The NCUA has released a proposed regulation that addresses the fiduciary duties of credit union boards. The new proposal makes it clear that boards are to be held to a heightened standard. It is more important than ever that credit union boards understand how their decisions can be judged.
Boards make important decisions at every meeting. Some decisions change policies and strategies for the future. Other board actions approve new services or ways to conduct business. In every instance, boards are expected to demonstrate care and loyalty for their credit unions. If board members' decisions lead to less than favorable outcomes, the board's judgment may be called into question.
Parties who may have grounds to challenge board decisions include regulators and members of the credit union. If the scrutiny of a board's action rises to the level of litigation, it is important to understand what standard courts will apply.
Courts often loathe having to second-guess the decisions of a board. This position taken by courts is framed in the Business Judgment Rule. The Business Judgment Rule is a common law principle stating that courts should defer to the judgment of boards for decisions made in the normal course of business. Courts recognize that directors must have enough leeway to take calculated risks. Boards often have to make decisions in the context of limited information, unpredictable competition and a rapidly changing environment. Courts believe that if all directors' actions are subject to second-guessing, it will lead to a chilling effect on boards to make reasonable business decisions.
The Business Judgment Rule makes a presumption that boards are in the best position to make critical decisions. As such, the Rule is an effective defense for boards whose decisions are being questioned. Courts will not interfere with a board's decision unless it can be shown that the board breached its fiduciary duties.
The factors a court will review when applying the Business Judgment Rule involve asking a few critical questions. First, the court may ask if the directors acted in good faith. This means the board did so with an honest belief that the action being taken would lead to a benefit for the credit union. Secondly, the court will look to see if the board acted in the best interest of the credit union. This precludes any actions where a conflict of interest existed, or the directors stood to receive personal benefit. Third, the court will inquire to determine if the board's decision was made on an informed basis. Finally, the court will want to see if the board was wasteful with credit union assets.
Credit union boards should pay close attention to any new NCUA regulations to ensure they are in compliance. In the case of fiduciary duties, directors should pay special attention to the changing expectations of being a board member.
Maurice R. Smith, President
Local Government FCU, Raleigh, N.C.
