Stephen L. Kiser and John L. Adrian

Knowledgeable directors are leading Alabama's many cooperatives; however, there is still room for education among these leaders, according to AAES research results.

A recent AAES study surveyed agricultural and rural electric cooperative directors to examine their understanding of the cooperative environment, with special attention given to responsibilities of boards and managers, business operational activities, and financial analysis. Forty-eight of the participating directors were affiliated with agricultural supply, credit, and marketing cooperatives and 31 belonged to rural electric cooperatives. Response rates were typical with the overall level at 32.5%. Farm supply/marketing directors had a 54% return rate while rural electric and farm credit directors responded at 23 and 29%, respectively. The agricultural grouping which included farm credit and supply marketing directors had a 47% return rate.

Cooperatives, as with all businesses, depend on effective leadership to enhance their chances for success. Leadership for cooperatives is provided by an elected board of directors and a hired management team. For Alabama agricultural and rural electric cooperatives, board members are selected from among the membership, with few exceptions. The nature and composition of a cooperative's board is influenced by the structure utilized by the cooperative.

Agricultural cooperatives are organized as "locals" and "regionals" with the regionals being either federated, centralized, or mixed in structure. A local cooperative generally serves a small geographic area, such as a county or several counties, while regionals generally serve larger areas. Local agricultural cooperatives have a board that is organized and operated based on state law and the cooperative's bylaws. A federated regional is basically a cooperative of cooperatives; each local cooperative has a board and there is an overall board, generally comprised of selected board members from the locals. Centralized regionals are structured like a local, with one overall board. Mixed regionals are comprised of both cooperatives and individuals as members. Board members may be selected based on geographic location, by farm enterprise, at large, or some other agreed-upon basis.

As in other business forms, the primary responsibility of cooperative boards of directors is the establishment of long-term, broad objectives/purposes/visions for the cooperative along with provision of a resource base to achieve these targets and be successful. The board must hire and guide the manager but not interfere in day-to-day operations so as to reach defined objectives and serve the best interests of the membership.

In the analysis of board members' opinions of the division of responsibility between boards and management, board members clearly recognized that day-to-day operation decisions were the responsibility of the manger (76%). They also recognized their roles in being loyal to the cooperative and regularly attending board meetings. Despite their primary roles for ensuring that operations are consistent with the articles and bylaws, understanding the corporate philosophy, acting in good faith with reasonable care in handling the affairs of the cooperative, avoiding conflicts of interest, and representing the best interests of members, directors often indicated that responsibility for these items was equally shared with the manager. Responding board members noted less clarity of understanding of their roles in establishing direction for the welfare of cooperative members, fiduciary responsibility for the long-term affairs of the cooperative, and maintaining accuracy of minutes of board meetings. These responses were fairly consistent for both agricultural and rural electric directors.

In the survey, board members were asked to assess their knowledge and abilities related to cooperative law, financial analysis, business decision making, and strategic planning using a five-point system ranging from poor (1) to excellent (5). Self-assessment scores were calculated for each grouping by cooperative type. These scores were favorable and fairly consistent for the four items and by cooperative type, with the exception that about a third of the agricultural cooperative directors indicated only fair (2) to average (3) knowledge of cooperative law. Rural electric directors had higher responses in the average (3) to good (4) range for knowledge of cooperative law. More than three-fourths of the directors indicated either average (3) or good (4) knowledge for financial analysis, business decision making, and strategic planning. Overall, directors of agricultural cooperatives tended to be slightly less favorable than rural electric directors in rating themselves. By knowledge area, self-assessment scores tended to be lower for knowledge of cooperative law and financial analysis and highest for business decision making.

Directors were very positive about their understanding and use of financial statements to make decisions for their cooperatives. On a five-point scale, 43 and 37% of the agricultural and rural electric directors, respectively, indicated the highest level (5) of understanding financial statements presented by management. Combining the highest two rankings (4 and 5) included 80 and 83% of the directors, respectively. When asked about their confidence in using financial data and analysis to make decisions, 47 and 40% of the agricultural and rural electric directors indicated substantial (5) confidence. When the top two responses were combined, 89 and 93% of the respective directors were included. Directors of rural electrics were much more likely to have participated in training sessions to help them analyze and evaluate cooperative financial statements, 63 versus 32% for agricultural cooperative directors.

Selected questions related to financial relationships and several business decision scenarios were utilized to evaluate directors' knowledge in the financial analysis and decision-making areas. Calculated scores from director responses to these items were compared to self-assessment scores to evaluate consistency between perceived knowledge and application of knowledge. Self assessment scores were in the average (3) to good (4) range, with business decision-making skills being rated the higher of the two areas. Agricultural directors were slightly more positive about financial analysis skills and rural electric directors rated themselves slightly higher for decision-making skills.

Directors performed well when confronted with selected financial questions and decision scenarios, with little difference noted by cooperative type. Actual scores generated from director responses in both areas were above self-assessment scores. Directors scored highest in the decision-making area at about 85% of the maximum score.

In the analysis of knowledge in the financial area, directors tended to score higher for questions related to liquidity and profitability measures and lower with measures of solvency and efficiency. Statistical analyses of factors affecting financial knowledge scores indicated that director participation in financial training programs increased agricultural directors' scores by 20% and rural electric directors' scores by 28%. Also, agricultural directors from larger cooperatives tended to have higher financial knowledge scores.

As would be expected, the analysis indicates that knowledgeable directors are leading participating cooperatives. However, there seems to be opportunity to strengthen directors' knowledge and roles with training related to cooperative law, roles/responsibilities of directors and managers, and financial analysis. Since previous participation in training programs by directors shows substantial positive impacts on directors' knowledge, expectations are that future training programs would also be beneficial. The evolving business environment will demand the very best leadership skills of cooperative directors.