New Regulatory Environment Demands Increased Board Effectiveness and Accountability
MADISON, Wis. - Shareholder lawsuits and a demanding regulatory environment are forcing all boards of directors - including those of credit unions - to a higher level of accountability and performance. Board effectiveness is no longer a desired goal, it's a necessity. Effective boards share many of the same qualities, but they all start with finding talented and competent directors. In this area, Filene Research Institute Executive Director Bob Hoel says credit unions can learn something from community banks when they recruit. "Most good community banks select board members who position the bank favorably and bring in business," said Hoel. "Board members are told that when they are recruited for the bank's board, bringing in business is part of the job. Credit unions should try to recruit members who have strong ties and relationships within the community." Effective credit union boards have a recruitment strategy - essentially a marketing strategy aligned with the credit union's goals - that seeks candidates with varied viewpoints and occupations from different parts of the community. A board can never reflect all of the segments of the membership, nor is it advisable, but a board that looks and thinks alike is deficient, says Hoel. Even if there are no current vacancies, boards should always be in a recruitment mode and have candidates ready to serve. Potential directors can serve on board committees where other directors get a chance to observe their contributions and work style. Some boards view committee experience as grooming for a future board member. New recruits can also provide the board with accounting, business, or legal help. Potential recruits should have the ability to deal with abstract issues, which is not as easy as it sounds. "It's easy to talk about loan delinquency, but harder to talk about branch strategy," says Hoel. Filene research supports this - providing strategic direction and managing CEO accountability are two key traits effective boards share. Directors must be able to see the big picture and avoid getting lost in financial minutia. The annual planning session can help to accomplish this. "Make sure you have a planning session that develops as close a vision of what you want the credit union to be without getting into management details," Hoel said. "How do we want to serve our members? What kind of services do we want to offer? Then decide on three to five strategic initiatives for the next year or two." After the planning session, each board meeting should have meaningful agenda items that focus on strategic initiatives. The CEO is held accountable for delivering results. The CEO's performance evaluation and compensation must be tied to reaching these goals Credit union history is dotted with dominant CEOs who thwarted board effectiveness and turned directors into rubber stamps for management fiats. A sure sign that this is occurring is when board decisions are always unanimous. Directors have a legal and ethical obligation to avoid becoming a rubber stamp, says Michael McLain, assistant general counsel and senior compliance counsel at CUNA. The director's legal duty is "care and loyalty" to the credit union. Care includes the requirement for directors to attend meetings, exercise independent judgment, receive and review adequate information, and speak out if necessary. Loyalty requires directors to consider the interests of the credit union first, avoid conflicts of interest, and hold credit union information in confidence, says McLain. But, back to the dominant CEO, what's a board to do? "If you ask the CEO to provide options and the consequences of each option along with the CEO's recommendation, the board gets the opportunity to assess the quality of the credit union's decision making process," says Hoel. If this course of action doesn't work, coaching a CEO who dominates the board can be effective. Directors need to inform the CEO that some of the directors feel they are out of the loop, and that the credit union needs to put the board's collective talents to better use. This takes courage and there is an element of risk, which is part of the director's job. Directors concerned about risk and liability are typically protected by their credit union's bond as well as the "business judgment rule," says McLain. This rule protects directors from liability for their actions if: they acted in good faith with independent and informed judgment, and in a manner believed to be in the credit union's best interest.