitycooperatives should seek in their leaders, thereare many others.

As the statement at right implies, cooperatives need strongleadership to meet present and future challenges. But seriousquestions arise. What does leadership mean for a coopera-tive? What makes an effective cooperative leader? Preciselywhat skills or traits are required? What type of people fulfillthis need?

There are many definitions for cooperative leadership.These may include: having the ability to lead the board ofdirectors toward sound decisions; being loyal to the coopera-tive and inspiring loyalty in others; being unselfish and trust-worthy; having courage to take on hard problems and theintegrity to stand by decisions; understanding and upholdingcooperative principles and concepts.

But do these definitions go far enough to enable membersand directors to successfully identify and choose future lead-ers? To a degree. But other leader characteristics should alsobe considered.

Many would agree that effective leaders often have impor-tant personality traits that are intangible, or that lie belowthe surface. Indeed, there’s often something inexplicable thatmakes some people leaders. The strength of their personali-ty—be it charm or stature (i.e., they connect to people andcarry themselves well)—in itself makes them effective leaders.These people usually stand out from the crowd. They possesstraits that are difficult to learn, since they often come natu-rally to such people. There may be some who try to “act out”these traits, but they are usually seen as just that: as actors.

However, certain leadership traits, behaviors and methodscan be learned or acquired through experience, education,training and self-study. The following are traits commonlyfound among effective leaders.

E n t h u s i a s m —Does the person show consistent enthusiasmt o w a rd the cooperative, people and life in general? Is the per-son positive and upbeat when challenged with difficult circ u m-

stances and issues? An effective leader confronts business andlife with enthusiasm, isn’t a pessimist or a complainer. Thesepeople are willing to take on tough issues with the same enthu-siasm that they display going about their everyday lives.

Listening ability—A leader listens to people and hearswhat they have to say. The listening is sincere and patientand shows respect for different opinions. A good listener lis-tens to learn, rather than listens only to await a chance totalk. This trait inspires trust and confidence.

Think before speaking—E ffective leaders are thosewho have the ability to think things through before con-s t ructing their words and phrases. Speaking very quickly oro ff the cuff works for some people, but others often findthemselves saying things they didn’t actually mean orintend to say. Leaders need to have the ability to analyzei n f o rmation, and then form logical conclusions beforea rticulating their thoughts.

Stubbornness vs. flexibility—Leaders often learn whento stick to their guns and when to be more flexible. This usu-ally takes experience, because every situation is different.Effective leaders are those who have learned when to stay thecourse in their opinions and decisions and when to be flexi-ble. Leaders must be careful not to be indecisive, stubborn or

Seeking the best Di recto r leadersh ip :what does i t take ?

“Little positive can happen for cooperativesunless they have leader-ship able to meet thechallenges of the 21stcentury. Skills requiredto lead cooperativesmust be identified anddeveloped in directorsand managers.”

—Excerpted from “Agricultural Cooperatives in the 21st Century”(RBS Cooperative Information Report 60, pg. 17).

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Rural Cooperatives / Novemer/Decemer 2003 13

overly flexible. Rather, they should usea blend of those traits, depending onthe situation. Consistency is key—those being led must come to under-stand and know the decision-makingprocesses of their leaders.

Complete tasks—Leaders com-plete things when they’re supposed tobe done, or make sure that thoseresponsible get it done. Leaders areprepared for action and are able toinstill in others the need to be pre-pared. Completing work and projectsin a timely manner creates respect andallows people to witness the ability andintegrity of their leaders.

Take responsibility—“The buckstops here” is a slogan good leadersadopt. They are willing to take respon-sibility for negative events or occur-rences that fall under their jurisdiction.They don’t try to pass problems off onsomeone else, but take them on. Theyalso know how to graciously take creditfor success and—even more impor-tant—know how to give credit to oth-ers when it is due.

Thought provoking—A goodleader is able to get others to thinkabout things rather than just followblindly. A leader involves people byprovoking thoughts through challengesand by providing information. Thistrait often allows a leader to build rela-

tionships that will endure and createcommitment needed to complete tasks.

Effective leaders will have many ofthe qualities or traits outlined here, andprobably some others as well. Often,various traits compliment each other,giving the person even greater leader-ship stature and ability. If some traitsare lacking, an effort should be made toimprove in those areas.

Understanding and knowing whattraits to look for while identifying per-spective leaders is critical. In addition,it is also important to understandwhether an identified leader will be agood fit in a specific situation. Eventhough a person may be identified as asuitable leader, it does not necessarilymean that the person will thrive in allleadership roles.

Indeed, a person may be a tremen-dous leader in one situation, but not agood leader in a different situation,such as in a cooperative. These ques-tions may need to be asked:

■ How well will the prospectiveleader fit into the situation given thecircumstances? Will the leader be likelyto succeed in the environment?

■ How well will he or she fit, giventhe other leaders and personalitiesinvolved?

■ Will the person be liked andaccepted by the other cooperative play-

ers, be they members, directors ore m p l o y e e s ?

■ Does the situation seem to be onewhere the person will have an adequateopportunity to grow into the leader-ship position and thrive?

■ Does the person have the righteducational background, experienceand knowledge of cooperatives andbusiness?

■ Is the person open minded aboutlearning more about being an effectivedirector? Will he/she be willing to befurther educated, partake of trainingworkshops and attend conferences,etc.?

■ Does the person have the vision,values and staying power necessary to fitthe opportunities aff o rded by the coop-e r a t i v e ?

These and other pertinent questionsmust be addressed when working toselect quality leaders for cooperatives inthe current competitive enviro n m e n t .L e a d e r-quality people should be soughtout, even though it may be a challenge tore c ruit them because they are often verybusy and lack the extra time to take onadditional responsibilities and leadershiproles. Knowing the traits to look for andthe questions to ask can help identify thebest people to lead cooperative board sand cooperatives as we go forw a rd into achallenging and competitive future. ■