While there are multiple viewpoints on the federal credit union industry’s new efforts for directors to smarten up as mandated by the NCUA rule on director financial literacy, an upshot opportunity presents itself in the form of enhanced governance by directors.
The issue of improved and effective governance is hard to argue against. The NCUA financial literacy requirement for directors to have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand a credit union’s balance sheet and income statement and to be able to ask substantive questions of management and auditors, seems pretty basic after one year of its promulgation. We have come too far from the 1920s, ’30s and ’40s when a mom-and-pop style of oversight worked for many credit unions. A director position on the board as a reward or recognition for service from a select employee group member met most credit union’s operational needs for governance.
The complexity of our 21st century financial industry requires knowledge, not just of balance sheets, but of risk-management tolerances, operating and personnel policies, records and disaster recovery plans, investments, borrowing, insurance and emerging technologies, just to name several areas. Volunteer directors with expertise, experience and willingness to continue learning will help meet obligations of their board duties.
For us, in working with other board directors and managers, we found that the opportunity is not just meeting the financial literacy test by taking a short instructional class, but rather how well is that director knowledge and expertise manifested? A credit union’s use of that knowledge is best seen when directors use it to develop and maintain effective overall policies that enable the organization to function smoothly and legally. Directors, working with executives, can construct bylaws and policies that allow the organization to have that high level of confidence today’s financial environment demands. Once those policies are in place, directors yield to their managers to instill utilization throughout the organization.
Smaller credit unions have been particularly sensitive to the new regulatory requirement and critical of the NCUA for a lack of understanding of their limited resources to find qualified directors and to provide training.
It is a legitimate concern for many as they struggle to keep up with the ever-increasing regulatory mandates of a U.S. financial institution. When you add the additional director financial standards to the mix, some smaller credit union CEOs are worried about surviving.
If smaller credit unions fail, blame cannot be placed totally on the director financial literacy requirement as the cause. It may turn out to be a contributing factor for some, but the larger picture will be competition challenges unique to our industry, the emerging regulatory and technological changes, and the needs of our varied memberships.
If completing coursework or having the experiential and financial pedigree is not the true test, then what is? Hard and fast objective criteria may have to slide a bit into the subjective realm. And that occurs in many evaluative exercises. But here is where the opportunity comes and vigilant, progressive boards can lead their credit unions and ride the literacy high water wave.
Consider your board’s overall governance competencies beginning with these strategies: translate financial literacy and training into sound, effective, measurable policies. Policies that cover all the products and services a credit union provides its members, including the charter and legal requirements, will be the proof that board members have the expertise and are fulfilling their duties.
Encourage and seek out potential candidates for board service which reflect the membership and who already hold the necessary expertise that will complement a board’s wide range of responsibilities of formulating policies, communicating, serving as trustees and developing the credit union. This affords a great opportunity to welcome 30-something candidates and connect to the Generation Y member. A diverse board and especially younger board members can rejuvenate group thinking by the board and bring this generation’s way of doing banking to the table. They will represent Generation Y members who want the options of quick smartphone apps and social media tools. Did someone say increasing membership?
We might conclude that governance practices will improve if credit union board members act on that financial literacy training and put it to use in other areas of oversight and direction of their credit unions. Taken alone, the NCUA rule will sharpen the skills of individual board members for those who need it and new board members who will need it in the future. The added benefit will be for boards with the vision to expand their reach and apply it to other duties to maximize their strategic and business plans to effectively serve their credit union communities.
Bill Arensdorf is a principal partner at Dynovation Consulting and a credit union board member.
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