Study: Paying Board Members Reduces Likelihood of CU Insolvency

A study published earlier this year provides support for paying credit union directors.

The issue of whether or not to pay a credit union's board of directors is a controversial one within the credit union industry. There are those who argue that volunteer boards represent the cooperative nature of credit unions, while others argue that paying board members is necessary to attract qualified members to the board and ensure directors fulfill their duties.

The paper, To Pay or Not Pay: Directors’ Remuneration and Insolvency Risk in Credit Unions, hypothesized that highly compensated directors will have an incentive to more carefully monitor management behavior. The paper found that director pay reduced the likelihood of a credit union becoming insolvent, but only when board members are highly paid.

The research examined a sample of Australian credit unions, where the majority of institutions have moved from a traditional volunteer board nature to one that compensates directors.

The paper also concludes that director pay should be large enough to have a significant impact. If the remuneration is not quite sufficient, then it is better to not-to-pay at all.

The paper's findings have important implications, especially as more states enact laws allowing state chartered credit unions to pay their directors.

The trend is for more credit unions to move away from volunteer boards to paid boards.

The question confronting credit unions and regulators -- is what constitutes reasonable compensation for directors?

Based upon this study's finding, higher director pay should be encouraged.

But are these results only applicable to Australian credit unions?

The study of director pay and credit union insolvency risk needs to be replicated for the United States.

Read the paper.