Increasing the Effectiveness of the Board in Electric Distribution Co-operatives
Updated: Mar 16, 2019
The issue of Board Effectiveness has been increasingly moving to the top of the priority list for distribution co-op Board Chairs and CEOs. How can board chairs ensure that the board and individual directors, are doing all they can to understand and meet the needs and expectations of their member/owners while overseeing long-term success and sustainability of their co-op?
One place to look for answers to that question is to interact with board chairs and directors from other distribution co-operatives. There are ample opportunities to do so provided through the NRECA, Touchstone Energy and other State-Wide organizations. Learning from others is a valuable source of information/ideas to improve board effectiveness, and one that all board directors should engage in. However, there may be another, potentially more valuable place to look, that may bring a different frame of reference on the issue of board effectiveness and potentially new ideas on how to improve it.
In recent years, boards of publicly traded companies have come under increasing pressure for the performance of the companies they oversee. They have also experienced an increase in director liability for failure to ensure that shareholders/owners are effectively represented and receiving a fair return on their investment. There may be many things to learn from them that is transferable to electric co-ops. When a publicly traded company’s performance falls below expectations, the board hears from disgruntled shareholders just like a co-op would hear from disgruntled member/owners if service is bad, outages happen too often, last too long or their rates go up.
Since the financial crisis in 2008, publicly traded companies that are failing to meet shareholder expectations are seeing a significant rise in shareholder/owner activism, an organized effort to influence the direction of the company by bringing pressure to bear on the board of directors. By looking at what the boards of publicly traded companies are doing in response to shareholder activism, co-op boards may uncover valuable insights and ideas that they could adopt to make them more effective at meeting member owner needs.
Valuable Insights from the Outside
What are boards of publicly traded companies doing in response to shareholder/owner activism? Here are some insights that may be most relevant to distribution co-op boards.
More Focus on the Future
All boards need to keep an eye on the current and near-term performance of their organizations. The danger however is that many boards get too caught up in the day-to-day. When a crisis happens, pressure is often brought to bear on the board to react immediately or to change the direction of the company. While boards need to be listening and responsive to shareholders/members they must do so in the context of the strategy they have helped to develop.
The board of publicly traded companies, just like the board of a distribution co-op, are ultimately responsible for the long-term success and viability of their organizations. Co-op board directors need to be focused on the long-term mission, vision and strategy for their co-op and make sure that management is executing the strategy to get there. Directors should know the strategy and be able to articulate it effectively to all co-op stakeholders
Board chairs and directors must avoid the “short-termism trap” and demonstrate the courage and commitment to stay the course when short term pressure to veer off strategy is applied.
In the end, boards improve their effectiveness and therefore the performance of their organizations by being prepared for and focused on the future. They ensure their company has a robust vison and a strategy to get there.
Composition and Tenure of the Board
Without a robust strategy that is fully supported and actively promoted by the board, the performance of any co-op is likely to suffer and lead to member/owner dissatisfaction. Taking a proactive approach means ensuring that the board has the broad experience, domain expertise, knowledge and skills to guide their co-op to sustained long term high performance. Board chairs need to make sure their boards have the right mix of competencies to help decide on the right strategy, the right plan and the right management team to execute it. In addition to competencies, boards should also consider the changing demographics of the member/owners they represent. There is significant evidence that suggests a diverse board (gender, ethnicity, age, background) that reflects the demographics of their member/owners are more effective at communicating with and understanding how to meet the needs of those members, thereby increasing the chances that members expectations are consistently met or exceeded.
Tenure of board directors is another important factor to consider in optimizing board effectiveness. The average tenure of board directors in U.S. publicly traded companies is a little over eight years. While there is no agreement on the optimal tenure of a director, it is clear that a minimum amount of time is necessary for a director to hit their full stride and bring the maximum value of their contribution to the table. It is also clear that thoughtful and planned turnover of directors over time is necessary to keep the board fresh, add new perspectives and ensure mirror like representation of member/owners. Board succession planning is used by boards of publicly traded companies to improve the effectiveness of their boards and their ability to strategically guide their companies to great performance and owner satisfaction.
Dwight D Eisenhower is attributed for saying “plans are useless, planning is invaluable” At some point in the future, despite your best efforts to build and execute a robust strategy, member/owners will become unhappy or dissatisfied with the performance of your co-op. This is inevitable. As part of a co- ops strategy, boards should be discussing and planning for this situation in advance and have an agreed to “play book” of what the board, individual directors and management will do when it occurs. Without a play book, boards may respond inappropriately to member/owner dissatisfaction, get defensive and keep their contact with member/owners to a minimum until the “storm blows over”. When a member/owner crisis occurs the board chair and each director should know exactly what they should do and with which members, to ensure a fast, coordinated and effective response. Having a play book in place that clearly identifies the actions that will be taken by the board chair, directors, CEO and management team is something distribution co-op boards should include in their strategic plan.
Actions to Improve Board Effectiveness and Enable Strategy Realization
As boards of publicly traded companies work to support their organization’s strategy they are taking action to improve their effectiveness. Below we have highlighted five actions that should be at the top of the list for the boards of distribution co-ops:
Strategy Focused- Step back and challenge some of your assumptions and attachments to the status quo. Shed old ways of thinking or behaving that may block future oriented strategic planning and action. Ensure that board members are focused on strategic issues and member/owner value as the board guides the co-op to the future.
Self-reflection and assessment- In light of your co-ops strategy, individual directors should take the time to assess their own effectiveness and ability to support strategy execution. The assessment should lead to development of a personal plan that may include training and coaching to close any gaps or add any capabilities that will make them a more effective board director.
Assess the composition of the board- Given the vision and strategy of your co-op, take an unbiased, objective look at the composition of the board. Assess if the board has the right mix of experiences, domain expertise, demographics, tenure and commitment to effectively guide the co-op toward its vision of the future. The results of this assessment should lead to the development of a transparent succession plan designed to improve the composition and effectiveness of the board over time to strategically guide their co-op.
Improve board synergy- Synergy thrives on diversity and the ability to converge and integrate different perspectives into a plan of action that all can support. A highly effective board operates as an effective team where full participation from all board members is expected and different points of view are valued and encouraged. A good measure of board synergy is the quality of debate and the ability to listen to and integrate different perspectives into a plan of action. Set a few team/full participation/ quality of debate goals and review progress regularly.
Board effectiveness plan- Highly effective teams seldom just happen. Effective teams are the result of self-assessment, identification of strengths and weakness, honest and transparent discussions, talent and the development of a plan to improve effectiveness. Typically, this plan includes the actions that the board can take as a team as well as the individual actions that can be taken by directors to be more effective team members/leaders. If a board perceives they need to improve their effectiveness, develop a plan and monitor your progress against it.
Electric utilities have faced and successfully navigated a lot of change in their past. And boards from distribution co-ops have done a good job of looking out for the interests of their members. That is the good news. The challenging news is that more change is coming, and it is coming with more speed and complexity than in the past. Is your board ready? If your answer is yes, I congratulate you. If you are uncertain or your answer is no, I hope you can take away some ideas from this blog to help your board be more effective, strategy focused and ready for the future.
Copyright © 2017 PowerNavigation. All Right Reserved