Director’s Handbook: New Rules, New Times
Call the NCUA suit against WesCorp’s outside directors the warning shot that, whether the NCUA wins or loses that case, makes clear one fact. Serving on a credit union board involves risks, responsibilities, accountability and losses when the job is not done well.
New, more stringent rules apply to directors, and a bottom line reality is that the rules do apply. Said Stuart Perlitsh, CEO of Glendale Area Schools Federal Credit Union: "Just because you weren’t paid doesn’t entitle you to make stupid decisions."
"It does not matter that you are an unpaid volunteer. There is no difference under the law. Director responsibility is not defined by whether you are paid or not," added Fred Becker, CEO of NAFCU.
Matters sometimes culminate in a court of law, but they may also end simply with a wave of public humiliation, a reality discovered in February by the volunteer directors of Hawaii State Federal Credit Union, whose lavish benefits (four mainland trips annually, spousal travel benefits, use of a company credit card and more) triggered an exposé in the state’s largest newspaper, The Star Advertiser, which swiftly led to cutting back the perks and a follow-up story headlined "Directors Snip Their Benefits."
Matters are different today for volunteer directors, said Michael Lozoff, an attorney with Shutts & Bowen in Miami, who heads the firm’s credit union practice. Lozoff acknowledged that he can remember board meetings from many years ago when directors spent much of the morning "studying the lunch menu."
No more. "Directors know there is a need to be much more serious about the job," he said.
Much of the new stringency, indicated Lozoff, is a migration into credit unions of the higher director standards that washed across corporate America in the aftermath of the Enron and similar scandals and resulting legislation such as Sarbanes-Oxley, which made unmistakable that directors have a duty to mind the store, to question management and to independently review strategies and balance sheets. There’s a fine line between board service and meddling in management decisions, but, for the most part, corporate boards got a big wake-up call early in the decade and the directors who remain know their jobs entail hard work.
This ethos now is penetrating credit unions.
Boards find themselves in the NCUA’s cross hairs and, said Lozoff, "this has spawned a new cottage industry, training directors on their job duties."
Lozoff is personally active in that industry, and he is quick to share the keys to board success.
It starts, he said, with "a written statement that sets out a code of conduct for volunteer directors." Unspoken codes of conduct do not hack it anymore–put it in writing, stressed Lozoff.
Lozoff added that his firm is also emphasizing to credit unions the need to name qualified directors. Not everybody has the skills to analyze ledgers filled with million- dollar decisions and, nowadays, director ability is highly important when filling vacancies.
Lozoff also pointed to recent NCUA statements that task examiners with inspecting credit union education programs for directors.
Other NCUA statement have further upped the ante for credit unions and their volunteer directors, said Lozoff.
The NCUA, in recent statements, has itemized what it sees a director needing to be able to do and topping the list is: "Carry out his or her duties in good faith, in a manner reasonably believed to be in the best interests of the membership of the federal credit union, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances."
The NCUA also dropped a few bombshells in its recent director statements, including this: "The proposal also amends the indemnification provisions of NCUA’s rules to prohibit a federal credit union from indemnifying officials and employees for liability from misconduct that is grossly negligent, reckless, or willful in connection with a decision that affects the fundamental rights of members."
If nothing else does, that clearly puts directors on notice.