MADISON, Wis. — A volunteer board structure is at the heart of the credit union community.
But is there still a place for volunteer boards of directors in an increasingly complex operating and regulatory environment? Or must credit unions make radical changes to their boards to effectively compete in the financial services industry?
Those are just some of the issues Credit Union Journal will explore in a continuing Special Report focusing on CU volunteers.
Frequently referred to as a key differentiator from for-profit financial institutions, board volunteers have, according to some industry insiders and analysts, become marginalized. Management is supposed to report to the board, which is composed of the elected representatives of the membership, but in many cases it seems the board reports to management.
More evidence of volunteer marginalization lies in the fact until recently there were no credit union volunteers in the ranks of the boards of any of the national trade associations, and are relatively rare at the league level. Moreover, at least one league, Illinois, has banned volunteers from its board.
Finally, the spread of states in which volunteers can be paid recently expanded to Tennessee and Washington. This leads to the question: Does paying volunteers, besides creating an oxymoron, eliminate "volunteerism," which has been a key component of credit unions and of the cooperative principles?
One issue on which everyone interviewed for this Special Report could agree upon is the importance volunteers have had in the CU community throughout its history. A close second is that there will continue to be a place for volunteer board members going forward despite the challenges.
"The movement cannot exist without the volunteers," said Pete Weldon, who is chairman of the National Association of Credit Union Chairmen (NACUC), and chairman of the board at $206 million-asset 1st Community FCU in San Angelo, Texas. "One of the big arguments on keeping us tax exempt is we are run by volunteers, and I would challenge that none of the big association boards run any better than either one of my boards.
"Volunteer boards of directors set the policies and the CEO carries them out," Weldon added. "The board has one employee and that is the CEO. There are cases where the tail is wagging the dog. If the CEO is hesitant to provide information or answers to the board's questions, they have a problem. If the CEO does not follow directives, there is a problem. The board picks the CEO, so those things need to be spelled out in advance. The board and CEO have to have respect for each other, and they have to have teamwork."
Chuck Fagan, president and CEO of the Credit Union Executives Society, Madison, Wis., disagrees with the premise that boards are reporting to management, rather than vice-versa.
"I think this is an exaggeration," he said. "I get to visit many, many credit unions annually and I do not get the sense the reporting structure has flipped in any way."
A board needs to manage at the "right level," according to Fagan, which he defined as working with senior management to establish a strategy and allowing the CU's staff do its work.
"The credit unions that follow that path are the ones that are doing well," Fagan said.
The credit union industry had to adapt to field of membership expansion after 1998, Fagan pointed out, adding now it needs to adapt to recognize boards have a lot more to do. "They have to rely on the staff and not be involved in the day-to-day activities. Strategy and leadership are what boards need to provide."
Associate Directors
Jim This, president and co-founder of the Paragon Group, an Olympia, Wash.-based CUSO owned by TwinStar Credit Union that offers board effectiveness evaluations, acknowledged there are some CU directors who are "not skilled."
He argued, however, that the majority are "dedicated" and "understand what is going on."
"The role directors take going forward is critical — being focused on members, making good policy decisions, and keeping us from becoming profit-driven organizations," This said. "Even at the big credit unions, the board members have that connection with the members' concerns. If we are all about the bottom line then we really are not different from the banks."
Some CUs are introducing associate board programs, This noted. Associate directors are not elected, but instead are appointed for one-year terms, typically because they have expertise or experience.
"They are being developed for being a future board member," said This. "Having associate board members is a best practice that gets people who are truly capable, and when they do take over the learning curve is reduced quite a bit because they have been in meetings and planning sessions."
Two credit union consultants said CUs and their boards must do much more than simply add associate director programs. They stressed that major changes are needed immediately.
Tony Ferris, managing partner for Rochdale Group, Overland Park, Kan., said while the financial education standards for directors set forth by NCUA nearly three years ago have at least forced the governance issue into the spotlight, "it has not raised the level of volunteers, though."
"The whole governance issue has evolved over time for our industry," Ferris said. "We are at a precipice. On one hand there is a lot of history and mission fulfillment in these volunteers. They have devoted much of their lives into their credit unions, but we need to recognize the boards need to get true financial industry experience into the next generation of directors. It is an issue of composition of the board rather than training. The boards need to have the expertise and the diversity in order to run a complex financial institution."
With tens of thousands of directors on CU boards across the nation, according to Ferris, it is a "huge undertaking" to find people willing to give up their personal time and become educated. "We need to start today, not wait for everyone to start migrating off the board," he said.
Mark Lynch, a credit union consultant based in Sault Sainte Marie, Mich., specializing in growth strategies and board governance, among other things, was born and raised in Australia before moving to the U.S. six years ago. He was a CU director in Australia for nearly three decades.
Lynch said that every CU board strategic planning session agenda this year should include the question, "How do we as the board improve the way we operate?"
"They need to ask questions about every area of board governance," Lynch said. "Does everyone know the role of the board? Does everyone get the right information in the board package? When does the board meet? The worst time to hold a board meeting is when people are tired and hungry — which is when most boards meet, in the late evening."
Lynch said the key words are composition and succession. When directors can have an open dialog about what the board should look like in the future — such as, "When all of us are gone, what will the board look like?" — then they will be taking the first steps toward creating a composition strategy.
As for the succession strategy, he said boards need to have a pool of qualified people waiting in the wings when the current directors retire.
In some cases, boards might need specific skills — perhaps HR or marketing, which Lynch said is a clue for recruitment of future directors. He said today's boards often consist entirely of people who understand the history and philosophy of the credit union, but may not have financial expertise.
"This is not necessarily a right or wrong composition strategy, but the directors need to know why they are there, how the business operates, what are the right questions to ask."
It is difficult to say the "best" way for a board to be composed, according to Lynch. A board comprised of all retired people could direct the CEO to develop a strategy to attract young people and immigrants.
"To me, that would be perfect," said Lynch. "That is an example of the board supplying the vision but not necessarily having the expertise. The board is not there to micromanage."
Lynch said boards should not try to improve all in one year, but should aim to improve over time.
"Pick an order to improve," Lynch advised. "Education is one part, but there are many ways to improve. Improvement can be done individually and as a team. Ask directors to assess themselves and what they need to do to improve."
Don't Lose CU Mindset
If Ferris were to be appointed the nation's "Credit Union Czar" tasked to fix what's wrong with the current board structure, he would stress the necessity to truly define the responsibilities of the board, as well as its composition.
"Also, there needs to be very robust recruitment tools," he said. "There needs to be a committee allowing credit unions to bring on people to operate in an advisory role, which serves as a pipeline for the next wave of directors."
CU directors today have a "great mindset," Ferris said, by which he means they embrace the credit union philosophy and look out for the membership instead of just the bottom line of the organization. He said this mindset has led to a culture of operating a credit union that is different from a bank.
"I would hate to lose that," Ferris said. "If credit unions just brought in a bunch of financial types they might just look at the bottom line. The current directors need to pass on this mindset to the next generation of directors."
Another issue, according to Ferris, is the need for accountability mechanisms for the board. Credit unions have accountability for staff, he noted, but very little for their directors. Ferris would implement a governance model that provides for performance accountability and answers critical questions: Is the board governing with one voice? Do the directors have active oversight of the financial position and the risk position of the organization?
"Certainly the directors are responsible for the CEO and his or her performance, compensation and other related issues, but they need to maintain their level of influence at the strategic level," he said. "They also need to know the risks that are being leveraged to achieve results and the implications of those strategies. They need to be able to dig into the basic models of running a financial institution."
If boards added individuals with financial industry experience, then they would know more about the way the industry is headed, Ferris said. For example, what is the future of payments? Today, that is purely a question for management to handle. But he said if boards added directors with experience in that area, then they would be able to provide additional insight.
"We are seeing a handful of boards and credit unions starting to make these changes. There are advisory committees popping up, there are new members on boards who have financial experience, or are younger or are a different ethnicity. There are credit unions focused on their governance."
One trend that has Ferris concerned is as CEOs retire, often several board members retire at the same time.
"Change is good," he noted. "But it needs to be better organized than a mass exodus because that can lead to a loss of the credit union mentality. Just walking in and being a board member is not an easy proposition. New directors need to understand their credit union's governance model, as well as how to monitor performance of the organization and other elements."
New Clothes?
Paragon Group's This said boards simply need to remember their overriding purpose. He noted the day-to-day operations of CUs are for management to handle, while boards are there to set policy and create visions.
"Board members can be really helpful by being the folks who ask the questions about balancing the good of the credit union versus the good of the individuals," he said. "Many of these board members were management in their own life. Really good volunteers ask simple questions to prevent an 'Emperor's New Clothes' situation."
Frequently the newest board members ask the best questions because they are not enmeshed in the history of the credit union, according to This. They are willing to ask, "Why do we do this?"
"Volunteers are good at asking those basic, simple questions that get us back to making good decisions," he added.
Susan Mitchell, CEO of Las Vegas-based credit union consulting firm Mitchell, Stankovic and Associates, said volunteers are "such an important part of the credit union difference," adding this is a "critical" time for volunteers within the industry for many reasons.
"We need to get back to the concept of being the original social network," said Mitchell. "The field of membership, the common bond, meant we had a circle around us and a group that represents each other. Looking at the future, the board must represent the membership and must be representative of the membership. There has to be people who want to make a difference and contribute to it."
Adding A Voice
Last year
John Sackett, the current chair of CUNA's Volunteer Leadership Committee, as well as the treasurer for the board at $1.3 billion Royal CU, Eau Claire, Wis., is the first to take on this role. Going forward, the chair of CUNA's Volunteer Leadership Committee will be the non-voting representative on the CUNA board.
Jill Tomalin, EVP and chief operating officer of CUNA's Madison office, who oversees CUNA Strategic Services, CUNA Councils and the Center for Professional Development, said the Volunteer Leadership Committee was created in 2011.
"The VLC was dedicated to all volunteers," Tomalin said. "We have always had volunteers serving in several positions. We always talk about voice of the volunteer, so it was a natural progression to have a volunteer be part of the board."
Susan Newton, CUNA's EVP of credit union system relations, explained the 24 seats on CUNA's board are divided into six geographic districts. Each district elects four directors, Class A, B, C and D.
Classes A through C are credit union representatives by membership size, while Class D directors are league or state association presidents.
Although all Class A-C directors currently on the CUNA board are credit union CEOs, the CUNA by-laws specify they could be a volunteer (must be a voting board member of a credit union in the group that is eligible to elect a director).
"Voting is done by each district and class," said Newton. "There are no at-large directors, per the CUNA by-laws. It was set up this way in the late 1990s after a change to the board's governance structure. To add a seat strictly for a director would require a membership vote to change by-laws."
Scott Earl, CEO of the Mountain West CU Association, said the "right way" to get national volunteer representation is to find a way for them to be elected to a CUNA board seat.
"The CUNA board seats are fairly sought after," Earl said. "It is a positive to get volunteer input represented. CUNA is taking an active role in engaging the volunteer. Even though it is a non-voting role, that person can be part of discussions and deliberations. He also chairs a committee."
CUNA's Newton said the trade group has for years been looking for ways to get more volunteer engagement.
"While volunteers are able to serve, there has not been a volunteer elected to the board," she said. "We have set up committees such as the Volunteer Leadership Committee, and we have volunteer representation on the Government Affairs Committee."
Newton said after many years of no volunteers being elected to the CUNA board, the association decided the easiest way is to invite the chair of the Volunteer Leadership Committee.
"Because the person is invited, not elected, he or she cannot vote," she noted. "This was the easiest way to make a change. Looking forward, we are looking for more volunteer engagement. We have a regular process we have followed since the 1990s to look at governance, see if there are any by-law amendments we need to propose to the membership. It is the intention of our incoming chairman this year to appoint another renewal committee."
Why have no directors been elected to the CUNA board? Newton said the topic has been discussed among the VLC frequently. "It is not because it is prohibited by by-laws, the volunteers just might not have the same networking opportunities as CEOs. It is important to us here that we have more outreach and we certainly have been trying to do that over the past two or three years."
Sackett Fine With Not Voting — For Now
Sackett has a lengthy credit union resume, starting with his being a member of Royal CU for more than 30 years. Prior to becoming RCU's board treasurer, he held the position of chairperson for 17 years. He chairs the Finance Committee and serves on the Political Action Committee.
Prior to becoming chair of CUNA's Volunteer Leadership Committee, Sackett served on CUNA's Community Credit Union Committee, CUNA's Mergers Task Force and the CUNA Task Force on Due Diligence.
So far, Sackett has attended two CUNA board meetings, with a third scheduled to take place in Washington, D.C., in conjunction with CUNA's GAC. During a recent interview, he told Credit Union Journal his role on the CUNA board has been a "great experience."
"[In early February] I was invited to an information session for new board members—three board members are coming on through the election process," he said. "We went to the CUNA offices and had a full day of information from all departments of CUNA, what they do, how it all relates."
Personal experience is important, Sackett said, as he insisted one has to attend CUNA board meetings to understand how the board operates. At the first meeting, he reported, every single board member made it a point to come up to Sackett, welcome him and thank him for being there.
"They all thought it was a great idea to get director input. I have asked questions during the meetings, but do not feel the need to comment until I have attended at least three or four meetings to gain an understanding of how the process works."
Some have questioned exactly how much Sackett can accomplish in his new role, given the fact he cannot vote. He told CU Journal this is a "legitimate question," but he has a good feeling based on the conversations he has had so far and will be able to have with the board in its entirety or with individual members.
He knows he is serving as a representative of the 70,000 or 80,000 directors in the movement and some will have questions and concerns.
"Some members of the Volunteer Leadership Committee think the appointment should have been made with full voting rights," he acknowledged. "I think it is a huge accomplishment by the CUNA board to take the first step in the right direction. To be there, to have a voice and have insights and input into decisions made by the CUNA board is important. I would find it very difficult to be a person pounding on the table to demand a position on the table. It is a slower process than some would like, but as long as it is progress we have to be respectful of the process."
There is a "flaw" in the CUNA board, Sackett continued, as evidenced by the fact not one of the 24 members is a volunteer. He said the problem lies in the voting mechanics, as not once in his many years as a director has he seen a ballot for a CUNA board seat.
"They go to credit union CEOs for votes. Those CEOs, rightfully so, vote for people they know," he said. "There are different viewpoints that need to be acknowledged."
There are obstacles in getting a CU director elected to the CUNA board, Sackett said. Any would-be candidate would have to get their name out for consideration. In the case of the district Wisconsin is in, this would involve publicizing oneself to six states.
"The system has a flaw built into it," Sackett said. "To get volunteers on the board, there needs to be a certain number of seats that can only be filled by volunteers, because it is unlikely it will happen under the current system. That way the volunteer voice will be heard by the largest trade group in the credit union system."
Sackett quickly added he is "not complaining," just being realistic about the future of getting the volunteer voice heard.
"I am enjoying my time and my effort — there is a big learning curve for me — but I know there is a lot of responsibility on my shoulders to succeed. I think it is a positive. I have yet to hear a single CUNA board member say or indicate it is a mistake to include me."
Sackett's seat on the CUNA board may not continue much longer, he noted. He is in his second year as chair of the Volunteer Leadership Committee, and in most cases people are rotated through committees after two years.
"If I no longer am the chair of the VLC, in March or April, there might be a new appointee. I have expressed a desire to continue with this, but I don't know what will happen in a few months."
Reaction To New Position
Chuck Fagan, president and CEO of CUES, praised CUNA for adding Sackett's input, saying it is "absolutely appropriate" and added CUES is looking at making a similar move.
"Up to and including 'Don't Tax My Credit Union,' there are many campaigns that need help, so getting volunteers involved is huge," said Fagan. "Volunteer involvement is absolutely appropriate. Boards should be a fair representation of the membership, so I think the step CUNA has taken is a good one. Directors need to be strong, active people who support growth of the organization."
Credit union consultant Lynch said good board governance means stating the qualifications of the board member.
"I do not have strong feelings either way whether the trade groups should have directors on their boards, but if people are qualified they should be on."
Rochdale Group's Ferris said what CUNA has done is a "good move."
"Letting the voice of the director be heard is a great concept," he said. "CUNA has other committees directors can participate in. But it is a difficult path to ask volunteers to weigh in without detailed industry knowledge. I probably would have made the same decision to not let the person vote, due to a lack of technical expertise. Could that change if we overhauled our boards? Maybe."
