The Perils of Nepotism
RANDALL A. PENTIUK, ESQ. & APRIL E. KNOCH, ESQ.

In the cooperative world, nepotism is the practice of showing favoritism toward one's family members or friends in economic or employment terms. A good example is using the Director’s position to give special dispensation to certain individuals or even hiring a friend or relative in a position with the cooperative. This not only has a damaging effect on the overall operation of the cooperative, but also erodes the membership’s trust. Further, it may ultimately lead to situations where elections are fixed, member issues are ignored, members who speak out are intimidated, or worse, embezzlement of corporate funds. In recent years we have witnessed flourishing cooperatives that have discovered that the relationships between employees and board members have destroyed member confidence in the Board, and even resulted in tens of thousands embezzled due to cover-ups and favoritism towards family members and friends. In short, Directors should not be related by marriage or blood to other Directors or employees.

Erosion of member trust in the elected individuals is destructive to the cooperative purposes and the continuance of the corporation. The only way to ensure that the loyalty of Directors is first to the cooperative is to create checks and balances through implementation of policies which reiterate the fiduciary obligations of the Directors with his or her acknowledgment and affirmation. We strongly encourage Boards contact their legal counsel to discuss implementation of these policies and, if your coop already has them in place, they should be reviewed for conformity with not only your governing documents, but applicable state law..