New Rules and the Board’s Role for Succession Planning

New Rules and the Board’s Role for Succession Planning

New Rules and the Board’s Role for Succession Planning

The NCUA has proposed new regulations for succession planning in credit unions. These would make explicit the tasks that credit unions must do at the board, committee and leadership levels. This includes formal, written succession plans for board leaders, committees and the operational leadership of the credit union, which must be tailored to the size and complexity of the organization, and be updated at a minimum annually.

By Kevin Smith

Yes. I know. We don’t like new regulations or for people to tell us what to do. But there are new (pending) rules and the board’s role for succession planning will be impacted. So let’s not just have a knee-jerk reaction to the fact this has been proposed and take the time to examine what’s going on, and why. After all, we acknowledge that not all regulations are bad. After all, we’re pretty happy to have the NCUA insure our deposits up to $250,000, not being eager to revisit the great crash of 1929, right?

What the Proposal Says

Here’s what the NCUA has written (emphasis mine):

(e) Succession planning. (1) General. A Federal credit union board of directors must establish a process to ensure proper succession planning to include officers of the board, management officials, executive committee members, supervisory committee members, and (where provided for in the bylaws) the members of the credit committee, as described in Appendix A. 
(2) Board responsibilities. The board of directors or an appropriate committee of the board must: 
(i) Approve a written succession plan that covers the individuals described in paragraph (e)(1) of this section; and 
(ii) Review, and update as deemed necessary, the succession plan and policy in accordance with a schedule established by the board of directors, but no less than annually
(3) Succession plan contents. The succession plan must, at a minimum, identify key positions covered by the plan, necessary general competencies and skills for those positions, and strategies to identify alternatives to fill vacancies. 

*Full language of the proposed rule is here.

What I’m Paying Attention To

It may not always be the case, but the NCUA is giving some pretty clear guidance about what they expect from boards. It establishes who’s covered, that it must be written and updated at least every year. And it is item (3) above that’s most interesting to me, and clarifying. This is explicit direction: identify key positions, the necessary skills and competencies, and strategies for alternatives. These are marching orders and the work to be done if you haven’t already. (I know from personal experience that many of you have not. Don’t try to con me!) The first, to ID key position is pretty straightforward. But let’s look at the other two.

Necessary Skills and Competencies

The regulators are making sure that the succession plan is thorough enough, by making sure that the planners are looking at the capabilities needed for the organization to thrive. The next logical step is clear development and training plans. Your candidates don’t necessarily have to currently have those skills, but you need to make sure that they will. This is growth and learning, and isn’t revelatory in its approach. Let’s use a “for instance.”

For instance, perhaps you’ve identified your CFO as a candidate for CEO in a couple of years. Forgive me for insulting CPAs, but the bean counters are always know for their impressive communication and human leadership skills. (I know I’m stereotyping. After all my colleague, Tim, is a CPA and one of the best leaders and communicators I’ve ever met. But you can see some truth, n’est-ce pas?) Perhaps this candidate’s development path requires the leadership training to get to the next level. Too often, board members are satisfied with the achievements of a candidate thus far, without thinking ahead to the gaps for a higher-level position. This can (and does) have severely negative consequences.

For Instance, perhaps you’ve identified the CMO, chief marketing officer, as the candidate for CEO. She’s shown remarkable strategic thinking and success. But here we might have the flip side, where she needs to buffer her knowledge in the financials, and in the work of the asset-liability committee to make sure she’s ready for the top spot.

These examples hold true for the board planning for its own future. It’s critical to identify the skills that you have, the skills that you want and then the gaps between. Board members and candidates can level up or you can recruit those with the skills. But paying attention to competencies and training not only important but the difference between competence and incompetence.

Strategies for Alternatives

By requiring that succession plans have strategies for alternatives, the NCUA is making sure that it’s harder for you to cop out on a plan with one candidate or approach. Let’s face it. There’s a war for leadership talent. It’s a tough hiring environment and your perfect candidate might get poached, or simply change course. This is far more common today. You need to be ready to pivot and have options available. Yes. This is work and it’s complicated.

Why Is This Necessary?

According to the NCUA, “analysis found that poor management succession planning was either a primary or secondary reason for almost a third (32 percent) of credit union consolidations” (emphasis mine). I have encountered this myself: boards that have dropped the ball on succession planning (typically for the CEO) throw up their hands and accept merger as their exit plan. Too many healthy, vibrant credit unions, and those with unlimited potential are going away because of absent succession plans. That I’m not a fan of. There are always legitimate reasons for merger, but this isn’t one. For that reason, I support this proposed regulation, a position that’s rare for me. The trades, predictably, don’t support a new (or any) regulation. I disagree in this case. Their argument is that the NCUA already has mechanisms for handling this, but the evidence and the data suggest that this in not enough.

Short Term and Long Term

In the short term, the recommendation is to look to your disaster recovery program and not to recreate the wheel. Use what you’ve already developed. The interesting twist to this is the suggestion that CUs consider mutual assistance plans for emergency situations. I love this. The sixth cooperative principle: cooperation among cooperatives. But this will need some substance to the plan.

For the longer term, that advice is more detailed and practical:

  • ID Key Positions – more than just the CEO, also key contributor, specialized skills, size, complexity, location
  • Conduct Position Analysis – location, services, relationships, culture, mission, competencies (for future), written job descriptions, identify the gaps
  • Develop Succession Plan – strategies to overcome gaps, ID candidates, assess skills, training to reduce gaps, write down plan: training, with whom, resources, timeline, report to board
  • External candidates – Where, budget, timeline. Should CEO be involved? Do candidates have right experience? Outside firm?
  • Monitor, Evaluate, Revise – everything changes. Annual review (minimum)

Boards: Take Care of Yourselves and Monitor the Rest

Let’s be clear – the board isn’t involved in creating the leadership succession plan, but it does have to make sure that it’s being done carefully and that it’s written. But be clear on the wording from the NCUA, “The Board envisions that the examination program would confirm the existence of a succession plan and training.” The inclusion of “training” here is significant.

The board does need to take care of itself. This is real work for the board that is more difficult than it used to be, as credit unions are more complex. I appreciate that the NCUA is recommending the use of associate director programs. At TEAM Resources we are big fans of these. This is a training program where the associate director can get training and education about board governance and the industry before they have to vote. It’s a better way to onboard and to find out if the associate is a good fit for the board. We can no longer afford to have new board members without any experience waiting for a year or two to learn before they add their voices. But the associate director program is but one tool of many that you can use.

I haven’t said all that I’d like to on this topic. But I believe that I have covered the significance of the pending regulation. There is a great deal of complexity and challenge in this area for our movement. I implore you to dig in, to learn, and to do what’s required necessary.

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