Corporate bylaws provide the framework that dictates how an organization will be governed. Not surprisingly, they get a great deal of attention during the formation of a new entity. They also generate interest when the organization’s governance or operating practices are called into question. But all too often, they remain dormant in the document archives.
There are three good reasons to conduct an annual review of the corporate bylaws:
1. Ensure compliance with applicable federal and state law.
Each state sets rules and requirements for cooperatives operating under its jurisdiction. Noncompliance jeopardizes the organization’s favorable regulatory and tax treatment. Therefore, co-ops need to make sure that their bylaws reflect the prevailing legislation. An attorney who specializes in the industry can conduct a general review and recommend adjustments based on his or her expertise.
2. Ensure the organization’s policies, procedures, and actions align with the bylaw’s provisions.
If the organization does not follow its own rules, it could be subject to regulatory sanction, adverse rulings in litigation, denial of credit by lending institutions and unfavorable publicity.
3. Add, change, or delete sections that no longer reflect market conditions or the needs of the organization.
For example, in response to expanded service offerings, the organization may wish to expand its definition of membership. Many co-ops have elected to treat cable and Internet customers as members along with their telephone users. Pending court cases and judicial decisions provide even more powerful incentives for an extra measure of scrutiny.
As a case in point, capital credits have been a hotbed of activity. By law, cooperatives must return excess margins to their members on the basis of patronage. Some members have brought suit against their cooperatives, citing violations of state statutes, corporate bylaws and/or written policies. Specific complaints include:
- Failure to have a system in place to retire the capital credits
- Failure to retire the capital credits even though the organization had the financial means to do so
- Withholding financial information to conceal the organization’s capacity to retire capital credits
- Discriminatory practices in the allocation of capital credits to members
- Failure to provide proper membership notification
No one can blame members for seeking attractive terms for capital credit retirement. Yet this sentiment often stands in tension with the board’s bias toward fiscal conservatism. They have a fiduciary responsibility that demands prudent action with respect to the organization’s financial health. Excess margins in any given year may be necessary to offset anticipated losses, meet debt servicing requirements, build reserves, and/or fund capital investments that are essential to its long-term viability.
Some bylaws provide detailed guidelines for the distribution of capital credits – e.g., a payout of 5% of the excess capital annually, or a payout schedule that retires the current year’s excess capital over 20 years. This level of specificity may place the board in a compromising position should the co-op’s financial future look less rosy than the present day. Yet making adjustments to the bylaws to reflect an emerging reality requires a favorable vote by the entire members. Timing and politics may work against them.
Ideally, the bylaws set the intention to remit capital credits in accordance with applicable law and provide reasonable latitude for the board to act on that intention. The board can then craft a formal policy that sets forth an approach to retiring credits that maximizes the value for the co-op and its members. This policy establishes guideposts through which the accounting department institutes procedures to act on the board’s directives. A professional accounting firm can be a valuable resource to establish the requisite systems and structures. The annual audit provides assurance to the board that their policies have been enforced.
The annual review should include a close inspection of the terms of service for board members. Given the scope of the board’s responsibilities, it should cover qualifications for the officers and members-at-large as well as the requirements for retaining board positions (e.g., attendance, no current or anticipated conflicts of interest).
Determine which month provides the most auspicious time to discuss bylaws – e.g., when new members join the board, during the annual planning session, or on board meetings that are historically light on agenda. Then, put “Bylaws Review” on the board calendar during that time frame every year.
Jennifer grew up in Sublimity, Oregon. After graduating from the University of Oregon School of Law, she returned to her hometown to practice law with her dad, Jim Tiger. Jennifer has 18 years of experience representing telephone companies and other communications providers throughout Oregon. Connect with Jennifer here.