LAS VEGAS–A conference made up primarily of CU board members were told their credit unions would likely be better off if many of them didn’t return to the meeting in future years.
The reason, suggested Ben Rogers, managing director of research at the Filene Research Institute, has everything to do with freshening up the makeup of credit union boards to better reflect the membership and to bring new ideas and approaches to make it more effective.
But none of that will happen, he said in remarks to the Directors & CEOs Leadership Conference here, without serious board commitment.
“You have to want it. You have to do it. And you have to keep it up,” said Rogers. “Those three things underpin everything when it comes to board effectiveness.”
Rogers said Filene’s research has found that currently, 35% of CU boards have no procedure or process for terminating ineffective directors, 37% don’t believe their board renewal process identifies effective leaders, and 61% said they have no formal board/director evaluation processes.
Board renewal can pay great dividends, according to Rogers, who pointed to what has taken place in Canada after the law began requiring governance practices in organizations be disclosed, and that governance ratings be adopted.
Almost immediately, the low-hanging fruit was picked and boards moved to disclose what they were already doing. In 2002, 19% were doing board evaluations; by 2012, 78% were conducting them. After about 10 years, boards, under external pressure, began adopting meaningful new structures and behavior and the balance of the control shifted, he said. The result has been measurable improvements in those organizations, according to Rogers.
Filene research has also found that when CUs were asked about their board renewal policies, 74% pointed to regular elections (which he noted are required, anyway), 28% said they had term limits, and 2% said they had a mandatory retirement age.
“I’m not here to say you should do term limits, but I am saying it’s something you should talk about for effective board renewal,” said Rogers.
Rogers said that when research has probed which board practice is most strongly correlated with good ROA performance, of all the measured relationships, the only governance practice that yielded a strong positive correlation with actual credit union ROA performance was whether boards felt they had an effective CEO evaluation in place.
According to Rogers, there are four types of boards--Rubber Stamp and Sleepy Boards; Watchdog and Micromanaging Boards; Scout and New Technology Boards, and Challenger Boards. The latter, Challenger Boards, is the ideal position for credit unions, Rogers said. “Challenger Boards bring new ideas and hold management accountable for making things happen.”
Rogers offered these recommendations for all boards:
- Measure CEO performance
- Review board responsibilities annually
- Don’t’ worry about board size
- Add women, minorities, youth to board
- Require financial knowledge of board members
- Attract board members with management and financial experience.
But to make any of those work, he repeated, “You have to want it. You have to do it. And you have to keep it up.”
LAS VEGAS–It’s been nearly seven years since the largest fraud perpetrated in credit unions took place, but the egregiousness of the board’s failures in doing their jobs still rankles one former board member.
The failure was St. Paul Croatian FCU, which was liquidated in 2010 at a cost to the National Credit Union Share Insurance Fund of $170 million. And what is most interesting, is that it was never caught—or really even suspected—for an extended period by either the credit union’s board or examiners.
“It’s very simple,” said Bob Kravetz, a former director at Department of Labor FCU who participated as an expert witness in a lawsuit that had been filed by CUMIS related to the case. “I was going to call this session ‘How a board of directors can destroy a credit union.’ Because that’s what essentially happened. A $70-million fraud that cost the NCUSIF $170 million.”
As part of his participation in the case, Kravetz reviewed the CU’s annual reports from 2005-10, all the meeting minutes, depositions, exam reports and more. Kravetz shared his perspective during the Directors & CEOs Leadership Conference here.
“What I found was the St. Paul Croatian loan policy required that all loan requests over $25,000 were to be brought to board for review and discussion,” said Kravetz. “Suffice it to say, it wasn’t done. All the loans also required shares to secure them. Again, that didn’t happen.”
Over a five-year period, years during which loan volume soared to as much as $42 million annually, there were years in which no loans were reviewed by the board.
“Would the board have discovered the fraud? I don’t know, but it still should have been brought to the board’s attention and the board should have been asking where are these loans going?” Kravetz said.
Kravetz said the CEO, Anthony Raguz, provided the board with the same boilerplate language in reports year after year, and no one raised a question. Nor did the independent auditor used by the credit union. Nor did the NCUA examiners.
Why didn’t the board notice?
“The excuse presented at trial was that the CEO told the board these loans are share-secured. And the board said OK. But it was impossible for it to be share-secured, as they had less money on deposit than loaned out.”
Perhaps the most amazing red flag that went completely unnoticed, however, said Kravetz: From 2002-09, the credit union reported no delinquent loans. None. “And this is even during 2007-08 when the bottom was dropping out of the economy,” said Kravetz. “This includes all loans: credit cards, auto loans, etc. And in the examiner’s report they noted that, too. So NCUA is not off the hook on this, either.”
Kravetz noted the year-end 2007 NCUA exam report did finally say “There is a problem in the reporting of loans by type. As of 12/31/07, share-secured loans are reported as $131 million. However, the combined total amount of member (deposits) is only $122.5 million. This needs to be investigated and corrected.”
Kravetz said that finally, in early 2008, the board directed the CEO to tell the board why this discrepancy was happening. The CEO failed to provide any information to the board, and the board didn’t follow up.
The fraudulent loan scheme at St. Paul Croatian, which involved constantly resetting loan due dates and other paperwork, eventually led to convictions on numerous charges for more than two-dozen people. The CEO is currently serving a 14-year sentence in federal prison. CEO Raguz got 14 years in federal prison. More than a dozen defendants also convicted.
“No board member faced any criminal charges,” Kravetz told an audience that was mostly made up of board members. “But by keeping their heads in the sand they destroyed their credit union. What’s the moral to this story? It’s incumbent upon all of you to pay attention. You’ve been elected by your members to protect them and their assets. It is your responsibility to have oversight over the CEO. About 10 years ago I did a session on board governance and what directors should and should not do, and one thing I talked about was how many of you show up for the board meeting and you hear the ripping sound of people opening their board packets for the first time. You can’t do that. You need to look at it before you ever get to the board meeting.”