Credit Union Governance: The Case for Effective Board Succession Planning

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Credit Union Governance The Case for Effective
Board Succession Planning
CUES Teleconference Presentation by Anthea
J. Radford Arjane Governance Group April 13, 2004
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(No Transcript)
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Presentation Objectives

• Share trends in best practice as they relate to
  Board succession planning
• Stimulate discussion on the rationale and
  relevance of Board Succession Planning to the
  credit union sector
• Review the steps in the Board Succession Planning
  process

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THE CONTEXT
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The Context

• Never before been as much attention and focus on
  good governance
• Increasing pressure on Boards to perform at a
  higher standard
• Recent high-profile governance failures not
  result of Boards lack of business acumen -
  rather their inability to act like a board is
  supposed to act

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The Context

• Most, if not all governance reform initiatives
  call for more attention to be paid to who is on
  the Board
• Are they independent?
• Do they have the right skills experience?
• Do they have the necessary attributes? (Can and
  will they speak up on our behalf?)

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The Context

• These concerns lead to increasing focus on Board
  Succession Planning
• How do owners of the business ensure that they
  have the right people in place to look after
  their interests?
• Call for Boards to do a better job at this then
  they have in the past

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What Does it Mean for Credit Unions?

• Credit unions not affected directly by public
  company reform
• However, spirit and intent relevant to any
  organization governed by a Board of Directors on
  behalf of an ownership
• Credit unions unlike other cooperative sectors -
  consequences of governance failure are higher

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What Does it Mean for Credit Unions?

• Behavior of individual Directors and Board is as
  important, if not more so, than structure
• Requires having right Directors in place,
  acting in the right way
• Financial services sector increasingly complex,
  competitive, and fast pace of change

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What Is Board Succession Planning?

• The process through which the Board takes a
  proactive approach to ensuring that it has, and
  continues to have, individual Directors who, at a
  full Board composite level, possess the skills,
  qualifications, experience and attributes
  necessary to govern well on behalf of the
  organizations owners.

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What are the Steps?

• Development of Qualifications
• Recruitment
• Candidate Assessment
• Recommendation to Membership

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Qualifications Selection Criteria

• The basis on which Board Succession Planning
  takes place
• Foundation for recruitment, candidate assessment
  and performance assessment
• Combination of experience, skills attributes
  necessary to be a good Director with
  organization specific overlay

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• Articulated at a full board composite level
  (what does the Board need - not necessarily each
  individual Director)
• Impose a standard higher than minimum legal
  requirements

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What are the Right Qualifications?

• Knowledge, Skills Experience
• Governance
• Business (generally, financial services sector,
  credit union sector - includes financial
  literacy)
• Cooperative and/or credit union
• Attributes

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Why are Attributes Important?

• Board of Enron had the necessary business skills
  - obviously lacking in right attributes
• Those qualities necessary to
• think strategically
• maintain focus on primary accountability
  (Members)
• maintain independence from management
• ask probing questions
• deal effectively with the difficult people
  issues
• contribute effectively within a group

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For Example

• Integrity Accountability
• must demonstrate high ethical standards,
  integrity to personal professional dealings,
  willing to act on - and remain accountable for -
  boardroom decisions
• Informed Judgement
• ability to provide wise, thoughtful counsel on
  broad range of issues, develop depth of knowledge
  of financial services in order to understand
  question assumptions on which strategic
  business plans based judge probability of
  success

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For example

• Financial Literacy
• one of most important roles of Board to monitor
  financial performance, requires a level of
  financial literacy. Should know how to read
  financial statements, understand use of financial
  ratios other indices for evaluating performance
• Cooperative Philosophy, Principles Values
• credit union acts as a cooperative within the
  larger financial services industry
• Directors must bring an understanding of the
  cooperative principles and how to translate those
  principles to establishing effective objectives
  for the credit union (what does it mean to be a
  credit union within the larger financial services
  industry?)

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Right Attributes?

• Mature Confidence
• Teamwork - ability to value Board team
  performance over individual performance - respect
  for others
• Communication - openness to other opinions
  willingness to listen ranks as high as ability to
  communicate persuasively
• Directors must approach others assertively,
  responsibly supportively
• Willingness to raise tough questions in a manner
  that encourages open discussion

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Ineffective Recruitment Plan
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Recruitment

• Recruit against articulated qualifications
• Should be combination of
• maintaining an inventory of qualified
  individuals and recruitment based on need in any
  given year
• internal and external outreach efforts
• Need to manage expectations

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Candidate Assessment

• Candidates for Directorship should be assessed
  against
• specified qualifications
• other selection criteria (to fill gaps from full
  Board composite perspective)
• Process developed for ensuring a fair, open
  transparent assessment process

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Recommending Best Qualified

• Nominating Committee, or responsible body,
  recommends to Members those whom they have
  assessed as the best-qualified for the job
• In a number at least equal to or greater than
  number of vacancies
• Those not being recommended are entitled to
  continue to run

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The Challenge in Cooperative Sector

• Typically, board succession planning issues tend
  to be controversial
• Different schools of thought based on history of
  cooperative sector
• Concern that any intervention in election
  process infringes on open and democratic
  principles

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• In earlier days, cooperatives Members likely a
  smaller, closer-knit group (personal knowledge of
  potential candidates)
• With increasing growth of sector increasing
  complexity of business - case can be made that
  credit unions must close the gap between
  historical practice best practice

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• The role of a Director is a job like any other
  job in sense that it has specific legal
  responsibilities obligations - its job is to
  govern
• Typically, to retain the right individual for a
  specific job, you would
• establish the qualifications you are seeking
• determine selection criteria
• objectively interview
• select most qualified candidate

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• Depending on structure of credit union - most are
  now in similar circumstances to a public company
• Largely dealing with an absentee owner
• Most Members have difficulty in focusing at other
  than a customer level
• Low percentage response on elections

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• Small percentage of Members either understand
  qualifications for job or in good position to
  judge the qualifications of individual candidates
• Risks becoming a political exercise or
  personality contest
• Consequently, it falls on Board to act on
  owners behalf

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• If I was an absentee owner, Id hire someone to
  undertake appropriate hiring process on my behalf
  - advise of results/assessment, retaining right
  to make ultimate decision
• If you were an absentee owner would your
  preferred option be to leave it up to chance - or
  would you want someone acting on your behalf
  whose legal obligation it is to do so?

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Taking the Emotion Out of the Equation

• Shouldnt confuse owners right to elect, with
  their ability to elect - or make a
  well-informed decision
• No one would argue with selecting best candidates
  for job at management level
• Why should it be different for those who are
  legally accountable potentially liable?

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Key Criteria?

• The sole question or criteria should be - Which
  of the following options best serves the
  interests of the total Membership?
• 1. Totally open election process with no
  assessment or nomination provisions
• 2. Partially open with nominations being made on
  less than appropriate knowledge or process
• 3. Implementing a practice to encourage and
  facilitate the best qualified Board

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Maintaining Excellence

• Once you have a well-qualified Board in place
  need to focus on
• continuing training education
• performance assessment
• Necessary to ensure that performance continues to
  meet expectations

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Summary

• Proactive Board succession planning is in best
  interests of the ownership does not conflict
  with intent behind open election process when
  done properly
• Consequently, process is important - must ensure
  fair, equitable and transparent process based on
  specified qualifications and criteria

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Summary

• Because process is so important - Boards should
  seek assistance necessary to do the job well
• Many credit unions have taken a more proactive
  stance on Board Succession Planning
• Two of our guests today will share their own
  credit unions approach

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Thank You

• For a free trial to CUES Director Education
  Center, please visit www.cuesdec.org or call
  Josie Jach, CUES' Services Products
  Coordinator, at 800.252.2664, ext. 5319 or
  josie_at_cues.org