The tradeoff between risk and reward rules all things financial.That's particularly true in credit union boardrooms, where rewardsfor directors, in the form of newrules allowing compensation, are rising in lockstep withliability risks. The trend has incited many boards to get more serious about internal fraud, data breaches,increasingly complex regulatory oversight, rapidly changingtechnology and other serious risks.

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“The more consumers become aware of the board's fiduciaryresponsibility, the more they can include board members inlawsuits,” Mitchell Stankovic & Associates CEO Susan Mitchellsaid. “Volunteer boards have a certain perception and are lesslikely to be named as responsible. However, with the trend to payvolunteers, I believe this could change the dynamics.”

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These days, the biggest board vulnerabilities are oftenstructural, according to Mitchell and two other industry pros.Mitigating those vulnerabilities could require some fundamentalchanges.

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board recruitmentPoor Recruiting

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“Most credit unions are not doing a good enough job with havinga proactive, accountable nominating committee who's not just goingthrough the motions, but is actually recruiting and searching forthe right directors to fill those roles,” Filene Managing Directorof Research Ben Rogers said. He will host a board leadershipsession at the CU Directors conference in August.

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“If it's been a long time since there was a competitiveelection, that's probably a red flag. I would also say if it's beena long time since there's been a new nominee, that's a red flag,”he explained. “If you haven't had new applications, you haven't hadnew nominees, you haven't had a competitive election for a coupleof years, then I think that that means that the nominatingcommittee is not doing its job of keeping an evergreen list, ofhaving active conversations with potential directors.”

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Rogers also noted that longer-tenured board members who may feeltired or disengaged often remain on boards simply because there'sno one to replace them.

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“That's a very human-service-oriented reaction, but I think it'sa signal that the nominating committee is not taking its jobseriously,” he said.

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Mitchell said part of the problem is that director candidatesshould reflect the membership rather than simply be friends ofother directors. Credit unions need to be more diligent aboutavoiding candidates that present conflicts of interest. She saidshe expects regulators to start scrutinizing relationships amongdirectors more closely.

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board liabilityWeak Onboarding

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Sometimes some board members either don't grasp or forget theserious nature of their legal responsibilities, organizationalstrategist and Stuart Levine & Associates CEO Stuart Levinesaid.

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“Sometimes they think, 'Well, gee whiz, I'm just a volunteer.'That's not really helpful,” he said.

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Providing formal education and training for new directors is amust, Mitchell added. Information about bank secrecy and other corebusiness practices can be done online, but specialized servicessuch as member business lending or student lending should be donein person, she said.

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After that, credit unions should lead annual refresherdiscussions about duty of care, duty of loyalty and ethicspolicies, Levine added. Those discussions should be led by a thirdparty who doesn't work for the credit union, he said.

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That third party is ideally an attorney who has litigated ordefended financial institutions, Rogers added. A person withenterprise risk management expertise could be a goodsubstitute.

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“I think just, pedagogically, it's a lot more fun to learn aboutthat stuff when you're talking to somebody who's been there, asopposed to just reading through the documents — because you canglaze over,” he said.

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It knowledge in the boardroomInadequate ITKnowledge

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CU boards that don't include directors who understandtechnology and can't have strategic discussions about deployingcapital around technology — particularly with regard tocybersecurity — may have a hard time, Levine said.

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“They think it's some conversation behind the curtain that onlythe Wizard of Oz knows,” he said. “If you believe in the mission …then you have to understand we have to embrace change and learning.That means understanding products and services that are deliveredthrough technology, because that's the only way to competetoday.”

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Another reason to get more IT expertise on the board, Rogersadded, is that losses involving technology (such as data breaches)increasingly affect perceptions about directors' competence.

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“Cybersecurity has finally made its way out of IT, so to speak,and into the mainstream consciousness of leaders and officers, sothinking about those new threats is a big one,” he warned.

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board liability and what to doOld D&OPolicies

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Cyberliability and data liability issues change so frequentlythat reviewing the directors and officers liability policy often isjust good risk management; but, many credit unions don't do it,Rogers said.

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“I think that is human tendency. You bought a policy, the policywas good when it was written, you just keep paying the premiums andyou put it on the back of your agenda,” he noted. “But I would sayif you haven't looked at it in more than two years, you'redefinitely doing yourself a disservice. If the new directors arenot familiar with it, not only is it a good practice, but it'sprobably good training for directors to be looking at it once ayear.”

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But even with great insurance coverage, the stakes are high.

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“Even though most of the credit union boards are populated withvolunteers, that doesn't give you a pass,” Levine said. “You'redealing with hundreds of millions of dollars of member assets. Thisis family money. People are counting on you to get it right.”

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