Director fees and expenses - developing a board performance plan to prepare your system to respond to member and public inquiries.

• Author: Boudreaux, Greg
• Position: Includes appendix

The article by Harold McCaughrin in this issue of Management Quarterly is indicative of what we believe is a significant trend in the rural electric program, namely an increasing number of consumer and media requests for information about director fees and expenses, and the resulting need for directors to be able to explain and justify why these fees and expenses exist. This suggests that boards (and managers) will need to spend a greater amount of time discussing the level of expense that the board incurs now, and developing a philosophy about what level of expense should be incurred.

To assist boards in this process, we recommend that they consider developing a "Board Performance Plan" as part of the system's annual work plan and budget. Developing this plan will help the board determine its real philosophy about what amount should be paid for the director's fee, how much should be spent on training and education, the level of medical insurance and other benefits to be provided, and the other components that make up the total level of expenses incurred by the board. By participating in this discussion on an annual basis, each director will be better prepared to explain why these expenses occur if questions are raised by consumers or the media.

We will begin by identifying two questions that we will try to answer in this article:

1. On average, what do rural electric distribution systems now spend for director fees, expenses, education and insurance?

2. How much should a system plan to spend, and how does it determine that this amount is reasonable and prudent?

   How much does the average board cost?

   A review of industry data

   In order to establish data about our industry, we have reviewed the 1990 REA Bulletin 1-1 Statistical Report for Rural Electric Borrowers to obtain the total number of consumers served and the total revenues for all distribution systems. A summation of all distribution REA Form 7 Financial and Statistical Reports for 1990 was then used to obtain the total director fees and expenses for all distribution systems and the total number of directors. This is the most recent period for which data is available. From this information, the following results appear to be indicated:

   Average total annual fees and expenses per director $5,500 Average total annual board fees and expenses per consumer $4.64 ($.39 per consumer per month) Average total annual board fees and expenses as a percent of total revenues 0.32% These results are derived from REA reports. We can't confirm that all systems report all actual costs related to the board of directors and their activities in the same way on REA Form 7. For example, some systems may report all board expenses on part N, line 7, but others may only report the fees and expenses related to board member attendance at meetings and training seminars on part N, line 7, reporting the costs for group insurance premiums and officer and director liability insurance premiums in other general ledger accounts. A recent informal survey of Management Internship Program participants confirms this lack of consistency throughout the industry. Hence, the national data must be looked at very critically before drawing any conclusions.

   Given this caveat, systems may still want to produce a similar analysis for themselves. This can be done using the following REA Form 7 line items:

   Total director fees and expenses: part N, line 7

   Total number of board members: part N, line 6

   Total number of consumers: part R, line 10, column I

   Total operating revenues: part A, line 1, column b

   From this information, you can make these calculations for your system and compare your results to the industry numbers. But can you make a valid argument that your system's results are therefore reasonable or appropriate? We don't believe so for the following reasons:

   * Each board must determine what fee it should pay directors for performing their official duties.

   * Each board must determine what medical or insurance...