The Rundown

• Credit union CEO firings are rare events.
• CU directors usually have a long tenure and many have builta friendship with the CEO and are reluctant to act.
• Boards can help ensure good performance by settingtargets.

No job is harder for a board of directors of a credit union. Butno job is more crucial than knowing when to separate thecooperative from a lagging chief executive officer and having thestrength to act.

That is the gist of what many experts, sitting CEOs, retiredCEOs, third-party experts, credit union legal advisers and others,told Credit Union Times. “The key job of the board ismanaging the CEO and that means hiring and firing,” said Richard Powers, a senior lecturer at the Rotman School ofManagement at the University of Toronto who also is lead facultyfor the CUES Governance Institute.

“It is surprising how infrequently CEOs are let go,” saidconsultant Tom GlattJr. “Perhaps it should happen more often.”

Powers agreed. “It is very rare to see a change at the top,” hesaid.

It definitely does happen much more often at community banks,said Michael Lozoff, chair of the credit union practice group at Miami lawfirm Shutts and Bowen. Partly, said Lozoff, the reduced incidenceis because credit unions are not subject to the hostilities ofdistressed investors seeking revenge for poor quarterly financialreports. Partly, too, credit union boards incline to stay thecourse with their CEOs. Powers said that in his experience“directors tend to be longstanding directors, in excess of 10years. Relationships develop over that time. They often are friendswith the CEO. This puts them in a difficult situation. Acomplacency may develop.”

Steve Cohen, author of Mess Management: Lessons from a Corporate Hit Man andpresident of the Labor Management Advisory Group, put this issuemore bluntly. “Often the board is a lapdog for the CEO. I'd sayaround 40% of boards are lapdogs.”

It obviously is hard to fire a friend, and it may be even harderto do if one is a volunteer director, suggested multipleexperts.

Steve Winninger,retired CEO at Lake Trust, a $1.5 billion credit union in Lansing,Mich., offered his insights into the board vs. CEO boundaries. “Theboard is ultimately responsible for everything that happens in thecredit union, and they have to delegate to the CEO because theboard isn't there every day. Delegation with good targets andboundaries goes a long way to ensuring good performance by the CEObecause the standards are known and articulated. When this is done,there is clarity of role and purpose and the chances of success aregreater.”

Winninger added, “CEO turnover is very costly so setting thestage for success makes more sense.”

Success may be the preferred path, but there are multiple ways aCEO can get him or herself fired, said Lozoff. And these exitroutes are detailed in the CEO contracts he writes for his clients.The first route is what might be called moral lapses that bringshame on the institution and this could be anything from a DWIconviction through a sex offense or even filing bankruptcy. Lozoffstressed that committing the offense does not necessarily triggertermination. With a DWI, for instance, the board might insteadrequire the CEO to undergo counseling and possibly join AA.

Credit union governance expert Stuart Levine elaborated that “defalcation and theft are alsocauses for immediate dismissal.”

Reason two, said Lozoff, is failure to meet specific performancetargets. Typically, these are measures such as new accountopenings or asset growth or overseeing a smooth core systemconversion. Rarely, stressed Lozoff, will one bad year result inthe board exercising this option, but several successive bad years,coupled with much stronger results at competitors, might.

The third reason written into many CEO contracts is that theboard can elect to part ways with the CEO for no reason at all.This usually requires a two-thirds vote of the board and usuallyinvolves paying a sizable, predetermined severance to the CEO. Whatcan trigger this are intangibles, including philosophicaldifferences about the institution's mission.

Another prod to terminate the CEO may be pressures fromregulators to do so, which some experts said have become clearerand louder.

“We have seen cases where the NCUA has a frank talk with aboard. There has been heightened emphasis on the 'M' in CAMEL,” said Lozoff, where 'M' is for management in the NCUA'sformula for rating credit union performance.

Clear as the reasons to terminate may be on paper, in practicethere may be substantially more murkiness. Henry Wirz, CEO of Safe, the $1.9 billion credit union in Sacramento,Calif., said. “Over the years, we have had the opportunity to mergeor conduct due diligence on about 30 credit unions, and we havedone through financial analysis on about 50 other credit unions. Ibelieve that most boards do not have a good evaluation process. Thefailures in the evaluation process run the gamut from not settingmeasurable goals to not even doing evaluations. When goals are set,they are often not reasonable. So many credit unions operate inisolation without using peer statistics to benchmark their ownperformance. That fosters unrealistic goal setting.”

How a CEO firing typically plays out in practice, said Lozoff,is that a dissatisfied board will call in a firm such as his andindicate they are thinking about a CEO change due to performanceshortfalls. Lozoff then drafts a contract with the CEO that setsout clear targets and from there, the CEO's fate is in his ownhands.

Discomfiting as firing the CEO may be, it could be the easy partof the job. That's because actually firing a CEO triggerssubstantial work for board members. “If you don't have potentialsuccessors identified, the process of transitioning from one CEO toanother can be complicated and expensive,” warned MattFullbrook, manager of the Clarkson Centre for Business Ethicsand Board Effectiveness at the University of Toronto and an expertin credit union governance,

Added Bob Hoel,author of the recent Filene Research report, “Boards and CEOs: Who's Really in Charge,” “Replacing a CEO isvery stressful for a credit union, Most board members dread theprospect of searching for a new CEO. It's a great deal of work. Youdon't undertake this casually.”

Levine, however, noted that he has observed a recent deepeningof the board's willingness to engage “at a strategic level with theCEO. They are more willing to confront,” a trend he said he expectsto see continuing. More activist and vocal boards seem a probableoutcome of multiple forces at work in credit unions, saidLevine.

That might result in fewer CEO firings, said Hoel, who explainedthe paradox by pointing out that early discussions, beforedisharmony hits a permanent sourness, sometimes is key to saving aCEO's relationship with his or her board. “The advice to a board isto express discomfort early. If you let it fester, somebody usuallydeparts,” said Hoel.

“The board has to recognize its responsibility is not to the CEObut to the members,” said Powers. “The board has to be prepared tomake the call when it needs to be made.”