During the industry debate over board member term limits, regulators have focused on the board's responsibilities, financial literacy, qualifications and, in almost every regulatory letter, made it clear that the board is responsible for more and more of the credit union's day-to-day operations.
Term limits is another failed attempt to improve boards and credit union governance.
I think term limits are a distraction and take away focus from the real issue. The real issue is how well credit union governance works. Does the board represent the best interests of the members, oversee the CEO, set the strategic direction for the credit union and hold the CEO accountable for implementing the business plan? Too often the answer is no it does not. Too often the board and management look after their own interests. One clear example is the almost complete absence of healthy credit union mergers.
California's legislature has experimented with term limits as a cure for all that was wrong with state government. The results are clear. California's legislature's performance is far worse with term limits than it was before term limits. The state has a huge budget deficit and most of the major decisions are now made by voter initiatives that by pass the legislature. We have a legislature that is made up of inexperienced legislators who rely far too much on their career staffers and lobbyists for advice. California is close to economic collapse. While we can't completely blame term limits, we can say that term limits have not fixed anything.
I think that term limits will not fix the governance issues that plague credit unions. The fundamental problems are not due to ancient board members who never retire. The most significant problems that impact credit union governance are rooted in the member-owner concept. Credit union members do not serve the same role as owners who own shares in a company. Members have an undivided ownership interest that can only be realized in a liquidation. They have no ownership stake. Members leave the credit union with nothing other than their share deposits. Members don't usually vote; they don't attend annual meetings; they don't read the annual report; and members do not petition to run for the board so that most board member are in fact not elected by member votes but by acclamation at the annual meeting attended mainly by staff. Therefore, the key governance issue is that the owners are absent from the process of governance. Members have abandoned their role. The connection between the credit union and its members is a customer relationship, not an owner relationship.
The direct consequence is that the board and management are not held accountable by members for their performance. It is fair to say that regulators hold board and management accountable, but that is usually after the problems arise. Regulators are not owners and their interest is to protect the insurance fund. Any business that relies solely on regulator guidance will soon be out of business.
Term limits are the sign of failed governance. If the board, nominating committee and members are doing their respective jobs, there is no need for term limits. The board has to evaluate the performance of the board as a whole and individual board members. The board has to set expectations for performance of the board and board members, and then hold them accountable. The nominating committee has to consider the performance of individual board members and decide if they deserve to be nominated and in the case of prospective members of the board to see if they meet the qualifications set by the board. Members have to attend annual meetings, read the financial statements and vote in the elections. Members have to raise their voice when credit union performance is subpar. Unfortunately, members don't have the same tools that stockholders have to evaluate performance. Stockholders can use the price of the stock as a barometer of credit union performance.
Term limits imply that experience doesn't count. Term limits imply that nominating committees can't decide who should not be nominated. Term limits are a sign that members are not involved. Member involvement means members are running by petition, elections are contested and board members are accountable for their performance as they stand for contested elections.
We must give members better reasons to get involved and better tools so that they can act like true owners.
Here are some tools I would give members. I would advocate that examination reports be made public. When a credit union fails, it is too late to know that for years the examination reports have been terrible. I would advocate that CAMEL ratings be made public. I would advocate that bona fide merger proposals be made public. I would advocate that NCUA upgrade the M in CAMEL to measure governance. Good governance should include a measurement of how many members vote to elect the board; how many members attend the annual meeting; how many members access the annual report online; whether the board does a self evaluation each year on the board and each board member; and whether the elections are contested or not.
The best way to get members involved is to give them an ownership interest. We can't do that. So the next best alternative is to give them lots of information so that they get involved because they care.
Term limits will achieve one thing–turnover. Come to California and see what turnover gets you. It means that the legislature is weak while lobbyists and professional staff are strong. That is what you will find with term limits in credit unions. Weak boards and strong management. We don't need that.
SAFE Credit Union
North Highlands, Calif.