Credit Unions May Be Not-for-Profit, But They Aren't Charities
Credit unions are very proud of their heritage, and they should be. Credit unions, individually and as an industry, grew from nothing to serve tens of millions of members nationwide. But as the financial services industry overall has evolved, so too should some of the things credit unions were built upon.
What many have widely considered one of the underpinnings of the industry, volunteer boards of directors, should be a thing of the past. When credit unions began in the United States they took savings deposits and made some small loans. Credit unions are not so simple these days.
When credit unions were founded, mortgage-backed securities and 401(k)s were not even a germ of an idea. These are just a couple of the things of the 21st century that are far more complex than 100 years ago. Running a financial services company today requires very complex work and a very comprehensive understanding of what is going on. In short, it's a huge undertaking to serve on a credit union board.
Let me refer back to something older than American credit unions-the Declaration of Independence and the Constitution of the United States. These documents are what our country was founded on. They outlines all the things that no one can take away from Americans: life, liberty and the pursuit of happiness. The Constitution very clearly explains the philosophy of the U.S. government and its people and why they exist.
But even the founding fathers realized that this very open and empowering document might need amending from time to time for unforeseeable circumstances. The Bill of Rights drills down a bit to define in broad terms what is meant by those three rights. From the First Amendment, freedom of speech and more, to more recently added equal rights, this document and its meaning change with significant shifts in the times. Two hundred years ago the government didn't have a clue the Internet was in the offing, but it intended bloggers would be covered under freedom of speech. The Bill of Rights highlights what Americans can do and what cannot be taken away from them.
In 200 years, there have been just 27 amendments to the Constitution; it has been long lasting precisely because it is an enabling doctrine. In fact, the only amendment that has ever been repealed was the one that told American what they could not do, the infamous Prohibition.So return to 2010 and credit union volunteers. Thousands have proudly and honorably served as volunteers on credit union boards. But life and financial services have evolved. Most recently, there's an evolution of regulation afoot. Five years ago the NCUA and other regulators honed in on Bank Secrecy Act violations. Then it was third-party due diligence a few years ago. Now the regulators are zeroing in on what it means to serve on the board of a financial institution and other companies, for that matter.
Fiduciary duty and duty of care have been a matter of theoretical debate. In the wake of international financial crisis, regulators are looking to define more clearly for financial institutions what these terms mean. To accomplish that, certain bare minimum standards must be set. We've seen this with the NCUA's move toward basic financial education requirements for credit unions.
It's difficult to recruit board members for credit unions. Serving on a credit union board is a big time commitment and personal liability to take on as a volunteer, which is precisely the argument some are making. There's an attitude from some portraying, 'we're volunteers, so what do you want from us?'
Seeing that in words on paper makes me even more frustrated with the notion that board members aren't paid and so the NCUA shouldn't require them to learn about financial institutions.
Credit union board members should be required to understand the basics of a financial statement; they should be familiar with enterprise-risk management and they should carry certain liabilities. There's a lot more to know about financial institutions than there was 100 years ago, and it seems we've become a much more litigious society.
Another complaint I've heard is that the NCUA is getting way too deep into credit union operations by requiring financial education. This point of view is absurd in this instance because the agency's most basic mission is the safety and soundness of credit unions. At the same time, the credit union board's most basic mission is the safety and soundness for its credit union. The two are inextricably intertwined and appropriate.
Because of all the responsibilities put on a credit union board, the regulations should allow for credit unions to have the option to pay their board members. For their work, qualified board members should have the option to be paid. The word qualified is important. I'm not saying credit unions should just start paying their board members. Credit unions need the right board members, who may very well be existing board members, and then they should pay them. That would go a long way to attracting knowledgeable and effective board members. It could also boost age diversification on the board as 30- and 40-something working people with young families may be more willing to serve if there's a return.
The credit union philosophy is people helping people, not people helping people just from the goodness of their hearts. It's not for profit, not for charity, but for service. Credit union board members take on a lot of work and responsibility, and it is completely justified that they should be compensated for that. It doesn't have to be much but enough to draw in more dedicated and reliable board members. I understand that Vancity Credit Union in Canada pays its board members; see what it has to say about the impact.