ALEXANDRIA, Va.–Noting that nearly one-third of CU mergers are the result of a lack of succession planning, the NCUA board has voted 2-1 to put out for 60-day comment a proposal that calls for federal credit unions to have a succession plan in place for key members of management and boards.
NCUA Board Member Rodney Hood cast the dissenting vote against proposed rule, part 701, suggesting the requirement could actually lead to more mergers of smaller credit unions and calling the proposed rule “micromanaging” by the agency.
In his presentation to the board, Senior Staff Attorney in the Office of General Counsel Ariel Pereira said the lack of a succession plan is cited as a primary or secondary reason for merging by just under one-third of all credit unions.
Moreover, noted Pereira, the ongoing retirement of the CU CEOs/managers in the Baby Boomer generation is expected to continue to put pressure on succession in the corner office.
NCUA Chairman Todd Harper and Vice Chairman Kyle Hauptman both stressed the proposed rule provides for flexibility, and that credit unions that already have a succession plan in place will not need to recreate it.
According to Pereira:
- The proposal would require directors to establish and adhere to a process for succession planning for key positions, and the agency will define who those individuals are, but it includes members of the board and supervisory committee.
- The board will need to review the succession plan in accordance with the schedule established by the board but no less than annually.
- The proposed rule would amend section 701.4 B, which contains certain education requirements for federal credit union directors.
- The amendment would require that directors have a working familiarity with the succession plan, and the board will have broad discretion on how to implement the new requirement, The proposal is not prescriptive, said Pereira.
Harper: Succession Planning is ‘Essential’
NCUA Chairman Todd Harper described the proposal as “essential,” saying it especially helps to “maintain the viability of small credit unions and a diverse system with many small credit unions.”
Harper said the objective is to help to ensure that the credit union has strategies in place to fill key positions, such as officers of the board and key management officials to provide continuity of operations.
“Although the proposed rule would apply only to federal credit unions, the purpose of this rulemaking is to encourage and strengthen succession planning for all credit unions,” said Harper. “Significantly, the proposed rule would provide federal credit unions with broad discretion in implementing the proposed regulatory requirements to minimize any burden.”
In addition to helping credit unions prepare for the unexpected, Harper said succession planning is recognized as vital to the long-term success of any institution, including credit unions.
“A board’s failure to plan for the transition of its management could potentially come with high costs, including the potential for the unanticipated merger of the credit union upon the departure of key personnel,” said Harper. “Put another way, succession planning helps to safeguard credit union members’ choice of financial institution…We are losing credit unions much faster than we can replace them with new charters, and we must find a way to keep small credit unions viable over the long term. So, it is time to try something new.”
Harper said the problem of a lack of succession planning and resulting mergers is being exacerbated by the retirements of CEO/managers from the Baby Boomer generation.
“…According to some sources, even before the pandemic started, approximately 10% of credit union chief executive officers were expected to retire between 2019 and 2021,” said Harper. “Succession planning is critical to the continued operation of those credit unions for the board members and executives who are part of this retirement wave.”
Harper quoted Benjamin Franklin for his observation, “If you fail to plan, you plan to fail.”
No Need to Duplicate
In response to a question from Harper, agency staff said credit unions would not be required to duplicate or recreate any succession plan they already have in place as long as it meets the requirements outlined in the proposal. Harper said the proposal “creates a floor but not a ceiling” and provides “maximum flexibility.”
In response to a question from Harper over what low-cost or free resources are available to credit unions on succession planning, staff said NCUA offers resources on its websites, as do the CU trade associations. Moreover, smaller CUs can apply for technical assistance grants from NCUA to cover any related costs, staff told the board.
Hauptman: Addressing a ‘Problem’ Without Adding Burden
In his comments, NCUA Vice Chairman Kyle Hauptman said he agreed succession planning, and the lack thereof, is a “real problem” for some credit unions.
“Our job is to figure out if further NCUA involvement in this issue is beneficial, and if so, how do we ensure that there’s no burden on credit unions that have done sufficient succession planning,” he said.
Citing the figure that 30% of mergers in smaller credit unions are primarily or secondarily attributable to lack of succession planning, Harper said, “The cooperative business model, by definition, gives greater choice to the individual member regarding the direction of their credit union. When a member has no option but to vote for a merger because there is no succession plan for the CEO, they have lost that choice and ultimately their native credit union. That is not to say that a merger isn’t the right choice for some credit unions. But the choice to merge should be deliberate and planned.”
Hauptman said he always worries about “unnecessary burdens placed on already stressed credit unions,” and the agency is asking for stakeholder input on the burden of the rule and welcomes suggestions for less burdensome alternatives.
Hood: Could Lead to ‘Exact Opposite Result’
NCUA Board Member Rodney Hood said there is no succession plan in place for top NCUA leadership, which is just the first reason he does not support the proposed rule.
“As I often say, my regulatory philosophy is that regulation should be effective and not excessive. In my view, this rule goes too far,” said Hood. “If succession planning is an issue for credit unions, let’s have more succession planning webinars, issue guidance letters to credit unions, and make it a more prominent tool in the regulatory toolbox. We currently include succession planning in our regulatory toolbox by including it in the Management component of the CAMELS score. Indeed, I heard from a smaller credit union that was downgraded in their Management component of CAMELS for an inadequate succession plan. Maybe we should look at sharpening this tool that is already in the regulatory toolbox.”’
In response to a question from Hood, Pereira said the agency is working to put in place succession planning within NCUA itself for its management team.
Hood said he also worries the proposed rule will be counter-productive and will produce the “exact opposite result” of its intended effect.
“The smallest credit unions are struggling to stay open, so today’s rule could actually accelerate mergers in my view,” said Hood.
Hood questioned Pereira over whether he could confirm NCUA estimates that the rule will take credit unions 30 minutes to create a succession plan for the first year, under the guidelines laid forth by the Paperwork Reduction Act. Pereira confirmed the 30-minute figure.
No Need to ‘Micromanage’
“A succession plan that takes only 30 minutes to complete is either a check the box endeavor or a woefully underestimated regulatory burden,” said Hood. “I see the problem before us today regarding succession planning, like other problems facing the movement, as the need to have more effective governance by the members of credit unions. It’s up to the member-owners to address this issue and to know their rights, duties, and obligations in a transparent and clear way. It’s our responsibility to supervise these credit unions to keep the system safe and sound. It is not our responsibility to micromanage.”