We are a country and a community in transition. September 11th, Enron, corporate
scandals, terrorism, the fall of the stock market, legislative and regulatory
reforms as well as the renewed focus on governance are all reflective of a set
of remarkable transformations surrounding Credit Unions. Within the Credit Union
community, we have experienced significant changes as well - changes to the
common bond requirement via the Credit Union Membership Access Act, incidental
powers, disaster recovery, computer security issues, the Patriot Act and a host
of privacy issues.
P. DeLeon, CPA
You may ask - What have these events got to do with me? Why is there such a
spotlight on governance issues these days? To what extent will (or should) changes
in the business or legal realms have a meaningful impact on how we lead our
Credit Union? What are the new governance practices - or requirements - we should
consider implementing? What should we do to actually improve our governance
structure and practices?
Some Credit Union Governance Essentials
President Franklin D. Roosevelt signed the Federal Credit Union Act of 1934
establishing Federal Credit Unions. The Act was amended in 1937 to assure tax
exempt status for Federal Credit Unions. The core governance structure of a
typical Federal Credit Union can be understood as a not-for-profit cooperative
undertaking with democratic supervision by its members.
Such a basic structure places a good deal of responsibility upon the membership
to monitor and oversee the Credit Union's operations and management. The fundamental
governance elements utilized by Credit Unions include the members themselves,
the Board, a Supervisory Committee and the President or General Manager. In
addition, Credit Union by-laws traditionally call for a Board Chair, one or
more Vice Chairs and a Secretary. The latter is probably one of the most underutilized
elements of a typical credit union's governance structure - but need not be.
(See below: What Can We Do To Improve Governance At Our Credit Union?)
Let's look at some of the critical elements or issues that arise from such
Governance begins and ends with the Board. It is the leadership culture, structure,
processes and procedures whereby the mission of the organization is successfully
accomplished. We think of a Board as having five absolutely critical tasks.
These core tasks are non-delegable - although management and others often assist
with the implementation of each. They are:
- Management Development & Accountability
- Ethics & Financial Integrity
Interestingly, the first, third and fifth of these critical tasks are often
given a lower priority when it comes to the actual work of the Board. They sound
right, but when you actually match the activities of a typical Board, you find
an overwhelming slant towards performance and (sometimes) strategy. Significant
attention to performance and strategy is warranted, but not to the exclusion
of the other three.
It is shortsighted to not pay attention to governance because many Credit Unions
may suddenly find it hard to recruit or retain good Board members. How often
has your Board really focused on itself and held itself accountable for its
ability to govern well? Problems may occur that appear to be one thing (an ethics
or management problem), but are often a result of poor oversight. Without proper
attention, the Board's relationship with management can become unbalanced with
micromanagement a looming danger in one direction or lack of any meaningful
oversight at the other end of the spectrum. In addition, how many Boards have
really focused on their institution's ethics standards? How many Supervisory
Committees have really questioned whether the same CPA firm should be assisting
with both internal and external audits simultaneously?
The Supervisory Committee
While many of the core elements of the Sarbanes-Oxley Act do not directly impact
Credit Unions, the new law has put a number of important issues on the table
that may have a significant cascade impact on the role and responsibilities
of Supervisory Committees. Indeed, we have both suggested and seen a number
of Credit Unions review the Act and incorporate a number of the best practices
outlined within its provisions.
Questions we urge every Supervisory Committee to ask themselves: How do we
ensure we have the necessary knowledge or experience to carry out our role?
Is the set of our responsibilities growing? If so - how? What is our proper
role vis-à-vis outside auditors? Is it appropriate to have the same accounting
firm be our internal and external auditor simultaneously? When is auditor rotation
appropriate? If so, is simply rotating the audit partner enough? What responsibility
does the Supervisory Committee have to help ensure high ethical standards and
financial integrity? What do we do if we suspect that a fraud may have been
committed? Just how secure does our computer system have to be?
Many have suggested that the reason why organizations do bad things is because
one or two rogue employees step out of line. History suggests that is sometimes
the case. Far more troublesome - and common - are organizations with a business
culture in which governance and integrity take a back seat to financial or other
matters. The recent epidemic of organizational scandals suggests that senior
leadership is frequently the cause of problems. As such, one of the necessary
elements to a robust governance structure is to ensure that high ethical standards
are in place and followed - by everyone.
It is difficult to attract and retain good leaders if your institution has
a negative reputation or has ethical challenges. Customary leadership processes
and normally smooth-running governance structures can also break down in the
midst of ethics difficulties.
In addition, the Sarbanes-Oxley Act calls for Codes of Ethics for those individuals
involved in financial matters. While much of the Act is not directly applicable
to Credit Unions, the best practice impact of the new law will likely be a strong
impetus for all financial professionals and institutions to ensure they have
a set of written ethical values and standards that everyone must follow. (See
also our article: Credit Union Codes of Ethics: The Future is Now! The Audit
Report, Vol. 12, Issue 1, 2003)
What Can we do to Improve Governance at Our Credit Union?
It is a new governance era for Credit Unions. Theories abound, but here are
nine practical ideas you can consider to improve governance at your credit union:
1. Find opportunities for the Board to interact with Credit Union management
and other staff. Make sure the Board learns the operation and how it works.
This can be done through both formal meetings and more informal opportunities
to interact with management, employees, vendors, and members. It is difficult
to really understand the Credit Union's issues if you are a thousand miles away.
2. Ask questions - get answers. We have seen countless instances where
boards or committees simply neglected (or were afraid) to ask basic questions
- thereby enabling problems to occur or perpetuate. Board and committee members
who ask appropriate questions are a gift. Asking questions and holding each
other accountable for the answers is what the governance process is all about!
3. Actively recruit and develop talented Board and Supervisory Committee
members. Go out and get good people. What is your Credit Union's plan to
recruit and train new Board members? How can you enhance leadership development
throughout the entire Credit Union?
4. Conduct a Board or governance review. Take a good look at each of
the five basic tasks of a Board outlined above. How are you doing with each
one? Rethink how your Board and committees work. Where is there room for improvement?
How are other Credit Unions or organizations you respect structured? What makes
them effective? Take a hard look - make changes to update or improve your governance
5. Clearly understand your legal and financial responsibilities. Don't
skip the basics. Examine your mission, goals, values and structure. Don't assume
your Board and committee members know what to do - or their specific responsibilities.
Bring in a lawyer, colleague or an experienced facilitator who can review your
Board's responsibilities. Have a CPA or your auditor meet with your Supervisory
Committee and talk through its responsibilities and challenges.
6. Evaluate your leadership. Evaluation is a vital accountability tool.
Have you established success criteria for your Board members? How do you recruit
new Board members? Have you evaluated Board members' individual efforts? How
about the efforts of the Board as a whole? The Supervisory Committee as well?
Do you have a specific and regular appraisal system for your President? Do you
use it? Is it effective?
7. Empower the Board Secretary to improve governance. Most Credit Unions
would be well served to have a genuine and functioning officer position of Board
Secretary (as opposed to the more administrative function of taking minutes
at Board meetings). The role of the Secretary is to governance what a Treasurer
(in many business organizations) is to finance. The Secretary can and should
play a vital role in the functioning of the Board itself, the recruitment and
training of Board members, the process of Board self-assessments, succession
planning, the election of officers, the recruitment and selection of the Manager,
the recruitment and selection of the Committee Chairs, the maintaining (working
with staff) of the official records of the organization, the modification of
policies and by-laws, assisting with Board members that are dysfunctional or
do not carry out their duties.
8. When in doubt - seek counsel. Developing significant relationships
with professionals who can assist you with critical questions is one of the
strengths of any good organization. You are not expected to know everything
because you are senior staff or sit on a Board. Know what you don't know, and
get help when necessary. If it is possible, it helps if the professional you
are consulting already knows something about your Credit Union.
If there has been one resounding lesson learned from Enron and the other organizational
scandals (both in the for-profit and non-profit realms), it is - governance
matters. Governance sets the tone for an organization. It establishes a leadership
style. It creates and fosters a particular organizational culture. It determines
direction. It sets standards. It allows others to be held accountable. It enables
you to accomplish your mission. It fosters success.
In retrospect, governance may have become one of the most misunderstood areas
of organizational focus in recent years. Genuine governance is not about appearances
- it's about substance. It's not about not about simplistic measurements like
the number of meetings held each year, it's about authentic answers to hard
questions . . . Is our Board functioning effectively? What is really going on
in the Boardroom? Are Board members, Supervisory Committee members and Credit
Union staff clear on their roles and responsibilities? Is there effective teamwork
and communications? Have we objectively analyzed our strengths and weaknesses?
Do we really hold each other accountable?
Enron was a wake-up call. Many of the governance and public reporting structures
in the for-profit community were taken for granted. Hindsight says they needed
to be improved. The same could be true of the governance efforts of some members
of the Credit Union community.
The post-Enron era is an opportunity for each of us to look hard at the way
we govern Credit Unions and make needed improvements. If each of us uses it
as a genuine opportunity to fine-tune our governance efforts, the Credit Union
community - and all those it serves - will be better for it.
This article was published in The Audit Report, a publication of the Association
of Credit Union Internal Auditors. Reprinted with permission.