The necessity of financial knowledge by the board of directors.

• Author: Wasson, Russ
• Position: In the Boardroom

When we think of evolution, it's a positive thing. Cro-Magnon man to modern society. Small dirt roads to a network of super highways. Small businesses achieving large commercial success. Positive forward steps that benefit society.

We rarely think about organizations like Enron.

Enron, and all the companies like it that have been the subject of governance scandal, are viewed as pariahs-organizations whose leadership was greedy as sin and corrupt to the core. If we think of Enron at all, it's in passing. A key driver for the passage of the Sarbanes-Oxley Act, and the progenitor of so many of the more recent Wall Street scandals and failures.

Yet there is much to be learned and applied from the Enron governance scandal, as well as the many others that followed. Chief among those lessons is the need--indeed, the requirement--for "financial literacy." Why?

The environment in which electric cooperatives operate today is one of increasingly complex financial risk management. One of the primary duties of the board of directors is to serve as a fiduciary for the cooperative and for the member patron.

The Powers Report, prepared by a special investigative committee of the Enron Board, concluded that Enron's board "failed to monitor ... to safeguard Enron's shareholders." Obviously, no director of any board wants to find him or herself at the heart of a scandal. One of the pervasive consequences cooperative directors face is not the lack of motivation or incentive to properly monitor the management and the external risks facing the cooperative, but the internal risk that the board will not have sufficient awareness or knowledge to enable it to do so.

In recent years, we have seen several electric cooperative boards come under attack, and it became clear that the board, in many cases, did not have adequate knowledge to fulfill their governance responsibilities. Indeed, when the directors sitting on the board are generalists and lack the technical financial knowledge needed to understand the complicated reports and operations presented to them, they could vote for resolutions that substantially increase the risks facing the cooperative and the membership. We have seen in our industry several cases in which our electric cooperatives got into financial trouble or trouble with their membership. At the heart of each of these instances was a board that perhaps lacked sufficient financial knowledge to adequately perform their oversight role.

In the corporate...