DENVER-Credit unions will steal good ideas from any industry and, according to one person, they should be proud of that long tradition.
That was the only-slightly-joking message from Bob Hoel, the former executive director of the Filene Research Institute who today is a Filene Fellow in Residence and professor emeritus at Colorado State University. Hoel said not only can CUs appropriate good ideas from the business world, they can draw from negative outcomes to determine which mistakes to avoid.
As an example of the latter, Hoel pointed to mutual funds, which are a $12-trillion industry in the U.S. Such funds have boards of trustees that serve as "watchdogs," and Charles Schwab is one of the biggest names in the space, yet a key Schwab bond fund lost 35% in 2008-astronomical losses for what is supposed to be a "safe" investment option, he said.
"The company paid SEC fines and civil settlements, but whose fault was it? Turns out it was everybody, from management to the board of directors and also the regulators," observed Hoel. "Other examples include Enron, whose board featured a Who's Who of America, and Kodak, which invented digital photography but now is in bankruptcy because it did not adjust its business. In our own industry, corporate credit unions failed and local credit unions shrunk and failed."
A Fundamental Failure
According to Hoel, the common denominator in these and many other business failures is a fundamental failure in the way business is "supposed" to work. In business school the theory is stockholders have the most power, followed by the board of directors, with the CEO holding the least power. In reality, he said, the CEO holds the most power, then the board, then the stockholders.
"How does this happen? Because the CEO controls the information," Hoel asserted. "If the CEO does not tell the board everything, a ruse can last for a while. The board relies on the CEO, and most stockholders vote simply by selling their stock."
At credit unions, the theory is members own the CU and therefore have the most power, followed by the board, then the CEO, with regulators on the outskirts. Hoel said the "usual reality" is the CEO is the most powerful, followed by regulators, then the board, then the members. In difficult economic times, he added, regulators hold the most power, then the CEO, followed by the board and the members.
"Have I insulted everybody?" Hoel asked with a grin. "Let's just be honest about how things work."
C. Northcote Parkinson, a British naval historian, authored "Parkinson's Law. Law of Triviality," which stated organizations give disproportionate weight to trivial issues. Hoel said a perfect example of this concept is CU boards that "spend more time talking about dessert at the annual meeting than building a new branch or getting into participation loans."
"Credit unions do not have 50% penetration in any category-mortgages, car loans or credit cards," he said. "The biggest risk for credit unions is not people defaulting on their auto loans, it is credit unions becoming irrelevant. The risk is not innovating, evolving and improving, and not differentiating in the marketplace. Credit unions cannot just be average, they have to be different from their competitors. They must offer a special reason to do business with them."
Hoel said the definition of good governance is to manage key risks, but do not avoid risk; encourage both experimentation and failures; and stimulate critical thinking, learning and leadership development.
"The Business Roundtable's Principles of Corporate Governance said the most important board function is to select, compensate and evaluate a well-qualified, ethical CEO," he said. "If the board does this one well they can screw up a lot of other things and still come out pretty well."
Job No. 2 for a board is to monitor on behalf of the owners, Hoel continued. He said directors must have an attitude of constructive skepticism, ask incisive, probing questions, require accurate answers, all while acting with integrity and diligence and a commitment to long-term owner value.
"Board composition must reflect a mix of skills and expertise to enable effective oversight," he counseled. "The directors must understand the firm, its business and the industry. The board participates in strategic planning and oversees management's risk plan. Effective boards define the organization's purpose and value proposition, set boundaries for management, and advise and coach."
Make Meetings Interesting
How much owner involvement should credit unions have? Hoel said dull, poorly attended annual meetings are "the norm" in the corporate world.
"The exceptions are companies that hold sales-promoting extravaganzas," he said. "Berkshire Hathaway had 30,000 people show up for its 2012 annual meeting. Warren Buffet answers all questions, rather than giving a standard speech thanking the board."
Tarrant County CU in Fort Worth, Texas, with just $60 million in assets, draws 500 to 700 attendees to its annual meetings, which Hoel said is a function of giving members a reason to show up-information.
"Teach people about new products and services," he advised. "People are desperate for good information on saving for retirement, or about buying a home. If a credit union has a dull meeting, it should not expect anyone to show up."
