I’ll throw out some of the same clichés that you have heard a hundred times. The perfect storm. A necessary evil. The worst since WW2, the Great Depression, the dawn of time.

Regardless of the phrase you like to use, there is no question it is not 2006 anymore, when ethanol companies were able to raise millions of dollars at the drop of a hat. Everyone knew that the industry was going to mature, but few saw the current state of affairs playing out this way, this quickly.

The state of the industry has changed dramatically in recent months – but possibly the biggest change has come in an area that has, unfortunately, garnered little attention.

And that dramatic change is the role of the Board of Directors.

We don’t have enough room in this article to get in to all of the responsibilities and nuances of the Director’s role. But certainly chief among them are the fiduciary, oversight of executive management, approval of accounting practices, recommendations to shareholders, and the personal risk that Board members have on the line but might not realize.

However, the playing field for executing those responsibilities has recently changed dramatically. For example, take the interesting case of a ‘newbie’ to ethanol: Valero Energy Corp.

Valero’s revenue for 2008 was a staggering 9 billion. Yes, that is a ‘b’. Valero calls on some of the leading minds in the world to make some of the same decisions about the approval of accounting practices that a small independent plant in rural Midwest has to make.

With the competitive landscape so fundamentally different than it was a couple years ago, ethanol companies need to shift priorities, expectations, and approaches. And that is the role of the Board of Directors.

Let’s be honest here: there are some ethanol producers that are simply not going to make it. Bankers are tightening credit lines. Investors are not going to continue to make capital calls. Margin spreads are still unpredictable.

The question is what can be done by the Board to effectively prepare your organization for these challenging times and to make sure that plans are in place for the various risk scenarios. If you are a Board member, here is a short list of things that you should do right away:

Risk Assessment: know what your vulnerabilities are and how a shift in the marketplace affects you.

Workout/Turnaround Plan : after you identify your debt covenant obligations in your risk assessment, know where to turn when a bank workout or turnaround plan is needed.

D&O Insurance : the simple reality is that D&O Insurance does not cover many things that board members often think are covered. Know your coverages and your exposures to litigation.

Fraud Prevention/Internal Controls Review : the instances of fraud go up during challenging times, and it is much more cost-effective to prevent it rather than fight it after the fact. The good news is that if you have put in a robust Sarbanes-Oxley process, you are probably a long ways towards completing this task. For the rest, keep in mind a key responsibility of the Board is ensuring a strong internal control environment.

Cash Flow Forecasting : a common Board conversation should be around the company’s forecasted cash position. At what point are the lines of credit tapped? When is the line not enough? Will our lenders be willing to extend the line?

Obviously this list is not meant to be an exhaustive work plan. But it does begin to point Boards in the direction of oversight and planning rather than management. Certainly it is not a great deal of fun to perform some of these exercises, and much of it will be outside of the skills of the board members. However, it is the fiduciary duty of Boards to address these topics.

One last thing to note is addressing the 800 pound gorilla in the corner. I recognize that at many independent producers, the board members are also neighbors, friends, and family to the other shareholders. It is also true that many of these same board members’ core skills and expertise are in other areas, such as banking, farming, or real estate. This often creates the potential for inaction, indifference, or inability to identify possible courses of action.

That is not an issue that slows down Valero’s Board of Directors. To compete in their league you have to raise your game as well. Seek advice and input from external resources that specialize in these areas, as the objective point of view will do wonders for keeping the peace in your community as well as positioning you for success.

 

About the Author:  Brian Gramm is Partner and CPA for Milo Belle Consultants LLC, a Governance, Risk, and Compliance professional services firm headquartered in Sioux Falls, South Dakota.  Visit them at www.milobelle.com.