SEATTLE–A critical piece of board governance at any credit union is the role of board committees and supervisory committees, according to one former CU CEO and regulator who acknowledged how a credit union addresses duties of each can make for strong governance—or a lot of counterproductive tension.
Speaking to that issue was Parker Cann, who advised “If you haven’t revisited your board committee structure in the last five to 10 years, it’s probably time to look at policies, charters, delegations” and more.
Cann is the former EVP/general counsel with BECU, former CEO of Columbia Credit Union and interim CEO at Arrowhead Credit Union, and regulator with Washington’s Department of Financial Institutions. He retired from BECU in January of 2017.
His comments came during a day-long Symposium on Current Issues in Credit Union Board Governance that was organized by himself, along with John Lass of Lass Advisory Services, 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 Cann’s remarks here are part of a week-long series in CUToday.info based on the Symposium. Part I on "Failed Bank, Failed Board Governance,' can be found here. Part II on how "Governance Makes a Difference" can be found here.
'No One Size Fits All'
When it comes to board committees, Cann observed “There is no one size fits all here. You need to tailor your committees to fit your credit union. Boards of state credit unions and federal credit unions have legal authority to establish committees as they feel are necessary to conduct as they see fit.”
Boards need to ask themselves three questions regarding every committee: is it effective, is it efficient, and is it meeting regulatory requirements and expectations?
In addition to supervisory committees, the most common committees at CUs, he said, are nominating, governance, risk, comp/HR, compliance, pension, credit/loan, exec, finance, and investment.
“Since the Great Recession, board work has increased substantially,” said Cann, “and so have regulatory expectations. Regulators are more comfortable dictating to credit unions, particularly in corporate governance.”
By delegating responsibilities to their committees, boards can realize several benefits, he said, including better decision-making with deeper expertise/deeper review at the committee level, while creating efficiencies for the full BOD by saving time and effort.
But, he cautioned, “This is much less efficient if the board has to give a full review and re-approval of every issue decided by a committee.”
A 'Real Gray Area'
There are regulatory limits on delegating to a board committee, which Cann said is a “real gray area.”
Cann called regulatory guidance at the state and federal level on board committees “inconsistent and haphazard at best.”
“Despite the regulatory uncertainty here, it is reasonable to establish written delegations to BOD committees,” said Cann. “If an examiner objects, ask them on what basis.”
To support delegation practices, Cann recommends:
- BOD-approved policies rationalize the BOD’s philosophy on delegation to committees
- Each BOD committee should have a written charter or policy that outlines its responsibilities
- The committee be comprised of a majority of directors
- CUs should recruit or train directors for strong committee expertise
- CUs should encourage committees to take deep dives on significant subject matters. “Add more detail to committee meeting minutes to ensure they reflect a deeper dive. Minutes should go to the board for informational purposes”
“Even with a deeper dive into the subject matter, the role of a director as a committee member remains the same as the director’s role on the BOD; still at policy, strategic or oversight level, not at operational level,” said Cann.
What about non-board members on committees? It’s an issue that raises other questions, said Cann, including issues around confidentiality (CUs that bring in associate directors typically require confidentiality agreements).
One place where evolution can be seen in board committees is with the nominating committee, according to Cann.
“The committee has taken on greater importance as the selection of nominees for the BOD has become more important,” stated Cann.
Questions to Ask
Questions to ask related to the Nominating Committee, he said, include:
- Who serves on the committee? Are they in touch with the direction of the BOD?
- Does the committee make final nomination decisions? Or does the BOD?
- Does the credit union develop and maintain a desired skill set matrix for directors? Is it used by the committee in the recruitment and nomination process?
- Does the committee use a recruiting firm?
Nominating committees must also answer new questions around whether incumbents need to apply for nomination for re-election (or is it just assumed?); and does the committee review director assessments when considering nomination of incumbents. Policies around contested races must also be put in place, he said.
Supervisory Committees
Supervisory committees are a whole other issue and there can be conflicts with boards, he said. In federal credit unions, SC members are appointed by board, but only one can be a director.
In Washington, state charters have the option to either have SC elected by members or appointed by the BOD (but only one can be a director).
Contributing to the confusion around supervisory committees, said Cann, who had to deal with the issue when he was a regulator, is that the FCU Act says “management of a federal credit union shall be by a board of directors, a supervisory committee, and where the bylaws so provide, a credit committee.”
“This has been troublesome in the past,” he said, referring to the lack of precise guidance.
“It’s not entirely clear which of the NCUA’s audit requirements for SCs apply to state charters,” Cann continued. “In additions, for state charters, there is state law overlay, probably something similar to NCUA’s.”
Unfortunately, acknowledged Cann, some of these powers/duties are very broad or at least ambiguous, and can lead to different conclusions by examiners about the appropriate role of the SC supervisory committee.
Cann said another question to ask is whether the SC adds value to a credit union’s corporate governance processes?
“What is the highest and best use of your supervisory committee?” he asked. “Is it a strategic asset or just a check-the-box for regulatory purposes?”
Regulators seem to view oversight of the BOD as part of the supervisory committee’s role, said Cann.
Extraordinary Powers
Supervisory committees do have some “extraordinary” powers, he told the Symposium, in that they can:
- Suspend directors, subject to member vote at a special membership meeting
- Call a special meeting of members to consider removal of director and for “other” reasons
“These extraordinary powers may lead some supervisory committee members to conclude that they have the authority to challenge BOD decisions or take on an operational role, outside of the audit function,” said Cann. “There have been instances were supervisory committees have attempted to override BOD decisions. These turf battles can easily become public and are damaging to the credit union’s reputation.”
According to Cann, the advantages of a “true” audit committee include:
- No election. Members are appointed by board and may all be directors
- Better understanding of the role of the committee
- Less confusion about the difference in BOD and committee roles
- No extraordinary powers (suspension of directors, calling member meetings, etc., but may require amendment of statutes or regs for federal/state charters outside of California
Cann said the NCUA has expressly recognized the ability of supervisory committees to call themselves an “audit committee,” which helps it to recruit and members to appreciate the primary role of the supervisory committee.