Board Pay Acceptance Grows
Colorado and Arizona recently joined the growing number of states that allow state charted credit unions the option of compensating board members.
Even though paying directors remains controversial because it conflicts with the cooperative principle of volunteer directors, some credit union CEOs seemed to be more accepting of at least giving credit unions the choice to pay directors, especially small and midsize credit unions that are struggling to find qualified board members.
However, other CEOs contended it's time to offer compensation because the increasing complexity of the credit union industry demands more time, attention and work from directors, and it may even help improve board performance.
Working with lawmakers in Colorado and Arizona earlier this year, the Mountain West Credit Union Association introduced bills that were passed by the legislatures in both states that give state chartered credit unions the option to pay their board members reasonable compensation. Arizona's law also allows credit unions to pay committee members.
Scott Earl, president/CEO of the Mountain West Association, said the trade group lobbied for board compensation at the request of credit unions.
“I don't know that there were any credit unions that were clamoring to compensate their board, but they all felt like they should have that option, that choice,” Earl said. “So, it was more about choice than anything else.”
Perhaps CUNA's Model Credit Union Act may have been one factor that changed some CEOs’ attitudes on supporting director compensation. The 86-page Model Credit Union Act provides model language for leagues’ proposed laws and their state charters. The document is updated every few years by a working group of four representatives from the leagues and is compiled by the American Association of Credit Union Leagues with assistance from CUNA, according to CUNA Senior Media Relations Manager Vicki Christner.
In 2011, a provision to allow board compensation was included in the Model Credit Union Act.
This provision was added because credit union boards became more important as credit unions increased in size and regulatory complexity, Lynn Coard, CUNA's director of advocacy and counsel, explained.
“Compensating directors was a way for credit unions to ensure more competent directors at the helm,” she said. “It may be worth noting that even in states that permit director compensation, it is not widespread.”
Since that provision was included six years ago, three other states – Oregon in 2015, and Tennessee and Washington in 2013 – passed board compensation laws that were crafted and lobbied for by state leagues. Although the Michigan Credit Union League board considered board compensation last year, the proposal was nixed because it wasn't the right time, Dave Adams, the Michigan league's president/CEO, said.
Arizona's law was passed by the state legislature after a grueling 20-your session that ended at 5 a.m. on May 7. Colorado Governor John Hickenlooper signed the state's bill into law on April 15.
An estimated 18 states now permit board compensation.
However, CUNA does not have an official policy on board compensation, giving the trade association a neutral stance on an issue that credit union leaders have been debating for years.
Board compensation has remained a controversy because the seven cooperative principles for credit unions posted on CUNA's website include the No. 1 principle that touts voluntary membership. The principle includes the statement that, “many cooperatives, such as credit unions, operate as not-for-profit institutions with [a] volunteer board of directors.”
However, according to the introductory statement in CUNA's Model Credit Union Act, “while maintaining the fundamental tenets of the credit union philosophy, the model act is intended to update the historical credit union model to meet current challenges and members’ needs.”
Although credit union board members have historically served as volunteers, their challenges and the credit union industry have changed substantially over the years. These changes have given some credit union leaders a different perspective about the controversial issue of board compensation.
Todd Marksberry, president/CEO of the $1.6 billion Public Service Employees Credit Union, said his Lone Tree, Colo.-based Colorado cooperative has no plan to offer board compensation but he supported the state's bill to help small and midsize credit unions that are finding it more challenging to attract competent directors that can help financial institutions grow.
“It's controversial within quarters to be honest with you,” Todd Marksberry, president/CEO of the $1.6 billion Public Service Employees Credit Union in Lone Tree, Colo., said. “There are some friends of mine around the country – fellow CEOs – who get very passionate about this and say they’ll never pay their board. The challenge I have with that is they don't sit and listen to credit unions that say, ‘Hey, I am a $50 million credit union, and I can't find really sharp professional board members who understand what it means to be a board member, who are willing to accept fiduciary responsibility and the corresponding legal liability that goes along with that and do it for free for a not for profit.’”
President/CEO Jane Dobbs of the $180 million Canyon State Credit Union in Phoenix said compensation may help attract more qualified board members and support board accountability and governance initiatives.
“I believe that this will also support boards looking to improve governance as a stepping stone to implement or improve board assessment and evaluation strategies for success,” Dobbs said. “Understanding how other state credit unions that have this in place [and] have implemented it successfully will also help credit union boards leverage best practices and ensure compensation provides the expected results.”
As it stands now, directors face the same level of responsibilities and liabilities as other board members who are compensated for their work, Robert D. Ramirez, president/CEO of the $1.5 billion Vantage West Credit Union in Tucson, Ariz., said.
“This will also have a positive impact on retention and attraction initiatives,” Ramirez said. “It is very challenging for working professionals to commit to a volunteer board position when they have to spend time away from their paid positions to do so.”
However, Mark N. Hatchel, president/CEO of the $24 million B.C.S. Community Credit Union in Wheat Ridge, Colo., said he has mixed feelings about paying board members.
“In principle, I’m against it, but in practice, there might be some merit to it,” he said. “One is because we have such a hard time getting folks to volunteer. We’re a smaller credit union and our field of membership is blue collar and they are not stepping up to volunteer.”
Currently, the credit union's five-seat board has one vacancy, but he isn't convinced that compensation will help him attract new board members.
“I’m sitting on the fence about this,” he said. “The law was passed but they haven't written the regulations for it, and really, the devil is in the details.”
Those regulations on how credit unions may determine reasonable compensation are expected to be finalized before Aug. 10, 2016, when the Colorado law becomes effective.
The Arizona law is expected to be effective Aug. 6, 2016 if Governor Doug Ducey signs the bill by May 19. Austin De Bey, vice president of regulatory affairs for the Mountain West association, said he is optimistic the governor will sign the bill. He said he is uncertain whether Arizona's Department of Financial Institutions will develop formal rules for the legislation.
In Colorado, the Financial Services Board is the policy and rulemaking authority for financial services. Members of that board comprise three credit union CEOs, an executive officer of a state savings and loan association, and one public member.
Rainey Thoen, president/CEO of the $57 million Community Choice Credit Union in Commerce City, Colo., serves as the board's chair. Keith M. Cowling, president/CEO of the $660 million Credit Union of Denver in Lakewood, Colo., is the vice chair and Gerry Agnes, president/CEO of the $1.6 million Elevations Credit Union in Boulder, Colo., also serves on the board.
Mark Valente, deputy commissioner for the Division of Financial Services at the Colorado Department of Regulatory Agencies, said the Financial Services Board will hold a public hearing to gather input from credit unions and set rules, such as how credit unions are expected to determine reasonable compensation for board members.
Agnes said Elevations has been fortunate to work with passionate and talented leaders without offering compensation, and it's unlikely that the credit union's overall outcome will change dramatically due to compensation, noting that Elevations is already among the best as evidenced by its recent Malcolm Baldrige National Quality designation.
“Simply out of respect for their service and contributions to our success, we should compensate board members reasonably,” he said.
However, board member compensation should only be extended when the credit union remains adequately-capitalized in accordance with regulatory capital requirements and the board employs reasonable term limits, he added.
“It would be inappropriate to compensate a board when the safety and soundness of the credit union is in jeopardy,” Agnes said. “Likewise, boards of directors should not be able to vote to personally receive compensation for life.”
In addition, once a board member receives compensation, he or she may no longer receive the elevated liability protection afforded by Colorado statute, he noted.
“For instance, if specific board members are compensated, the ordinary negligence standard may apply to all director actions, rather than the limited immunity standard provided for uncompensated directors of non-profit organizations as set forth in Colorado statute,” Agnes said. “If the aforementioned conditions are a requirement to compensate boards of directors and individual members forego their limited immunity status, some boards may not opt for compensation. But, I’m confident that those who do opt for compensation will be glad they did.”