January 13, 2012

If directors ever need a reminder of the importance of their role as leaders, they can look at the back of a U.S. dollar, according to David Reed of Reed & Jolly, PLLC. Reed spoke to attendees at a workshop prior to CUES’ Directors Conference in Las Vegas last month.

“The pyramid is your credit union,” Reed said. “The all-seeing eye on the credit union is the board of directors. You are elected by the members to be that all-seeing eye.”

He emphasized strategic planning as the primary role of the board. According to the Center for Organizational Effectiveness, “Strategic thinking and planning is the process of deciding the optimal alignment between unlimited needs and limited resources to achieve your priorities.”

He asked directors whether their credit union has a document that notes:

• who we are;
• where we want to go; and
• how we intend to get there.

One of the big advantages of having a vibrant strategic planning process is that it provides credit unions with the ability to adapt to a changing environment. More than half of the workshop attendees had served as volunteers more than 20 years.

Emphasizing the rate of change, Reed said, “The average credit union has doubled in members and assets over the last 10 years. We are going to see that even our general business model has changed rapidly.” When 20-year board members began their service, the credit union had no website, bill-pay, card networks, or Visa check system. Cell phones were rare and large, and “mobile banking was a van with the credit union’s name on it.”

“Where are we going to be in the next five years has never been as important as it is now. For most credit unions, our triage is over. We have had the corporate meltdown, special assessments, new economic reality, investments that aren’t doing what we thought they were going to do,” Reed said. “For most credit unions the investment portfolio is bigger than our loan portfolio. We don’t know what future of industry will look like. Member business lending and secondary capital are two top things kicking around on Capitol Hill.”

Financial Regulation

Reed said U.S. credit unions haven’t had a really good three years on the legislative front. Reed’s lobbyist friends tell him credit unions “don’t have a lot of chips on the table. Four years ago, they would tell me one of the major questions being asked in key committees was ‘what do credit unions think about this bill?’ Now the question is ‘what do community bankers think?’ We’ve lost clout.”

He recommended boards understand the Consumer Financial Protection Bureau, which has taken over responsibility for significant regulation. “They are busy writing new regulations even without a director.” (A director was recently appointed through recess appointment.)

Reed’s predictions:

• Settlement Disclosure Forms will be required of credit unions $10 billion and up. However, it will change the compliance framework for all credit unions.
• Regulation Z – “will be moved over and renumbered by these guys. We need to look strategically at how we will handle the change.”

“We are the most regulated industry in the country,” he said. The good news is Congress can’t agree to anything. The bad news is we will get reinterpretation of rules, he warned. The credit union model is becoming much more complex. Boards need to make sure management is working with them to look over the horizon in a strategic way.

Duty of Care

In 1891, the U.S. Supreme Court ruled in Briggs v. Spaulding, 141 U.S. 132, that “directors of a national bank must exercise ordinary care and prudence in the administration of the affairs of a bank, and this includes something more than officiating as figureheads; they are entitled under the law to commit the banking business, as defined, to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrongdoing if that ignorance is the result of gross inattention.”

Reinforcing this ruling, National Credit Union Administration Rule 701.4 regarding director financial knowledge technically applies to boards of federally chartered credit unions, but more and more states will change their regulations to codify this standard, Reed predicted. Following problems at corporates and other credit unions, the NCUA’s website shares material loss reviews whenever there is a loss to the National Credit Union Share Insurance Fund.

By 2008, Reed said, the natural person credit unions that had failed had poor management, which to NCUA means staff and board. “The board of directors failed to realize the risk they were in and to act accordingly.”

In a conservatorship, the first group taken out is the board of directors. “Why?” Reed asked. “Because it’s the all-seeing eye at the top of the pyramid.”

“It’s no crime to make a bad decision. Mistakes happen. We are to make decisions in good faith,” Reed reminded. He defines good faith decisions as those believed to be in best interests of membership.

“The NCUA is basically a big insurance company,” Reed said, because they are in charge of the National Credit Union Share Insurance Fund. Examination reports are longer than they used to be, and examiners are looking at minutes to check if the board is asking tough questions. It is becoming more common for examiners to sit in on board meetings.

“Make sure your minutes note accurately what is being discussed,” Reed said. If there are dissenting votes, make sure they are being recorded. “The ultimate buck stops with the board, but you’ve always known that.”

The NCUA has hired almost 150 new examiners. Since it takes two years for them to get up to speed, new examiners are “hyper-technical” with no real-world experience. They are filling out attendance sheets for boards, especially if you have a bylaw that says you can be removed if you are not present at a specified number of meetings.

“The vast majority (of board members) have done wonderful service, but if you have people with health, work or location issues that mean they can’t participate, they need to be transitioned off the board and be replaced by someone who can actively participate.”

Lastly, Reed recommended that credit union boards practice:

• self-assessment;
• environmental scanning, an assessment of who the credit union is serving and how it stacks up against others;
• performance measurement; and
• evaluation.

The next time you pull a dollar bill out of your wallet, think about the board and its role: “Because that eye is perched at the top, you have a great perspective to look over the horizon line. Behind the pyramid is desert. Ahead is lush… You are headed for the land of milk and honey as long as you are looking over the horizon line.”
 
Barb Kachelski, CAE, is CUES’ SVP/chief operating officer.