National co-op leader says board members may have no idea of their exposure level

A national cooperative association spokesman said many Kaua’i Island Utility Cooperative board members may have little idea about the responsibilities and potential liabilities that come with the volunteer positions they were elected to.

Cliff Humphrey, legislative representative with the National Rural Electric Cooperative Association, said co-op directors can be held liable (in both civil and criminal venues, jointly or individually) for malfeasance or negligence in the exercise of their legal duties to the co-op and its member-owners.

“I suspect that many of those who (ran) for a seat on the KIUC board of directors have absolutely no idea what is involved in actually performing the job; no pay, required participation and attendance, exercise of ‘reasonable’ due diligence in making corporate decisions, and the potential joint or personal liability for failure to protect the best interests of the corporate co-op and its member-owners,” Humphrey said from Washington, D.C.

“Those who serve on electric co-op boards are universally unpaid volunteers, but they are still bound by state and federal law regarding their fiduciary responsibility to the corporation and to member-owners and the exercise of reasonable due diligence in performing their duties,” Humphrey said.

Actually, KIUC board members are probably alone among co-op board members in that they receive $150 per day while on board business, according to the KIUC bylaws.

“The corporate mandate and statutory purpose for all electric cooperatives is to deliver safe, reliable electric utility service to their member-owners at the lowest cost possible consistent with generally accepted good business practices,” Humphrey continued.

“Thus, directors who would attempt to use a seat on the co-op board for purposes other than overseeing sound business operations and attainment of good service and lowest-possible rates would be breaching their legal duties to the owners of the corporation,” he continued.

And it is not just local opponents of KIUC who are closely monitoring the election, and will continue to keep close tabs on actions of the new board, he observed.

“I know that RUS (the U.S. Department of Agriculture’s Rural Utilities Service that loaned KIUC the money to buy Kaua’i Electric) is keeping a sharp eye on the process in Kaua’i due to the unprecedented size and character of the $215-million acquisition loan and the potential exposure to U.S. taxpayers in the event of failure,” he said.

“Under federal law, the Rural Utilities Service may remove the sitting board of a cooperative borrower and conduct a new election in the event board activities are construed to endanger the co-op’s repayment of any federal loan or loan upon which there is a federal guarantee.”

Further, the U.S. Internal Revenue Service is monitoring KIUC to ensure that it meets all the many tests required to be granted exemption from federal taxation, he noted.

“Among those tests are the requirements that there must be full and free democratic elections for the co-op board, and adherence to the ‘one-member, one-vote’ rule.”

Humphrey said he knows of no other instance where a co-op’s entire board is chosen at a single election. “Most serve staggered terms due to the need for continuity and ‘institutional memory’ in overseeing the business of the company.

“I believe it is safe to say that most co-op members on the Mainland do indeed take the election of their board members (‘directors’ in some states, ‘trustees’ in others) very seriously,” he said.

“They do so because they know a cooperative is like any other private-sector enterprise, and must be operated in a sound, business-like manner in order to survive.”

He feels that, like their Mainland counterparts, KIUC’s member-owners recognize that the electric utility is a “priceless local asset to be guarded jealously and managed wisely.”

In that aspect, Mainland co-op board elections tend to be as spirited as the KIUC process was, he commented.

“Present-day board elections are generally enthusiastically participated in by co-op member-owners. Most are akin to the election of directors in any other private-sector business corporation, where experience, business acumen, and loyalty to the organization and its goals are most sought after,” he said.

“Member-owners of the co-op can hold directors responsible for their actions regarding the sound management of the corporation, and most states have statutory requirements governing proper conduct of corporate directors in the exercise of their duties.

“This (KIUC election was) not a ‘public election,’ even though as member-owners many members of the public participated,” he said.

“I do hope that, for the long-term best interests of all those who make Kaua’i their home, those chosen to serve their neighbors and friends as members of the board will measure up to the challenge of overseeing the co-op’s business in a manner that will maximize the potentially significant benefits for the community inherent in this form of electric utility business organization.”

In order to ensure board members are prepared to take on their responsibilities after being elected, a requirement in the KIUC bylaws is that all directors earn a Credentialed Cooperative Director designation or Director Certificate or similar certification from the National Rural Electric Cooperative Association within two years of taking office.

Staff Writer Paul C. Curtis can be reached at or 245-3681 (ext. 224).


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