There is near unanimity among industry experts that during the next five to 10 years the number of credit unions will shrink from 8,400 to around 5,000. But what will it take to survive and flourish during the next decade?
A skilled CEO and management team, of course, is part of the equation. We are entering a period of time, though, when a strong and knowledgeable board of directors is going to be just as essential as the chief executive officer for credit union effectiveness and survival. The board can no longer be viewed by management as a hindrance or rubber stamp. Why?
We need to go back to 2002 for part of the answer. The Sarbanes-Oxley Act was signed into law as the result of high-profile financial reporting scandals involving prominent companies such as Enron and Arthur Andersen. Among other requirements, the law calls for higher standards for corporate and financial reporting as well as greater transparency.
Although there is plenty of blame to share for the corporate scandals, the failure of boards to adequately govern and hold their CEOs accountable was a prime factor. Some corporate boards were either incompetent or failed to perform their due-diligence especially concerning executive compensation.
Once trust begins to be eroded in public institutions, it spreads to other industries. A similar phenomenon occurred after the savings and loan scandal. By their actions to ensure that credit unions avoided the problems of that industry, some observers have argued that NCUA assumed an over-protective or even paternalistic posture toward CUs.
Sarbanes-Oxley's Lingering Effect
While Sarbanes-Oxley applies only to for-profit corporations, it has had a ripple effect on credit union regulators. NCUA and state regulators understandably want to avoid similar scandals, which has resulted in an erosion of market confidence and extreme market volatility. Credit union boards will be held to a higher standard of accountability and transparency in the future.
NCUA, for example, recently proposed a regulation that would have required the disclosure of the salary of the CEO if two credit unions merged and one of the CEOs benefits by an amount greater than 10% of his or her salary. The trade associations-CUNA and NAFCU-were against this proposal. This was a short-sighted strategy. A far better approach is to embrace transparency voluntarily before it is imposed by the regulator.
Transparency is one part of the equation that must be matched by an effective and well-informed board. Credit unions should recruit board candidates with community intelligence and business experience. Other community organizations choose board members who can benefit their business by virtue of their business contacts.
Bank board members are sought for the book of business contacts that they bring to the board table. If credit unions are competing with banks in their local markets, they should also compete for the limited pool of qualified people for board positions.
Board responsibilities need to change. The focus should be on governance rather than "co-managing along with the CEO." Board members should consider attendance at a new group of meetings beyond the traditional credit union conferences held in California or Florida. Attendees at the vacation venues tend to bring back operational ideas-really the purview of management-along with their suntans.
These directors should become familiar with, and attend, Chamber of Commerce, city planning and similar meetings to develop relationships and become ambassadors for credit unions in their communities.
By attending these meetings, board members can determine the perspectives and needs of the constituencies the credit union serves and seeks to serve. One credit union in the Midwest had to wait more than two years to obtain the necessary permits and committee approvals to build a branch. If a board member had contacts on the city planning commission and had attended the necessary meetings the approval might have taken less time.
New board members with entrepreneurial talents bring a different mindset and true diversity to the table. They ask the CEO hard questions and challenge the status quo. This may be uncomfortable for some in management, but beneficial and necessary for the organization's growth.
During these times of mergers and charter changes, the board has to be conversant about the credit union and seek community venues to explain why, for instance, a hostile takeover wouldn't be beneficial to members.
A CEO-and other board members-should pose the question: are your board members willing and competent to answer tough questions about your credit union at community forums? If not, why not? It will be difficult, if not inappropriate, to shield board members from their responsibility as public ambassadors for their credit union.
John Gregoire is president of the ProCon Group. He can be reached at 608-821-1414.