Should Co-op Staff Serve As Directors? 1993 Update

Mary manages the co-op's produce department by day. Then, on a regular basis she joins other co-op board members to meet and review management's reports and recommendations. Mary and her fellow board members work hard to set the overall direction of the co-op, monitor its performance, and then evaluate the manager, among other board functions. Impossible, you say -- an employee serving as a board member? Unethical? Illegal? Actually, none of these. Ill-advised? Here are the issues for your co-op's consideration.

The question of whether co-op employees should be allowed to serve as voting members of a board of directors is one to which many consumer food co-ops give serious consideration. For co-ops (of any type) started more than 20-25 years ago, this question has most typically been answered with a resounding "NO.' However, of the retail food co-ops that participated in the most recent Cooperative Grocer survey, 62 percent indicated that they currently have employees serving as directors.

Previously, the standard rationale for restricting employees' service as directors has been that they are implicitly in a position of conflict of interest that automatically prohibits them from this role. But that logic is being successfully challenged -- and for good reasons.

*In worker-owned cooperatives, worker members face a challenging position when serving as directors; they must constantly make critical distinctions concerning the board's role as contrasted with their employee and management responsibilities. This article addresses the issue only in the context of consumer cooperatives.

The ethical responsibility to deal professionally and confidentially with personnel, planning and strategy development, real estate, and other sensitive issues applies equally to inside directors

The "inside" director

Actually, having employees serve as directors is a very common practice in most private, stock-held corporations. In those circumstances, such directors are generally on the board by virtue of position -- for instance, the Vice President for Planning is automatically a member of the board -- rather than by virtue of some sort of(democratic or arbitrary) selection process. These directors are most typically called "inside" directors -- as contrasted with "outside" directors, who are not on the company payroll. For this article, the terms inside director or employee director shall be used to refer to any employee serving as a director of a (co-op) board.

More and more, co-ops are realizing that there is tremendous benefit in having the perspective of someone internal to the company in discussions and decisions at the board level. In addition to this unique perspective, inside directors tend to have a closer understanding ofthe need for certain decisions and can provide a measure ofinstitutional memory that is often lacking in co-op boards with only outside directors. (Many co-op boards have a built-in high turnover rate and short memory due to their short terms, limits on how many terms a director may serve, and the stress they put on directors.) Finally, inside directors often end up contributing a better understanding of members' reactions to proposals or decisions than outside directors -- due simply to their more frequent and extensive contact with members.

Not representatives

Additionally, many co-ops find that the views of employees are important and valued considerations in the board's decision making. However, this raises a very important distinction for inside directors: under no circumstances are inside directors to act as employee "representatives." They do not function as representatives, they are not responsible as representatives, and they do not serve as representatives. In fact, it is this situation -- when employee directors try to act as advocates or representatives of employees -- that leads many to conclude that having inside directors generates such conflict of interest problems that it's a bad idea.

Indeed, allowing employees, members or directors to perpetuate this notion can be very damaging to the co-op, to the credibility of the board, and could lead to decisions that result in liability of the board or directors. To help avoid this problem and dispel this notion, it is advisable that inside directors never be considered or called "representatives.

The law is pretty specific on the overall responsibility of the director -- to act in a manner one "reasonably believes to be in the best interests of the corporation as a whole." The perpetuation of a strong business and fulfillment of the director's fiduciary responsibility to the owners overrides any special interest or potential representational role. A court would undoubtedly find an inside director guilty of breach of loyalty for acting in the interests of a particular constituency (for example, the employees) over the best interest of the co-op as a whole. Inside directors will be held responsible for their decisions as they affect the overall health and performance of the business, and they have the same "trustee" function to protect the assets of the member/owners that other directors have.

Make no mistake: an inside director on a co-op board has an extremely challenging job. Naturally, the staffmember/director is bound by law to the same duty of loyalty clearly defined and expected of all directors. This duty requires that a director's loyalty lies first and foremost with the co-op as a whole -- ahead of personal interests or loyalty to any other party.

Just How Does This Work For Co-ops?

The theory sounds intriguing. But what are the actual experiences of consumer food co-ops with employee directors?

We interviewed nine co-op leaders or managers of co-ops that allow employees to serve on the board.

Virtually all of those interviewed noted that their experience with employee directors is a mixed bag. Overwhelmingly, all noted that the primary factor for success with this system is a clear understanding by all involved of the role of the board and the role of the employee director -- what it does and does not mean.

In general, the majority felt that when all employees, the employee director(s) and all board members understand the role, the system brings many advantages to the co-op. Most indicated that internal directors provide the board with a broader understanding of the co-op and the implications of its policy decisions. However, when the employee director tries to use the position to redress management or workplace problems or to assert a personal agenda, the system causes many problems and strains throughout the co-op. In the words of one manager, "Board members look to employee directors for guidance -- which works as long as the employee director has good leadership skills and doesn't plan to use the position to interfere."

Following are the advantages and disadvantages cited by interviewees:

Advantages

• Employees tend to be very knowledgeable directors and have more stake in the success of the co-op.
• Employees bring stability to the board of directors --they tend to have more organizational history and a broader perspective.
• Employee directors are more familiar with the impact of board decisions on operations and on the workplace.
• Having inside directors legitimizes employee concerns.
• Good employee directors can serve as "expert witnesses" to the board for management's needs and gives the board a chance to hear from more than the general manager on internal matters.
• Employee directors bring a day-to-day perspective to the board, which can help ground the board in reality.
• They provide insight into the effect of policy decision on operations.
• Having employee directors shows employees that the co-op cares and gives employees a connection to the board.

• Employee directors round out the experience base of the board in evaluating decisions and the performance of the company.
• Inside directors help remind the board of the impact of their decisions on the lives of employees and members in a more tangible way.

Disadvantages

• Many problems result if that person needs to be terminated
• -- it can cause a lot of problems if it's not clear whether the person continues as a director or not.
• This system can cause employees to have unrealistic expectations of what the inside director board can do with respect to personnel (especially wage) concerns.
• This requires people to wear two distinct hats -- as an employee and then as a director -- especially hard if they try to assert special authority or powers while on the job.
• Employee directors can tempt the board into focusing on operational details.
• Inside directors can end up doing board work on their work time, causing payroll control problems.
• Employees on the board can cause an unbalanced board if there are too many or there is an unclear structure.
• When internal directors are elected by employees, everyone (including board members) has a hard time not thinking of that person as a representative.
• Inside directors are a poor substitute for good employee involvement in the workplace or for poor communications by the general manager to employees.
• Some employees have a hard time dealing confidentially with information.
• In some situations, the board can be put in a situation of having to choose between the general manager and the employee director.

Note that of those co-ops interviewed, about one-third elect employee directors at-large and two-thirds have their inside directors elected by employees (just the opposite of the split indicated in the survey). Most of those interviewed feel that election at-large tends to result in better understanding of the director's job by all parties and less role confusion. Overall, the comments by these practitioners reinforce the importance of clear agreement and understanding of the role and function of the board and all (employee and outside) directors. All but one of those interviewed recommend that employees be included on a board, despite the potential disadvantages.

A few considerations

First and foremost, it should be clear that making employees eligible to serve as directors is not an appropriate way to deal with workplace problems. Issues of management style, employee morale or weak job performance are not the kinds of problems that are effectively solved by a specific organizational structure. Indeed, such a view is bound to be based on an unrealistic, uninformed or inappropriate understanding of the role of the board.

Who will be eligible is a question that will be faced by a co-op deciding to allow employees to serve as inside directors. Certainly, an employee must be a co-op member in good standing to be eligible to serve as a director. But, should all employees be eligible? Only non-management employees? Only management employees? Where will the co-op draw the line?

Most commonly and appropriately, co-ops prohibit the employee(s) who report to or are supervised by the board (e.g., general manager) from serving as a voting director. However, there is no clear pattern with respect to whether management-level employees (those reporting to or supervised by the general manager) should be eligible to serve as inside directors. Some coops prohibit all managers while others find no reason to do so.

Certainly, this question highlights another consideration: one of the most challenging roles for inside directors will be maintaining confidentiality. The ethical responsibility of a director to deal professionally and confidentially with personnel matters, planning and strategy development, real estate negotiations and other sensitive issues applies equally to inside directors. In some ways, inside directors must be individuals who understand and can live up to these standards even better than most other directors -- simply because day-to-day involvement and contact with employees and members increases the opportunities to reveal confidential matters.

Obviously this is especially crucial for the inside director when it comes time for the annual evaluation of the general manager's performance. The challenge to these directors will be to find a way to participate constructively and appropriately in this very important activity. Again, as in other matters, an inside director's role is not to represent the views or opinions of employees but to exercise her/his best judgment in matters before the board. It is not advisable, however, to restrict the participationof inside directors from this very important activity. It is futile to have inside directors and then prohibit their participation and perspectives in a major and vital function of the board.

Structural issues

For co-ops that choose to allow staff members to serve as directors, there are a couple of important structural considerations to contemplate. First is the question of who elects these directors. There are basically two different approaches used by food co-ops -- with equal success. In the most recent Cooperative Grocer survey, two-thirds of the co-ops that have inside directors have them elected by all members and onethird have them elected by just the employees.

In the first approach, all directors are elected, atlarge, by the co-op's membership. Under this method, eligibility for serving as a director is basically extended to all members, regardless of employment status. Employee members are eligible to be nominated and run along with any other member. However, as noted below, it is important for the bylaws to state the limits on how many board seats can be held by employees.

The other approach is to have inside directors elected directly and exclusively by the employees. This gives added weight to the employee/members, since they obviously will have more impact on selecting an inside director in this way than would any individual member voting in an at-large election. However, some co-ops find this method works best for them.

Another major structural question is whether there are designated seats for inside directors (e.g., "of the nine director positions, two shall be held by employee members"), or whether employee/members are simply eligible and may serve ifelected. For co-ops that choose this second option, it is important to designate limits on the number of director positions that can be held by employees. It is the experience of most co-ops that employees have a decided advantage as candidates in at-large elections -- probably due to their familiarity and enhanced recognition from regular contact with members. The point is to have a structure allowing all members, including those employed at the co-op, to serve as a director, at the same time avoiding a structure where the board could (or would) be dominated by directors with a particular (internal, employee) perspective.

The final structural question is whether inside directors should hold officer positions; if so, which ones are appropriate and which are not? For a consumer coop, two officer positions are not appropriate for inside directors -- the president and treasurer positions. Because of the president's crucial relationship with the general manager and vital role in focusing the agenda and attention of the board away from operational details, the president should definitely be an outside director. The position is much too important in creating a climate of trust, respect and teamwork between the board and manager to be subjected to complex, overlapping roles, and potential doubts. The treasurer should not be an inside director because it is very important for someone outside of the daily operations and systems to independently scrutinize the coop's financial statements on behalf of the board.

On the other hand, some co-ops have found great benefit in having an employee director serve as the corporate secretary -- if for no other reason than because of the pragmatic fact of that person's proximity and how much easier it is to obtain the secretary's signature ofcertification on important documents when s/he is on the premises on a regular basis.

In conclusion, allowing employees to serve on your co-op's board of directors is truly a matter of choice. There is no evidence to suggest that either having or prohibiting employees from serving on the board is a major factor in the general success or failure of a co-op. However, having employee directors is not an appropriate way to deal with problems between the manager and employees; generally changing the organizational structure is not an effective way to deal with problems of management style or employee morale.

One of the more compelling arguments for allowing staff members to serve as directors is that to prohibit them from this right functionally sets up two classes of members -- those who can be directors and those who cannot (employees). While conflict of interest may be a concern, potential conflicts of interest exist with any director. The way a co-op handles sensitive issues is significant but need not restrict the participation of important organizational stakeholders.

In any case, of utmost importance in having an effective board with employee directors is that all directors understand the role of the board and the need for professionalism incumbent in this position. Without a good understanding of board roles and constructive leadership in keeping the board focused on its functions, the employee director can contribute to confusion and strife among the board, members and employees.

My advice to all co-op employees serving as inside directors: Remember, your responsibility is the same as any director's -- to use your best judgment and act in a way that you believe is in the best interests of the coop as a whole. And, good luck! I believe that allowing employee members to serve on a co-op board is an innovation that adds to the character and value of our cooperative businesses.