“Governance is not management.” –Kenneth Dayton, Dayton-Hudson Corp.
SEATTLE–Credit unions dealing with ever-more complex challenges most often respond at the management level. But it’s good governance at the board level that can really be a difference maker in responding to those challenges, according to one person.
To get to good governance, credit union boards should ask themselves three questions while also avoiding 10 scenarios that can lead to problems, according to John Lass, who formerly directed strategy at CUNA Mutual Group and who now leads Lass Advisory Services, where he works with numerous credit unions as well as Silicon Valley firms.
Lass offered his insights during a day-long Symposium on Current Issues in Credit Union Board Governance that was organized by himself, along with former CU leader and regulator Parker Cann, and Foster Pepper, a law firm that does considerable work with credit unions.
The Symposium took place in Foster Pepper’s downtown Seattle offices, and Lass’ remarks here are part of a week-long series in CUToday.info based on the Symposium. Part I featured an insider's view of how board failures led to the largest-ever bank failure.
Seven Reasons
Why is governance so timely now? According to Lass, there are seven primary reasons:
1. Credit unions have grown in size and complexity.
2. Many CU boards are facing succession events, both among board members and CEOs.
3. Board compensation has emerged as a key issue. “For a long time, it was taken for granted that a credit union board was volunteer, now there is a decision and a choice that needs to be made around that,” he said.
4. Board meeting frequency options are now available—no longer has to be monthly in many states.
5. New approaches are emerging with board committees.
6. Board composition and diversity are critical themes.
7. Excellence in governance is a perennial quest.
Throughout his remarks, Lass emphasized that the “board’s role is governance; the executive team’s role is management. It’s a nuanced relationship and it’s one of the critical underpinnings of a successful organization.”
To better understand the board’s role at a credit union, Lass cited the writing of Lesley Rosenthal, who said “Mission is what distinguishes nonprofits from their for-profit cousins. Nonprofits have missions instead of owners or shareholders. The primary directive for for-profit directors is to ensure the highest possible value for owners. By contrast, nonprofit board members’ prime directive is mission fulfillment.”
The Legal Precept, Plus
Board at for-profits and nonprofits share many legal precepts, said Lass, including:
- Oversight role
- Decision-making power
- Place in the organizational structure
- Members’ fiduciary responsibility
However, again quoting Rosenthal, Lass said nonprofit board governance places a heightened demand on board members due to:
- Larger mix of stakeholders
- More complex economic model
- Lack of external accountability
Citing The Director’s Manual: A Framework for Board Governance written by Peter C. Browning and William L. Sparks, Lass noted the authors argue that at the highest level they have two primary duties:
- Ensure the right CEO is in place
- Watch over the fiduciary interests of the organization
More specifically, the job of a board of a well-governed nonprofit organization is to:
- Formulate key organizational policies and strategic goals
- Authorize major transactions.
- Oversee matters critical to the health of the organization, not decisions about specific matters
- Establish risk parameters and monitor adherence
- Hire the CEO and ensure the succession plan is robust. Rosenthal
Three Questions to Ask
Again, citing Browning and Sparks, Lass said every CU board should be asking itself three questions:
* Is the right CEO running the company? “This is not a single event, but part of a continuous evaluation process,” said Lass.
* Does the organization have a robust succession process, and does the plan include the appointment of a strong short-term successor?
* Does the organization have the right strategy, and, if so, is that strategy being implemented effectively? (“It’s not the board’s role to develop the strategy.”)
Lass also offered a checklist of “Ten Mistakes to Avoid,” according to Charity Lawyer:
- Failing to understand fiduciary duties
- Failing to provide effective oversight
- Too much deference to executive committee, or board chair
- Micromanaging staff
- Avoiding the hard questions
- Insufficient conflict management
- Lack of awareness related to laws governing tax-exempt entities
- Operating with outdated, inconsistent governing documents
- Airing disagreements outside of the boardroom.
- Failure to cultivate board diversity. “At the end of the day, what you really want to have is a diversity of thinking around the table”
Browning & Sparks also identified the following issues as causing poor board governance, Lass said:
- Conformity pressure can lead to “non-synergy and a failure to aggregate collective knowledge when making decisions.
- Group size is often inversely correlated with individual participation.
- Board cohesiveness is critical to maintaining productivity, performance and director engagement (but you have to leave room for independent thinking).
- Boards must be alert to avoid “groupthink” and the “Abilene paradox” in making critical decisions.
- Establishing clear ground rules and expectations for participation is vital.