Governance Education

December 2010

Agenda
Role

of the board Relationship to officers Fiduciary duty review Duty of care cases

Role of the Board

By statute, a co-op must be governed by its board of directors which shall take all action for and on behalf of the corporation, except those actions reserved or granted to members. MSA Section 308B.455 A director individually or collectively with other directors does not have authority to act for or on behalf of the coop unless authorized by the board. MSA Section 308B.455

Role of the Board

A

director may advocate interests of members or member groups to the board but the fiduciary duty of each director is to represent the best interests of the co-op and all members collectively. MSA Section 308B.455

Relationship to Officers

Co-op is required to have the following officers but can appoint more:
President (or chair) :must be a member and a director One or more vice- presidents (or vice-chairs):the first vice-president must be a member and a director Secretary (or records officer):need not be a member or a director; can be combined with financial officer Treasurer (financial officer):need not be a member or a director. MSA 308B.475 subd. 1 Officers other than the General Manager(CEO) cannot bind the co-op unless authorized by the board

Relationship to Officers

A board may employ a general manager or chief executive officer to manage the day-today business of the co-op

If so employed, the CEO shall have the authority to implement the functions, duties and obligations of the co-op except as restricted by the board, the bylaws or articles. MSA 308B subd. 5

What This Means

Work as a whole and not as individuals or representatives of a constituent Select top management and plan for succession Provide general direction regarding co-op strategy and management operation of the business Oversee and guide managements performance and co-op financial performance Oversee compliance with laws Advocate but collaborate

Fiduciary Obligations
Directors
Duty

and Officers have three primary fiduciary duties:

of Care be competent Duty of Loyalty put co-ops interest first, deal fairly Duty of Obedience follow the rules

These

are found in statute and case

law

Duty of Care
Requires

directors and officers to

act:
In

good faith In a manner the director reasonably believes to be in the best interest of the organization and With the care an ordinarily prudent person in a like position would exercise under similar circumstances Same duty as corporate and

Minnesota Statute 308A.455

nonprofit directors and

This Means
Attend Board and Committee Meetings Be Informed: Industry, Operations, Governance Review Materials before Meetings Obtain Expert Opinions when Needed

This Means
Participate ask questions; weigh pros and
cons, alternatives, cost benefit and achievement of mission, understand risks and compliance program Can consider interests of employees, customers, suppliers and creditors, economy, members. MSA Section 308B.455

Good governance is fundamentally about

rigorous dialogue

subd. 4

You Can Rely on Others

Reliance Doctrine Director is entitled to rely on information provided by officers, employees, experts and committees who are: Believed to be reliable or Licensed professionals (for example, our auditor) Unless actual knowledge that reliance is unwarranted Minn. Stat. 308B.455 subd. 2

What is Acting in Good Faith?

Fact-based
Nonfeasance Malfeasance

and changing concept Determined by the courts

What is Acting in Good Faith?

Some

key cases describe the evolution

Graham v. Allis Chalmers (1963) (antitrust) In re Caremark (1996) (antikickback) Stone v. Ritter (2006) (anti money laundering) In re Citigroup (2009) (derivative litigation)

Past Laws Were Very Protective

Graham
(antitrust)
absent

v. Allis Chalmers (1963)

cause for suspicion, there is no duty upon directors to install or operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists Board can wait for red flags

Maybe That Wasnt Enough

In

re Caremark (1996) (antikickback)

while directors could be liable for failure to monitor, only sustained or systematic failure of the board to exercise oversight such as an utter failure to assure a reasonable information and reporting system exists will establish the lack of good faith

Board
Not

must supervise and monitor

just policy but actual behavior

What is Bad Faith?

Stone

v. Ritter (2006) (anti money

laundering)

Approved

and clarified Caremark To establish bad faith or malfeasance, must show directors
Knew they were not discharging their fiduciary duty or The directors demonstrated conscience disregard for their responsibilities such as by

Today- Business Risks

In

re Citigroup (2009) (derivative

litigation)
The mere fact that a company takes on business risk and suffers losses even catastrophic losses does not evidence misconduct Oversight duties are not designed to subject directors to personal liability for failure to predict the future and to properly evaluate business risk Citigroup had procedures and controls in place

If You Do This
You

may get the benefit of the business judgment rule

Process

oriented presumption that you acted with due care No after the fact judicial interference with your decision you can be wrong! But, irrationality is the outer limit of the BJR (waste/bad faith)

If You Do This
Application

in co-ops is uncertain. One court refused to adopt BJR to coops and instead appears to endorse a reasonableness standard. Willens v. Willens v.
Wisconsin Ave. Coop.

Difference

is on burden of proof and rationalized based on inherent selfinterest of member/directors

Some Other Protection

Co-op
But,

may indemnify directors.

MSA 308B.471

must have acted in good faith and received no improper personal benefit A few other requirements for criminal matters Article VIII, section 1 of Mississippi Market bylaws indemnify our board members if they act consistent with their duties

Some Other Protection

Co-op

purchases insurance

MM has D & O insurance with Executive Risk Indemnity Inc: Combined Maximum aggregate is $1,000,000 per year, with a $7,500 deductible (paid by co-op) per claim

Duty of Loyalty
Requires undivided allegiance when making decisions affecting organization This Means No self dealing (using your position for personal financial gain) No dealing with the Co-op unless disclosed and approved by disinterested directors without you in the room and terms are fair when compared with third party rates

Duty of Loyalty
Conflict

of Interest Policy Complete conflict of interest disclosure each year and update when necessary
Mississippi

Market board signs Code of Conduct each year Remember to report changes

Confidentiality
Keep

information not disclosed publicly confidential This could include:

Items discussed in executive session Trade secrets, if any Strategic plans Business opportunities

Duty of Obedience
obey the Co-ops articles, bylaws, and applicable laws Must be faithful to the organizations mission and compliance program Must not act in a manner inconsistent with the organizations goals
Must

Questions?