Why Corporate Governance Among CUs Must Be Reviewed, Strengthened

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House Ways and Means Committee Chairman Bill Thomas (R-CA) emphasized the importance of transparency, accountability and verifiability in credit union operations at the Nov. 3. 2005 hearing on the CU tax exemption. The credit union system is taking Thomas' message very seriously, and the topic of corporate governance has been targeted as a critical focus area for credit unions.

NASCUS, the professional association of state regulators, is working with its member regulators and state-chartered CUs to strengthen corporate governance practices as a strategic priority for 2006.

With increasing compliance requirements and in some cases operational complexity in credit unions, it is important that board members are informed and fully understand their responsibilities. Recent philosophical debate in the system has opened up discussion about appropriate board responsibilities and actions. But corporate governance is not a new topic for the industry, or for NASCUS.

When the Sarbanes-Oxley Act of 2002 (the Act) was signed into law, the credit union industry spent time researching the issue to understand any implications on the credit union system. The law was enacted to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws and to implement other corporate governance practices.

While the Act and the Securities and Exchange Commission (SEC) implementing regulations do not apply specifically to credit unions, NASCUS maintains that some best practices can be gleaned from the Act for state-chartered credit unions and that certain provisions may be appropriate to consider.

A focus on corporate governance has resurfaced and NASCUS continues to promote strong corporate governance as good public policy. NASCUS' member regulators believe that strong corporate governance is an important part of the safety and soundness of a CU.

It is not to say that credit union boards are not fulfilling their oversight responsibilities. They are. But Congress has put a spotlight on credit union activities, and regulators are emphasizing that good corporate governance is essential to safety and soundness. Now is the time to ensure credit unions' "house is in order."

Some key questions need to be addressed by the system to enhance corporate governance practices. Are credit unions getting appropriate candidates as board members? Are the board members being educated on emerging issues? Are credit unions equipped to handle succession planning? Is there diversity among board members?

At several industry meetings across the country in the last few months, NASCUS has emphasized that credit unions should revisit their corporate governance practices and look inward to ensure the proper internal controls are in place. NASCUS maintains that the board sets the tone for the entire credit union and agrees with the premise that board governance is critical to the safety and soundness of the institution.

Other areas for corporate governance evaluation may include an assessment of director duties, the board selection process, board compensation and board diversity. The board has a fiduciary duty to the membership; it is important to ensure that the board infrastructure exists to support this duty.

A focus should also be placed on board education. Board members should continue to educate themselves on marketplace, membership and current compliance issues. It is critical that board members stay up-to-date on credit union issues and are in tune with the day-to-day challenges and long term concerns. Board members need to assess liability and risks effectively to ensure transparent oversight of the credit union. An informed and appropriately active board is essential in today's credit union system.

There is no better time than now to enhance corporate governance practices. As NASCUS works on this strategic target, we will share lessons and best practices from a regulatory perspective to enhance corporate governance. Transparency, accountability and verifiability are terms that will take on even greater importance for credit unions in the near future. In working to strengthen corporate governance, those ideals can be preserved and strengthened for the benefit of the entire credit union system.

Mary Martha Fortney is the President and CEO of NASCUS, the National Association of State Credit Union Supervisors. For info, www.nascus.org, or contact Ms. Fortney at marymartha nascus.org.

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