It's high time for the boardroom to meet the board game "Risk."
That's because boards often underestimate and are not held accountable for their own responsibility for risk analysis, according to one expert. That will need to change, according to Dennis McCuistion, one of the country's leading experts on corporate (and credit union) boards.
A former bank CEO, McCuistion frequently consults with financial institutions and other businesses, leads strategic planning sessions, has written a number of books, including "The Seven Challenges Facing Bankers in the Future...and How to Meet Them," and may be best known for being the host and executive producer of the award-winning "McCuistion Program" on PBS.
"I want to focus you on the board's role in strategy and risk," McCuistion recently told group of CU board members in Texas. "Every one of you has a different way of developing strategy, monitoring strategy, and measuring risk. You need to think about risk and strategy in the same breath."
When McCuistion pressed CU volunteers for the kind of risk analysis they do in their own board rooms from Beaumont to El Paso, the responses were relatively vague. "We don't do so very clearly," summed up one board member. Others made reference to their three- and five-year plans.
"A lot of times in strategy sessions we try to look out five years, and if you can do that you're a better man than I," said McCuistion. "But let's say three. Even then we tend to look at what can we get done in the next three months."
McCuistion urged CU boards to truly understand their risk appetite and tolerance for variance from the CU's strategy. The piece that's often missing there, however, is risk related to what might be called the "apparent upside."
McCuistion posed a question that should have been asked by a number of corporate boards in 2007 and 2008: "If things are going so much better than you thought, the question you have to ask is, 'How is it we're hitting home runs every time we step up to the plate?'" As he noted, "Subprime mortgages weren't just going well, they were going too well."
McCuistion pointed to 19 CUs (and corporates) that have failed. "Assume each credit union had 10 board members, or a total of 190, then the question is, 'Where were the board members when their credit unions were making the mistakes that ultimately led to their demise?'"
Board members who have read this far or heard McCuistion before may have already concluded they will be ratcheting up how they monitor risk. Not so fast, my friend. "I'm going to submit that it is very difficult to monitor the strategy," he noted. "The question of objectivity becomes so important." And he added, "If I'm sitting on a board and I don't get it, I have two choices: keep sitting there, or stand up and ask a question. You don't have to be rude, but you have to be persistent."
McCuistion, who is also frequently consulted as one of 36 national faculty members at the National Association of Corporate Directors, also addressed another issue in front of many boards. "A board's biggest responsibility is succession planning," said McCuistion. "It's the one where the board is completely accountable, and the choice has significant consequences, good and bad." When McCuistion asked how many CUs had a formal, written plan for board and management succession, only about one-third of those in attendance raised their hands.
"If you have term limits, you need to have in your policy how your recruitment works. Recruitment is the one thing boards do poorly," he said. "I think we ought to be constantly having a recruitment process going on. It is hard to get someone to come on the board. There should be a committee on the board that...is responsible for identifying and vetting candidates, getting them on the board and getting them indoctrinated. That would include having a job description for the board."
When talk turned to a little something called "term limits," the chill in a roomful of directors almost caused the heat to kick on. "There are 85-year-olds, and there are 85-year-olds, and that's the problem with chronological limits," noted McCuistion. "So what I suggest is you have an evaluation process for board members. It is one of the most touchy things you can do."
McCuistion recommended boards make lists of the skills that each member brings to the board table, identify what's missing and then look to fill the holes. When he probed the Lone Star State CU volunteers for what they feel is missing from their boards, responses included "getting rid of long-term, dormant board members," "getting better demographics that represent our members," and the contrasting responses, "We need to shorten the meeting and the board packet," and "We need to lengthen the time we meet so the board understands what's going on."
"One of the problems we have is that most of us aren't credit union experts, so we don't know if they know what they say they know," McCuistion said of management. "We have an over-reliance on subjective evaluation."
And yet another risk.
Frank J. Diekmann is publisher of Credit Union Journal and can be reached at firstname.lastname@example.org.