Does Your CU Treat Members as Owners?

Credit unions claim that their members are owners.

However, credit union governance practices suggest otherwise.

Federal credit unions are averse to disclosing executive compensation.

Unlike state chartered credit unions, which disclose executive compensation information in individual Form 990s, there is no such requirement for federal credit unions.

However, Robert Hoel in a Filene Research Institute report, Power and Governance: Who Really Owns Credit Unions?, wrote: "Denying credit union owners and the general public executive compensation information in a direct and straightforward manner is difficult to justify objectively. Because transparency is a powerful tool for detecting and preventing insider abuses."

Hoel commented that the National Credit Union Administration "may want to require credit unions to include specific compensation information in call reports and make the information available to credit union members at annual meetings."

In a related matter, credit unions don't give credit union members the ability to have a non-binding say on executive pay, stockholders in publicly traded companies have the right to cast an advisory vote on executive compensation.
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International Training Trips May Signal a Corporate Governance Problem

If your credit union board members are rewarding themselves through international or luxury training trips or other perks that are not available to other members of the credit union, your credit union may have a corporate governance problem.

At least that is the opinion of Sarah Moore, the Administrator of the Alabama Credit Union Administration.

During the November 9, 2018 presentation to the League of Southeastern Credit Unions, Ms. Moore discussed a corporate governance health checklist for credit union boards and supervisory committees.

She posed the following question:

Are Board members rewarding themselves through international or luxury training trips or other perks not available to other members of the credit union?

If your credit union answered yes to this question, this could indicate an unhealthy corporate governance at your credit union.

There is a whole industry catering to the education of credit union leaders and their elected boards.

However, some of these training programs are on luxury cruises or at exotic locations.

For example, the Credit Union National Association's Volunteer Conference will meet in January 2019 at Montego Bay, Jamaica. Educruises is promoting a Seine River Cruise in June of next year or a voyage of the Norwegian fjords in July 2019.

These look like junkets rewarding credit union officials and volunteers.

Credit Management Information System

A critical part of credit risk management is the ability to identify credit risk.

An article in the Federal Deposit Insurance Corporation's Supervisory Insights looks at credit management information systems. The article argues that a comprehensive credit management information system needs to employ forward-looking risk indicators, just not lagging risk indicators.

Lagging risk indicators include merics, such as charge-off rates, delinquency rates, and restructured loans.

According to the article, relying too heavily on "lagging risk indicators can result in inadequate risk identification and lead to decisions based on an incomplete understanding of the risks facing the institution."

Forward-looking indicators, however, proactively assess risks.

Examples of forward-looking risk indicators for retail loans include tracking production and portfolio trends by product, loan-to-value ratio, debt-to-income ratio, lien position, and credit scores.

The article has a table of forward-looking credit metrics for both commercial and retail loans.

To be effective, these reports need to be received on a timely basis, should include trend analysis, and should not rely to heavily on averages.

In conclusion, a forward-looking credit management information system is an important component of a strong governance structure.

Read the article.

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.

Filene: Troubling Drift in CU Corporate Governance

In 2010, the Filene Institute released an interesting study on corporate governance at U.S. and Canadian credit unions.

The report found that there "is a troubling drift away from truly cooperative and democratic governance."

The report argued that there is a failure by credit union members, who own the assets, to participate in running their credit unions. It is management that drives the change process at credit unions.

This decline in member involvement has arisen at the same time as the common bond has been diluted. The liberalization of the common bond has fueled credit union membership and asset size growth requiring professional managers.

For example, the study found that less than 1 percent of U.S. credit union members attended the annual general meeting.

The study also found unsurprisingly that for the vast majority of credit unions the number of candidates for the board of directors is the same as the number of vacancies. The authors concluded that "competition for board positions ... is not intense... and once one is nominated, achieving a position on the board is a formality."

The report noted that "poor membership involvement has weakened the accountability structure and widened gaps between the owners of the assets (the membership), the monitors of asset utilization (the board of directors), and the controllers of the assets (management)."

This raises the issue as to whether management's interests is aligned with the interests of the members.

Read the report.