MADISON, Wis.-A new report calling for changes in how board members are nominated, elected and measured once in the job has provoked renewed debate, with some, not surprisingly, disagreeing with the report's recommendations.
The report from the Filene Research Institute titled "Corporate Governance in Canadian and U.S. Credit Unions" seeks to find "the sweet spot that balances three different dimensions-the interests of members/owners, the oversight responsibilities of directors and the operational role of management."
The report suggests that because credit union boards rarely hold themselves or individual members accountable for the institution's performance, market failure is "the only realistic check on corporate governance" at many CUs. The study's authors argue that the once-per-year nomination process rarely builds an effective board. Rather, the study says, CUs should "consider replacing the nominating committee with a member-elected governance committee" or a larger committee focused on board performance, development and member engagement.
Longer term, the authors recommend that credit unions establish directly elected governance committees "which would hold the power to appoint members of a management board or monitor the effectiveness of the board and its members." Such a move would both reinforce the member-owner ethos (which many members have lost sight of, they argue) and enhance a board's capacity, training and performance.
The report also wades into a long-time debate within credit unions over compensating board members, who are volunteers in most states, although some board members are paid at some state-chartered CUs.
Volunteers Lacking Skill Sets?
Peter Goth, a co-author of the report and a lecturer in accounting and corporate finance at Queen's University in Belfast, Ireland, posited that the complexities and demands of billion-dollar financial institutions may require a skill set that many CU members are not equipped with. He stressed that paying boards may only be a strategy for larger CUs, "but perhaps that's the route that we're going; rather than expecting someone highly motivated to join the credit union but not necessarily having the skills ... to monitor and oversee management."
Surprise, Surprise
Not surprisingly, not everyone agrees with many of the report's recommendations.
"If I was a CEO, I think I'd be very hesitant to want to operate in that environment, because it seems like you've taken some of my authority away and given it to a paid board," said John Gregoire, a principal consultant with The ProCon Group in Madison, Wis. and a regular facilitator of board and management meetings. "Really the issue is that it's hard for regulators to have a one-size-fits-all model today."
Gregoire noted that while NCUA has begun structuring examinations differently for CUs with assets of $10 billion or more, "what they haven't really specialized in is to say 'Should governance be different?' Should we expect something different from the board at a $1-billion or $200-million CU rather than at a $20-million CU?"
Goth said that one of the guiding questions surrounding the study was whether the corporate structure of a model created in the 1930s-when the average CU had only a few hundred members and focused on savings and loan products-can still work in today's world of multi-billion-dollar full-service CUs.
The authors surveyed credit unions in the U.S. and Canada (see sidebar), but they also looked abroad for different governance structures, including the Dutch Rabobank, the UK's Co-Operative Bank and more.
Goth was hesitant to criticize the credit union movement as a whole, yet he also believes that the current model may not work if proper oversight from member-owners isn't in place to keep board and management self-interest and hegemony in check.
"As you get bigger and bigger and bigger, does the model work?" said Goth. "My gut feeling is it doesn't. The only way it will work is more and more regulation."
Goth acknowledged regulations are in place to protect stabilization and insurance funds, and that regulators are in the risk-management business, not the development business. "As a movement, we've got to take some of that control back. That's not to say take it away from the regulator, but the regulator puts down the minimum standards, not the optimum standards."
Gregoire believes NCUA has lagged in looking at governance structures. "When the examiner comes in, you're not going to hear a lot of different dialogue if you're $1-billion or $100-million ... even though boards have very different roles at that level."
Point, Counterpoint
Dan Clark, a longtime CU consultant in Tallahassee, Fla., countered that complex business structures don't necessarily mean credit unions need more governing board members. "We need better-focused, better-informed board members who know how to tell management its strategies and the ends to achieve, who let management operate and have sufficient reporting to produce the right oversight, to ask the right questions and to hold management accountable," he said.
Regardless of whether or not the authors' recommendations are adopted, Goth said that the study's main purpose was to stir debate. "The question is: What model do we go ahead with at the end of the day? Where does ownership of credit unions belong in future governance models of credit unions?"
To full report is available at http://filene.org/publications/detail/Corp_Governance
