The Two-Hat Problem

Murray Fulton and Brett Fairbairn


Images courtesy

The following question was recently posed to us regarding governance models for second-tier co-operative organizations such as federated wholesalers and financial centrals: Is there an expectation that board members must think about the interests of the second-tier organization or should they represent their home organization?

This question nicely encapsulates what Glen Tully, chair of the Centre’s Management Advisory Board, calls the Two-Hat Problem. When board members have two hats they can wear, which one should they put on?

For those not familiar with the terminology, primary co-operatives are enterprises, usually locally owned, whose members are individual people. Examples include your local credit union or co-op grocery store. These primary co-ops, in turn, often form higher-level organizations in which each credit union or co-op is one member. These second-tier, central, or federated co-operatives are thus businesses composed of co-ops.

The two-hat problem arises because people may simultaneously serve leadership roles in both a primary co-op and in the central co-op. If they are a director on both boards, which one do they really serve?

In our view, there is no compromising on the idea that the interests of the organization the directors are currently serving must come first. This means that when they are sitting at the board table of the second-tier organization, they have to put this organization’s interest first; when they are at the table of the member organization, then that organization comes first.

In everyday life, people are used to figuring out which hat to wear when. A common example might be when you find yourself serving as coach of your child’s ball team. You have an absolute duty as a parent to support your own child. And you have an absolute duty as coach to do what is best for the team and all its members. A coach who favours his or her own child will not be seen as doing the job: When the coach’s hat is on, you put the team first without loving your own child any less.


Images courtesy

A second-tier co-op is a kind of team — all the member co-ops working together — and the directors’ overriding loyalty in that context is to the group of co-ops.

Part of the reason for this clear distinction is legal; directors are required by their fiduciary duty to act in the best interests of the organization and could be personally liable if they fail to do so.

In addition, and even more importantly, we would say it is good governance. Effective board members can be distinguished by their keen sense of duty and responsibility to find the best possible outcomes for the group — i.e., to direct their hearts and minds to the success of the organization. Doing so leads them to seek alternatives, reconcile conflicting views, suggest innovative practices, and call to account those who might just state their view and check out of the discussion. Good governance suggests that directors at any board table be “all in” for the discussions of that board — sharing everything relevant, seeking the best decisions, and owning the collective outcome.

Of course, directors bring with them the personal knowledge that comes from their background and their involvement with a primary organization. This background is useful as an input into board discussions, since it sets a different tenor to the deliberations. Like all co-operatives, a second-tier organization has to be aware of the impact of its decisions not just on its own operations, but also on the operations of its members. This ability to think about the wider impact of its decisions is one of the characteristics that sets co-operatives apart from other organizations.

Having board members drawn from the membership provides a way of obtaining this larger perspective. In using this knowledge and perspective, however, board members have to behave in what we would call a non-particularistic fashion — they must use their wisdom to understand the impact on the system and not simply on their own organization. This non-particularistic approach means that individual board members will listen to and be influenced by other board members and support the resulting decision.

Directors engage and listen to and affect each other, so the resulting common perspective can go beyond the input from any one member. They keep their differences behind closed doors and, as we have stressed, collectively own outcomes. This makes it difficult for directors on a central board to function as representatives of their primary co-ops.


Images courtesy

The view we have sketched out here is often challenging to put into practice. One of the key problems is that people sometimes find it difficult to switch the hat they are wearing and may make arguments that appeal to the group but are really meant to secure benefits for their own organization (or even themselves).

While there is no easy solution to this, there are things that can be done. Training is one way to combat the problem — the more that people are able to understand the larger organization, the more difficult it is to focus simply on the organization they represent.

Even more important, we think, is for the board to have open discussions about issues, discussions in which positions can be challenged and biases can be tested. Directors should keep each other honest. Successful boards are those where, as we said above, the members direct their hearts and minds to the success of the collective whole.

This leads to our final point: Establishing clear norms in organizational culture is critical — norms that challenge participants to address the interests of all, that support disciplined behaviour and integrity. After all, this is how we solve the “two-hat problem” on the playing pitch every day.


Murray Fulton, left, and Brett Fairbairn

Future posts will delve more deeply into current governance literature and issues around the concept of representation.





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