Evaluating Board Performance (1996)

This document is brought to you in electronic format by the
University of Wisconsin Center for Cooperatives
January 1996 


By Bob Cropp
Director, UWCC

The greatest threat to the survival of a cooperative is the board of

While this is a strong statement, it also emphasizes the fact that
boards of directors are ultimately accountable for policies,
practices, and procedures that will determine whether the cooperative
will live or die.

A March 1994 report by the Plunkett Foundation -- Developing Directors
of Cooperatives and Other Similar Enterprises -- recommends that
    ...recognize that the success of any business ultimately depends
     upon the capacity of its directors to provide the vision and
     direction needed not only to survive, but to develop and prosper.
     Therefore, make a commitment to develop the capacity of the board
     of directors to improve both their personal and collective
     contributions to the overall development of the business.

What is your job as a board member?

The job of the board of directors is to improve the bottom line for
members. In order to accomplish this, the board must make management
of the cooperative better.

Although it may be easier for a cooperative to succeed with good
management and a weak board than with a good board and weak
management, even the best management eventually will falter without
board support.

Strong managers like strong boards.

The board has as its role a "change agent." This differs from the
traditional judicial performance of making "go" or "no-go" decisions
on management proposals. A board can develop ideas on its own, but
this requires an atmosphere conducive to change and board members able
and willing to go beyond traditional evaluative or judicial postures.

Imagination, innovation, and willingness to try new concepts and ideas
are attributes vitally needed in many boardrooms.

User benefits vs. return on equity investment

User-benefits versus return on equity investment are resulting in
structural changes in cooperatives:
  1. Conversions to Investor Oriented Firms (IOF's).
  2. Move to proportionality -- capital more accordance to use;
     equity redemption problems.
  3. New cooperative structure -- new generation cooperatives:
        o value added;
        o up-front capital;
        o closed membership; and
        o appreciable and transferable property rights.

Mike Cook's review of governance of IOF's indicate three major issues:
  1. How well are boards interacting and communicating with investors?
  2. How independent and objective are the compensation and nominating
     committees relative to inside influences?
  3. Have boards begun evaluating their own performance?

Further, chemistry sessions are in. Boards need to understand each
other in terms of values, beliefs, and purpose. This session is
"Evaluating Board Performance," or we could refer to this as a "Board
of Directors Audit."

Do you represent a cooperative that does or has done a board

Some of the important jobs of a co-op board of directors are to:
   * evaluate management;
   * evaluate the co-ops financial performance;
   * evaluate the membership and structure; and
   * periodically step back and evaluate the co-op's basic mission and

Evaluation is a way of checking your progress against your plans and
visions. For the same reason, it is important for the board of
directors to evaluate its own performance on a regular basis. After
all, shouldn't the board hold itself to the same standards it holds
for all other areas of co-op operations?

Directors could provide members with a more meaningful measure of
accountability and bring the governance process full circle if the
board's performance were subject to some sort of formal appraisal.

Why board evaluation?
  1. Provides the board with a chance to reflect on and assess its
  areas of
     strength and weakness.
  2.  May provide the board with an invaluable yardstick by which it
     prioritize its activities for the future.
  3. Can serve an educational and consensus-building function -- by
     clarifying and defining the overall standards of performance for
     the board.
  4. A formal appraisal encourages all directors to reflect on what
     board has accomplished, as well as on what it should be doing and
     how it works. Such a review can optimally result in all directors
     contributing to setting goals of the board. The commitment of all
     directors to the board's priorities and to improving board
     effectiveness makes those goals all the more likely to be
  5. Being a responsible board member is hard work and is often a
     job. An evaluation which points up strengths as well as
     weaknesses can give a board a sense of its own competence and
     accomplishment as a group. This is a good foundation on which to
     build positive change.

Value of time:

   * less time on the weather;
   * asking bottom-line questions;
   * management's role in member needs; and
   * board's role in member needs.

Challenges to co-op board:
   * return on management time;
   * return on board time;
   * political stability; and
   * governance as a leader.

Why the increased interest in board evaluation?

  1. More accountability expected by:
        o members/stockholders,
        o government agencies, and
        o public in general is interested in business ethics.
  2. Stricter enforcement of laws.
  3. More lawsuits against boards of directors.
  4. Great consequences for mistakes made by the board.

Board evaluation should not be a personal performance review. A board
assessment evaluates the performance of the board as a whole.

Who should evaluate the board of directors?
  1. Board's self-evaluation: All board members participate.
     An internal evaluation can be a good process. As a board, you
     have an opportunity to know your own strengths and weaknesses
     better than someone who has only limited contact with the board.
  2. A committee of the board does the evaluation.
  3. A non-board committee does the evaluation.
  4. The evaluation is done by an outside consultant.
     An outside consultant may be particularly useful if a board has
     never evaluated its performance before. The consultant can
     provide some objective criteria, offer a perspective on the co-op
     board standards, and can help the board set up criteria on which
     to base future evaluations.

     An outside consultant may be useful where there are
     emotionally-charged issues, or where the board's internal process
     has not been the best.

Should management evaluate the board?

Management undoubtedly has a perspective on the board's effectiveness.
However, it may be hard for an employee of the board to objectively
analyze the performance of his/her boss. If management evaluates the
board, the board needs to recognize that they may receive a different
set of answers from their own self-evaluation. A mature board may
effectively use this manager evaluation to strengthen board
performance and board/management relations.

What should be done with the evaluation?

A compilation of all directors' responses to questions (or outside
consultants' responses) should be prepared and copies distributed to
all board members. But this is not the end. One or two board members
could review the data and prepare an initial analysis for the board.
But more importantly, the entire board should review the data and then
discuss priorities for future boardwork -- setting goals for the board
for next year or directing a committee to follow-up on low-scoring

A board evaluation should provide guidelines for effective board of
director performance. It should answer the question, "Are we as a
board contributing to the co-ops ability to meet its purpose?"

An honest and frank assessment of board performance and practices
should serve as a starting point for discussions about how to improve
the board's systems and overall effectiveness.

How often should the board be evaluated?

The board may choose to evaluate itself annually or have an outside
consultant conduct the evaluation annually. Rather than annually,
every other year may be viewed as adequate.

Starting an evaluation procedure.

The first step in starting an evaluation procedure is to set standards

  1. Selection procedure for directors. This should not be left to
     at the annual meeting. The selection procedure for the board
     should be in the bylaws or in the policy manual.
  2. Duties of directors. If the board has no job description, one
     be developed or adopted.
  3. Performance of directors. Many cooperatives currently have bylaw
     policy provisions covering board attendance. The board may wish,

    the members may include in the bylaws, other performance
     for directors such as a minimum volume of business done with the
     cooperative, or some other requirement.

Any evaluation system should:

  1. Set standards for evaluation;
  2. Judge performance against these standards; and
  3. Make corrections in performance.

Steps for an effective board assessment:

  1. Obtain commitment by all board members to the process.
  2. Set performance objectives or criteria.
  3. Plan the process and gather the information.
  4. Discuss and interpret the data.
  5. Develop a plan of follow-up; identify areas for change and set

What criteria should be used?

   * Simplicity has great value.
   * Each question should ask about one item or aspect of performance.
   * Use a simple rating scale -- such as 1 to 5 (5 for outstanding or
     excellent performance; 1 for performance that is non-existent or
     needs improvement).
   * It is advisable to allow directors to indicate where they don't
     the answer to a question.
   * Allow for written comments.

What to evaluate?

  1. Membership accountability and governance.

     The board is the representative of the members and the steward of
     their interests. However, it is important that an individual
     board member, and the board as a whole, does not cater to special
     interest groups, but considers what is best for the cooperative
     (membership) as a whole.

     Criteria may include:
        o approval of applications for membership;
        o effectiveness of membership meetings (annual meeting);
        o process of director selection;
        o membership communication;
        o membership relations program;

       o annual report is presented to members; it clearly describes
          co-op's operations and financial status; and
        o the co-ops capital plan creates an adequate capital base for
          co-op's current and future needs.

  2. Board operations.

     Criteria may include:
        o an organizational chart has been established;
        o board job descriptions established;
        o meeting packets that include agenda, clear written reports,
          recommendations or options from the general manager or CEO
          and committees (mailed prior to meeting);
        o length of board meeting;
        o board discussions and participation;
        o policies regarding board terms, elections, officers, meeting
          attendance, committee structure;
        o orientations of new board members;
        o are decisions made in a timely manner?
        o written record of board policies and decisions;
        o executive sessions;
        o annual board calendar;
        o board manual;
        o job description for general manager, CEO;
        o procedures for appraisal and compensation of general
        o training and development of general manager, CEO;
        o procedure for board training and development; and
        o effectiveness of committee structure.

  3.  Legal responsibilities.

     To direct affairs of the organization within the guidelines
     provided by the act of incorporation, articles, bylaws, and any
     regulations governing the organization.

     Criteria may include:
        o degree in which board members are informed;
        o board members are knowledgeable of articles, bylaws,
        policies; o articles and bylaws are reviewed (annually) by the
        board; o board reads and approves minutes of each meeting; and
        o written policies on board ethics and conflict of interests.

  4. Financial overview.

    To establish financial plans and policies and to monitor the
     organization's operations for soundness and stability.

     Criteria may include:
        o financial policies reviewed and updated;
        o capital and operating budgets approved annually;
        o goals/policies for important financial ratios established; o
        board receives regular financial reports; o insurance program
        reviewed and updated annually; o policies established for
        member equity/redemption; and
       o procedure for annual audit.

  5. Planning.

     To approve the organization's mission, the goals and objectives,
     major plans and programs, capital and operating budgets. Planning
     is a culmination of al the board's responsibilities. IT is the
     process that pulls all of the elements together and makes the
     board's vision for the co-op become real.

     Criteria may include:
        o board approves mission and vision statements;
        o board approves annual business plan;
        o board reviews and approves a 3-to-5 year plan;
        o board evaluates the mechanism(s) provided for member input
          the planning process; and
        o board is adequately informed about the business and market
          environment in which co-op operates.

  6. Board-management relations.

     The line between board and management roles can be blurred at
     times. Board and management responsibilities (delegation from
     board to management) often change as co-ops grow and/or boards
     and management mature. Established procedures and strong
     communication are important.

     Criteria may include:
        o written job description of general manager/CEO;
        o procedure established for general manager/CEO annual review
        o manager's/CEO's reports to the board;
        o board chair or executive committee's relationship with
        o board and management work together to determine the
        direction of
          the co-op;

       o does the board focus on goals and results and leaves
          decisions, methods, to management? and
        o board provides overall personnel guidelines to management
          remains uninvolved with specific personnel matters.


Good boards of directors continually strive for improvement.

Good boards of directors:

   * understand the uniqueness of user-benefit co-ops;
   * are mentally aggressive;
   * ask good questions;
   * participate in education/training;
   * value time;
   * are good decision makers; and
   * are leaders.

To receive a paper copy of this report, call UWCC at
608-262-3981, or write danz-hale@aae.wisc.edu, 
or print on your printer.