Should Co-op Staff Serve As Directors?

The question of whether co~op employees should be allowed to serve as voting members of a board of directors is one that many food co-ops give serious consideration to and wrestle with. For co-ops started more than 15-20 years ago, this question has most typically been answered with a resounding "No."

However, of the retail food co-ops that participated in last year's Cooperative Grocer survey, close to 60 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. However, that logic is being successfully challenged -- and for good reason.

In worker owned cooperatives, worker members serving as directors also must make critical distinctions concerning the board's role. This article treats the issue only in the context of consumer cooperatives.

The "lnside" 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, as individuals who are internal to the corporation, are most typically called "inside" directors, as contrasted with "outside" directors, who are not on the company payroll. For this article, "inside directors" 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 participate in discussions and decisions at the board level. In addition to this unique perspective, inside directors tend to have a closer understanding of the need for certain decisions and can provide a measure of institutional memory that is often lacking in co-op boards with only outside directors. (Many co-op boards functionally have institutionalized a very high turnover rate and short memory due to their short terms, limits on how many consecutive terms a director may serve, and/or the stress put on directors.) Finally, inside directors typically 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 feel that the views of employees are important and valued considerations in the board's decision making. However, this raises a very important issue for inside directors: under no circumstances are inside directors representatives. They do not function as representatives, they are not responsible as representatives, and they do not serve as representatives. To help dispel this notion, it is advisable that inside directors should never be considered or called "representatives."

The staff member/director is bound by law to the same duty of loyalty, overriding any special interest or potential representative role.

Make no mistake, an inside director on a co-op board has an extremely challenging job. Naturally, the staff member/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. The perpetuation of a strong business and the meeting of fiduciary responsibility override 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 (e.g., the employees) over the best interest of the co-op as a whole. Inside directors will beheld 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 as any other directors.

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, morale or weak job performance are not the kinds of problems that are generally effectively solved by a change in the 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, 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 co-ops prohibit all managers and 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 the opportunity to breach confidentiality is that much more available.

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 participation of inside directors from this very important activity. It is futile to have inside directors and then prohibit their participation and perspective in this, one of the most vital, board functions.

Structural Considerations

For co-ops that choose to allow staff members to serve as directors, there are a couple of important structural questions to consider. First is the question of who elects these directors. There are basically two different approaches used by food co-ops -- with equal success. The stores in the Cooperative Grocer survey that indicated that they have inside directors were evenly divided on this issue.

One approach is to have all directors elected, at large, 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. The other approach is to have inside directors elected directly and exclusively by the employees. This approach obviously gives added weight to the employee/members, since they will have more impact on selecting an inside director in this way than would any individual member voting in an at-large election. However, there are some good reasons for this method, and it has been used successfully.

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 service if elected. 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. While you may want to allow members who work at the co-op to serve as directors, you must avoid structuring a board that is bound to be dominated by directors with an employee perspective.

A final structural question is whether inside directors should hold officer positions; if so, which are appropriate and which are not. For a consumer co-op, two officer positions are not appropriate to be held by 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, the President definitely should 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 co-op's financial statements on behalf of the board. On the other hand, there are some co-ops that have found great benefit in having an internal director serve as the corporate secretary -- if for no other reason, because of that person's proximity and how much easier it is to obtain the secretary's signature of certification on important documents when he/she 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, to be sure, having inside 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 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 can't employees). While conflict of interest may be a concern, potential conflicts of interest exist with any director. The way a co-op handles such sensitive issues is important, but need not restrict the participation of important organizational stakeholders. In any case, if utmost importance is that all directors, especially inside directors, understand the role of the board and the need for professionalism incumbent in this position.

My advice to all co-op employees serving as inside directors: "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 co-op as a whole. And, good luck!" I believe it's an experiment worth trying.

See other articles from this issue: #017 June - July - 1988