The Board s Oversight Role

Transcription

1 The Board s Oversight Role Ty Thompson Chief Member Counsel, NRECA , tyrus.thompson@nreca.coop Roberta Aronson Senior Vice President and General Counsel, CFC , roberta.aronson@nrucfc.coop

2 LEGAL AND REGULATORY FRAMEWORK 2

3 State Corporate Law Electric Cooperatives Incorporated and Operating under Electric Cooperative Act in 30 States Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia, and Wyoming 3

4 State Corporate Law In Many (but not All) States, Electric Cooperatives Directly or Indirectly Subject to, or Influenced by, General Corporate Law To Extent Not Inconsistent with Electric Cooperative Act 4

5 State Utility Commission Rate Regulation by State Utility Commission 14 States: Full Regulation 9 States: Optional Regulation 2 States: Partial Regulation 22 States: No Regulation Other Regulation by State Utility Commission Territory Safety Siting 5

6 Federal Tax Law Internal Revenue Code 501(c)(12)(A) Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses. 6

7 Federal Tax Law Like Organizations Public Utility Type Service Cooperative Principles Subordination of Capital Democratic Member Control Operation at Cost 85 Percent Member Income 7

8 Miscellaneous Rural Utilities Service Mortgage, Loan Contract, and Regulations Private Lenders Mortgage and Loan Contract Federal Energy Regulatory Commission Other State and Federal Agencies 8

9 ROLE OF LEGAL COUNSEL 9

10 Role of Legal Counsel Resources Available Electric Cooperative Bar Association Legal Reporting Service Annual Legal Seminars Bylaw Revision Guide Sample Documents 10

11 Role of Legal Counsel Legal Counsel Assists Electric Cooperative ( Cooperative ) in Complying with Law Assists Board of Directors ( Board ), Directors, and Officers in Complying with Duty of Obedience Legal Counsel is a Means to be Used in Complying with Law Board must use Means Appropriately and Effectively 11

12 Electric Cooperative Legal Counsel Inside (Employee) or Outside (Agent) Counsel General (Continual) or Special (Periodic) Counsel Usually (but Not Always) Board Retains Outside General Counsel Manager Retains Inside Counsel Board or Manager Retains Outside Special Counsel Board, President, or Manager Requests Legal Services Manager and Attorney Inform Board 12

13 Electric Cooperative Legal Counsel General Counsel Attend, and Draft Minutes of, Board and Member Meetings Negotiate, Draft, and Review Contracts Facilitate Acquisition and Disposition of Real Property Facilitate Borrowing and Lending Money Research and Address General Business, Cooperative, Tax, and Electric Utility Law 13

14 Electric Cooperative Legal Counsel General or Special Counsel Litigation Labor, Employment, Tax, Antitrust, Environmental, Intellectual Property, and other Specialized Areas of Law 14

15 Client Cooperative is Client Manager, Board, and Members are not Clients Cooperative Acts through Authorized Members, Directors, and Employees 15

16 Constituent Misconduct Legal Counsel must Proceed as Reasonably Necessary in Cooperative s Best Interest if he or she Knows A Cooperative Director, Officer, or Employee Is Violating, or Intends to Violate Legal Obligation to the Cooperative, or a Law That might Reasonably be Imputed to the Cooperative That is Likely to Result in Substantial Injury to the Cooperative 16

17 Dual Representation Subject to Conflict of Interest Provisions, Cooperative Legal Counsel may Represent Cooperative Directors Employees Members 17

18 Privilege Attorney-Client Privilege may be invoked regarding A Communication Between Privileged Persons In Confidence To Obtain or Provide Legal Assistance Communication Must Concern Legal Matter Be Disclosed Only to Employees and Agents who Reasonably Need to Know of the Communication 18

19 Malpractice Legal Counsel may be Civilly Liable for Professional Negligence if Owes Duty of Care Fails to Exercise Care Failure Causes Injury Legal Counsel must Exercise Competence and Diligence Normally Exercised by Lawyers in Similar Circumstances 19

20 Discovery and Work Product Discovery Compulsory Disclosure of Information Regarding Litigation Interrogatories, Depositions, Requests for Admission, Requests for Production Work Product Material Prepared by or for a Lawyer or Prepared for Litigation (Planned or Pending) 20

21 Discovery and Work Product In General, may Discover any Nonprivileged Matter Relevant to Claim or Defense For Good Cause, Court may Order Discovery In General, may Not Discover Documents and Things Prepared in Anticipation of Litigation or for Trial 21

22 ROLE OF THE BOARD OF DIRECTORS OVERSIGHT AUDIT FUNCTION ENTERPRISE RISK MANAGEMENT

23 How do I Differentiate between the Role of Management and the Board of Directors? Where do you draw the lines for strategic planning and oversight? Board Policies and Procedures 23

24 Audit Roles and Responsibilities Board of Directors: Management: Day to Coordination External Auditors: Internal Auditors: Controls Oversight Preparing Financial Statements, Day Auditing Financial Statements Auditing Internal 24

25 Oversight of Audit Function BEST PRACTICE: WRITTEN POLICY AND CALENDAR BLUE RIBBON COMMITTEE FOCUS: - Independence - Financial Literacy - Time Commitment 25

26 Relationship Between Board and Auditor Board responsible for appointing, determining compensation, oversight of work, evaluating and discharging auditors Board responsible for resolving disagreements between management and auditors Board and Auditors should meet in executive session outside presence of management 26

27 Relationship Between Board and Auditor (cont.) Auditor s responsibility to the Board Report on independence Report on all services (audit, tax, consulting) Review audit report prepared by management Review all accounting and financial accuracy issues, judgments and estimates Statement on Auditing Standards 99 - Fraud 27

28 Other Audit Committee Responsibilities Review adequacy of internal controls Review legal and regulatory matters Review compliance with ethics code Receive complaints about accounting, internal control and audit matters Power to conduct or authorize investigations and retain independent consultants 28

29 More Board Responsibilities Training Accounting Alphabet Soup GAAP, GAAS, GAGAS, FASB, SEC Understand company s structure, business, reporting requirements Self Assessment 29

30 Corporate Fraud and Accountability Destruction, Alteration or Falsification of Records in Federal Investigations or Bankruptcy Tampering with a Record or Otherwise Impeding an Official Proceeding Improper Influence on Conduct of Audits 30

31 Questions Risk Oversight Has your coop identified all of the major risks that could affect the coop? Emerging risks? Are your comfortable with the Board s role with respect to risk management? Is there a process in place at your coop to assess and evaluate critical business risks? Are there adequate and proper responses in place to manage your coop s critical business risks? 31

32 Community Federal Members Market Governance 32

33 In the business world, the rearview mirror is always clearer than the windshield. - Warren Buffet 33

34 Risk Governance Primarily the responsibility of the Board of Directors: setting corporate strategy and oversight of risk management. Focus on risk appetite: How much risk is your cooperative willing to assume in pursuit of its goals? 34

35 Risk Assessment Process High Medium Risk High Risk I M P A C T Low Low Risk LIKELIHOOD Medium Risk High 35

36 Risk Management Response Strategies Avoidance Reduction Share or Insure Accept 36

37 One size does not fit all! 5. Close Gaps 1. Organize the Effort 2. Establish a Framework 4. Inventory Risk Response Activity 3. Assess Risk 37

38 Today s Takeaway There is risk in almost everything we do! It s all about identifying the critical risks and knowing how they are being managed. 38