Questions around credit union governance are critical to any credit union’s success (or failure), and it’s one the Filene Research Institute has explored extensively. Some of the findings around research related to board governance and answers were shared with a large group of board members who turned out for a session during NAFCU’s annual conference here.
“Governance is about confidence in the system,” said Tansley Stearns, Filene’s chief experience officer. “We must be leaders and remain open to new ideas.”
Stearns readily acknowledged all of the challenges before any credit union board and board member, including time demands, economic uncertainty, board diversity, competency, members, training, and liability.
Evolution of 'Owner Power'
Those factors have contributed to an issue frequently cited by credit unions, that it’s very difficult to recruit new, and especially younger, board members. As Stearns made clear throughout her remarks, younger board members can be found, but a credit union needs to commit to it.
Those factors have contributed to an issue frequently cited by credit unions, that it’s very difficult to recruit new, and especially younger, board members. As Stearns made clear throughout her remarks, younger board members can be found, but a credit union needs to commit to it.
“The credit union members are interested in benefits of ownership, but not as interested in participation in governance process. They are passive and will take business elsewhere,” observed Stearns, noting that the research further shows “owner power” evolves as the organization grows, and among members who owns the credit union remains unclear.Those factors have contributed to an issue frequently cited by credit unions, that it’s very difficult to recruit new, and especially younger, board members. As Stearns made clear throughout her remarks, younger board members can be found, but a credit union needs to commit to it.
To engage members as owners, Stearns said one strategy is to make much better use of the annual general meeting (which for many CUs require staff to be on hand to create a quorum).
“Consider making it an extravaganza to attract larger numbers and use it as marketing event,” said Stearns, citing Madison, Wis.’s Summit CU’s AGM as an excellent example. “Can you leverage it to allow people to better understand the benefits of ownership and to allow people to be better engaged?”
What Boards Say
When boards are asked to identify what they believe to be their most challenging responsibilities, the research found:
- Hiring and firing specialized CEOs.
- Performing meaningful evaluation of CEO and organization.
- Assessing and developing and approving strategy.
- Ensuring appropriate board composition on an ongoing basis.
- Developing and maintaining effective governance structures, systems and processes.
Stearns noted that as credit unions grow in size and complexity, boards have increasingly ceded power to the CEO, but need to ensure they are informed of industry and credit union trends.
“Do not fixate just on the traditional metrics,” said Stearns. “Remember meaningful member metrics such as Net Promoter Score and Member Energy Score.”
Stearns also told CU boards to:
- Discuss and review succession planning annually.
- Value formal mechanisms (formal calendar and agenda) for board effectiveness and diversity.
- Remember the effectiveness of board chair influences effectiveness of board.
Factors In Strategic Errors
Stearns said Filene’s research has found that when boards make strategic errors, it is often due to one of these factors:
1. Overconfidence. “We may have been on a board for a long time or have a really capable senior team and think, ‘We’ve got this.’ The danger is not looking up and seeing what else is happening.”
2. Mental accounting. Is training just another expense, or an investment?
3. Status quo bias. “We’re really guilty of this. It’s the way we’ve always done it. We’re not adapting. For instance, we won’t close a branch that’s been around for a long time.”
4. Loss aversion. “We are fairly conservative by nature in credit unions. But this is when we don’t want to take additional risks. There are times when we have to be more innovative and take calculated risks.”
5. Anchoring. “This is measuring board performance against a set number in our heads, such as ROA of 100 BPs or better.”
6. Sunk Cost Effect. “We tried something new, and perhaps it’s not working as we’d like, and we don’t make a decision to shut it down. This is about knowing when to pull the plug.”
7. Herd Behavior. “This is somewhat common in credit unions. We see others at credit unions doing it, and we do it, too.”
8. Confirmation Bias. “We think that others think like us.”
9. Mis-estimating future pleasure levels. “This is thinking that things will be more painful or less painful in the long term.”
Good “fodder” for a board meeting discussion(s) should include these topics, said Stearns:
- Meeting member expectations
- Developing your human resources
- Are we meeting financial expectations?
- How are we dealing with environmental and regulatory forces that may alter the organization and the playing field?
- How effectively are you operating the credit union from an operating systems perspective? How well are you operating from a learning or change perspective?
Four Types of Boards
Stearns said Filene’s research has found four types of boards in credit unions, which it defines as Scout and New Technology Boards; Challenger Boards, Rubber Stamp and Sleepy Boards, and Watchdog and Micromanaging Boards.
“The best place to be is that Challenger Board, providing lots of support and guidance, but relying on the subject matter experts,” said Stearns.
Stearns said that one way for boards to get some insights into their own behavior and priorities is to keep track of how much time is spent at board meetings on the various points of discussion.
To make the most effective use of time, she said Filene recommends:
- Ensure all directors consent to agendas outside of board meetings.
- Schedule all strategic agenda items for the beginning of board meetings.
- Record and track actual time spent on each agenda item in order to assess whether or not improvements are being made.
Filene's Strategic Cycle
Those points and others should be considered with regularity, said Stearns, noting Filene has developed a Strategic Cycle for the board to help them be more strategic in the long term so that strategy is not just a point in time, such as when the board goes off to an Autumn planning session.
In addressing the NAFCU meeting Stearns touched on several issues that are often hot buttons with board members, including term limits, diversity, and age. She Said Filene’s research has found most CU boards are comprised of eight to 12 directors, and that there is no evidence of a relationship between size of the board and performance of the credit union.
Stearns noted research shows that diversity helps improve board performance, but when she asked for a show of hands among attendees for credit unions with a board diversity policy, no hands were raised.
Not surprisingly, it has found the majority of board members are white males over age 50, but Stearns added, “But social expectations are changing the dynamics there.”
Board members under age 50 make up just 2.1% of board members overall, Filene’s research has found.
“The reason that is a little concerning is that when we go and talk to credit unions about what is there most important strategy, it’s about attracting this next generation, the younger members. If that matters to you then they have to be represented across your organization, and that includes your board. One way to dip your toe in is to have a Young Adult Advisory Committee.”
'You Might Be Surprised'
Stearns said she has heard from board members saying that no one in their twenties has time or inclination to serve on a credit union board, but that can be a cop-out.
“I think you might be surprised if you asked. The one thing the Gen Y’ers are really, really interested in is doing business with organizations that want to do right by the world.”
Stearns recommended boards recruit new blood by:
- Taking prospects to dinner
- Offering a tour of branches and headquarters
- Inviting prospects to participate in a board meeting
- Asking for referrals
- Requiring every director to make a referral on an annual basis, with an emphasis on targeted groups.
By a show of hands, about 10% of those in attendance at the NAFCU session said they have formal board evaluations in place (Stearns said approximately 40% of CUs do), but that not all evaluations processes are “equal.” She said one best practice is to have a third party lead reviews of board members.
“There is a reason for us to take this seriously. The organizations that do formal evaluations are healthier,” said Stearns. “They have a better balance of directors, and actively seek specific director skills.”
Six Strategic Pillars
According to Stearns and Filene, the six “strategic pillars” for a good board include:
- Anticipate. This is the relentless curiosity to get out and figure out what is happening.
- Challenge. This is making hamburgers out of the sacred cows.
- Interpret. This is the ability to have multiple lenses against robust criteria.
- Decide. This is a balance between detail and speed.
- Align. This is a board in alignment with the membership.
- Learn. This is pace of change, continual learning and failing forward.
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