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Addressing Underperforming Directors

Ignoring the behaviors and activities of an underperforming director can have dramatic consequences. Yet among a group of peers such as a board of directors too often these scenarios go unaddressed. It may be easier in the short run to avoid dealing with the problem but it rarely gets easier. This is, in fact, a duty of the board.

By Kevin Smith

“Sadly, boards are more likely to replace a CEO than oust one of its troublesome board members.” Beverly Behan, Board Consultant

Someone is going to call me out on the fact that I’ve used this quote before. I hope they do. It means someone is paying attention. (See the original post here.) But this one needs further attention because I don’t believe circumstances have changed much, if at all. It’s a doozy of quote too. (Tim and I used it in our book too. It makes a dramatic point!).  

 The first time I used the quote in a blog post was in 2016. In my mind that’s long enough to warrant revisiting. But in that post we were writing about renomination and what directors need to demonstrate to earn renomination to the board ballot.

Today, I’m writing about addressing underperformance and having uncomfortable conversations. This is about confronting issues, rather than ignoring them or simply having hushed discussions in hallways after meetings, where nothing gets resolved.

Common Problematic Behaviors

Click the sidebar to see the full letter.

Here are some of the negative/troubling things that I hear about around the country in my hundreds of conversations with directors, CEOs, senior leaders, as well as with others related to board work.

Directors who:

  • Fall asleep during board meetings
  • Are clearly never prepared
  • Are way, way off topic on a regular basis
  • Have experienced mental decline, age related or otherwise
  • Talk far too much (or far too little)
  • Bully staff and colleagues on the board
  • Don’t do what they agree to do (think of those who have to be chased down for everything and never hit a deadline)
  • Cannot let personal feelings and opinions go when the vote goes against them

I’m sure you can add your own examples. (And please do in the comments below. It helps others to know they’re not alone.) These are the most common ones I hear about. And you can let your imaginations run wild with the damage that these behaviors can cause to the board and the credit union. You may have some actual terrifying anecdotes. Don’t underestimate what’s at stake.

In previous blogs, you’ve read about the TEAM Resources approach to strategic governance via written policy to provide tools for managing these scenarios. But let’s talk about actually getting beyond the discomfort of the circumstances and dealing with humans in a way that doesn’t have to be confrontational or hurtful.

Addressing Behavior

  • First, remember your humanity and empathy. You have to confront the situation but it doesn’t have to be confrontational, negative and accusatory. Consider where this director may be coming from, and what they may be dealing with in their life. Keep the discussion as positive as possible.
  • Always start from an assumption of best intentions. Don’t presume malicious intent unless you have significant evidence of that.
  • Schedule a time to meet with the individual one-on-one. This is never something to address in front of a group.
  • Be specific about the behavior you are witnessing and how it may be coming across. “I noticed at the last board meeting that you didn’t seem engaged with the meeting. Your attention seemed to be somewhere else and you didn’t contribute as much as you have in the past.”
  • Ask about the circumstances and be ready to listen and really hear what is going on. Use active listening techniques.
  • Offer support. “How can I, and we as a board, help you so that you can fully perform your duties? What do you need?” You’ll be surprised how far this will get you, either in the desire for help or in the acknowledgement that the behavior is happening and needs to be addressed.
  • Be clear about what plan is in place and a timeline for making things better. “In the next two board meetings, can you try to make sure that you are not the first person to speak up so that we can make room for other voices? And we can see how that goes.”
  • Refer to your well-written governance policies that address how the board has agreed to work as a group. Remind them that this is what they signed and agreed to and that the current behavior violates the policy. “Part of our governance policy on behavior states, ‘Board members will be properly prepared for Board deliberation. This includes, but is not limited to, reading board packet materials in a timely manner, keeping up with industry trends and issues, ongoing training and education that is specific to the individual needs of each Board member.’ And you are not holding up your end of that requirement.” This approach keeps things formal and professional, and keeps your involvement at a professional and not a personal level.

Often, after taking these steps problem directors will see own up and offer to step down. Handled with compassion this doesn’t need to be a fight or a negative circumstance. Though, I can’t promise that this will always be the case. Humans can be messy. But I do know that this approach is far more effective than accusations and confrontations.

Whose Responsibility Is This?

The easy answer as to who should do this is the board chair. That really is part of the job description for someone who is primus inter pares, first among equals. So, if you’re not up to this kind of discussion you can lean in and realize that it is a skill that can be learned. Or, you may have to step back and recognize that by not taking on this task is dropping the ball for the job in a way that can damage not just the board, but the entire organization. If that’s the case, you might not be the right chair for the job. (Small consolation for some of you who “ended up” as chair, I know.)

But I also want to put it out there that it doesn’t have to be the chair’s job. Anyone on the board can take up this task. Remember, you are equals. And with the right kind of culture and trust, it’s reasonable that we should expect all directors to bear the weight of accountability for the group.  

Courage

What I’ve described requires some intestinal fortitude and won’t always work perfectly. It also provides some guidelines that make this less difficult with opportunities for very positive outcomes. If expectations are clear and agreed upon by the board as a whole, you have a foundation for addressing underperformance. But ignoring the situation can never be an option. There’s too much riding on the board.

 

As always, please tell me what you’ve tried and what I’m missing. I never claim to be perfect or completely comprehensive.

Strategy Traps

The time to think about strategy is not limited to the fall right before the new year’s budget proposal. Strategy is an all-year discussion. Boards can (should) shift to this kind of thinking with conscious effort. It’s also critical to avoid the all-too-common strategy traps. Be thoughtful in how you differentiate.

By Kevin Smith

 

Strategic planning discussions?! Now!? In February?!

Ya sure. You betcha. (To quote my Norwegian/Wisconsin in-laws). The snow is falling outside and I’m putting off shoveling with this blog post. So, for some of you, those clues suggest it’s not the time of year to talk about strategic planning. But Tim and I want to push back on that. We want you to be thinking about strategic planning EVERY month. Not just in the fall right before the new budget proposal. So, let’s check in on a few things so that we can keep the strategic planning muscles in shape all year.

I do a lot of reading on a variety of topics, one of them strategy. And a lot of what I read is often very vague. It’s written to apply to any company, in any industry, of any size. This is how authors sell books, by appealing to a very wide demographic. This can be fine and I typically pull nuggets of value out of anything I read, even if limited. Some of what I read on strategy is clearly geared towards very large corporations. (It may be that their own sales strategy is to focus on MBA students ready to jump into the big time.) Again, all fine and good, but sometimes I don’t see enough value for the credit union industry that we support. But one book that I found valuable is the seminal, Playing to Win: How Strategy Really Works, by Roger Martin and A.G. Lafley. There are a number of great lessons and I recommend the full text, but what stuck with me most is their Six Strategy Traps to Avoid. Let’s review:

Six Strategy Traps to Avoid

  1. The Do-It-All Strategy
    Failing to make choices and making everything a priority.

  1. The Don Quixote Strategy
    Taking on the strongest competitor first. (“Walled Cities.”)

  1. The Waterloo Strategy
    Wars on multiple fronts with multiple competitors.

  1. The Something-For-Everyone Strategy
    Trying to capture all segments at once.

  1. The Dreams-That-Never-Come-True Strategy
    High level aspirations that never get translated into concrete how-to-play and how-to-win choices.

  1. The Program-Of-The-Month Strategy
    Generic industry strategies that all competitors are using.

I’ve seen credit unions that have tried all of these approaches over the years. What I see most commonly are number 1 (The Do-It-All Strategy) and number 4 (The Something-For-Everyone Strategy). And they ARE traps, making organizations feel like they are onto something to pursue when in fact they are just chasing a vague vision. And shockingly, there are a couple of shops out there that were more or less trapped in all six of these at once!

Review and Connect the Dots

Board members – review your strategy documents. Then think about the six traps above. Are you in one of them? Or in danger of falling into one? Do some critical analysis, as strategy documents can become very complex and have the appearance of a differentiation. Make sure that you can articulate your value proposition in plain language, and in a few sentences without too much jargon. If you’re not sure, bring it up in a board meeting, or as a discussion on your board portal software. You may need to start working through this now so that you have all of your strategy ducks in a row by the time the new budget is proposed next November.

And remember – it’s much easier to say “yes” to lines of business to pursue than it is to say “no.” But most credit unions can’t be all things to all people and must become excellent at one thing rather than mediocre at many. Which means that there are things, somewhat profitable angles, that need to be cut off. It’s a difficult decision but an approach that gives much more clarity for making decisions about resources, purpose and priorities.

Tim’s Financials Decoding Manual

And Now for Something Completely Different!

From Kevin Smith and Tim Harrington

You’ve gotten used to the fact that this blog space has consisted mostly of musings about governance from me, Kevin Smith. But this month we’re going to do something completly different. Not too long ago, Tim sent me a document that encompassed many of his cheat codes for understanding credit union financials at the board of director’s level. He wanted to share it with me (since I don’t speak CPA and have to practice) and to see what I thought we could do with it. So we’re going to share it here! It’s a tremendously helpful resource for any credit union director, but it may be just the ticket for newer directors still trying to get their feet under them in terms of reading the financials.

Not only will be post this below for your perusing but at the bottom there will be a link to a downloadable version for you to save and treasure forever. (And maybe you can bring it to the next conference you’re at with Tim and have him autograph it! :lol:)

FINANCIAL DECODING MANUAL.

IMPORTANT FORMULAS



Exercise: Using the Balance Sheet and Income Statement above, you can caluculate the following important ratios. In this exercise, we are NOT using Average Assets, but to keep it simple (and slightly inaccuate), we are using Total Assets: $227,000. To calculate Average Assets, you would need the Total Assets from the previous year end Balance Sheet. To calculate the Average, you simply add the Total Assets from the end of the previous year to the Total Assets from the most recent Balance Sheet, and divide by two.

Yield on Assets

Interest Income from loans and investments / Average assets

$____________ / $227,000 x 100 = ______%

 

Cost of Funds

Dividends and Interest paid / Average assets

$____________ / $227,000 x 100 = ______%

 

Net Interest Margin (Spread)

Yield on Assets less Cost of funds

_______% less _______% = ________%

 

Operating Expense Ratio

Total operating expenses (excluding Provision for Loan & Lease Losses) / Average asset

$___________ / $227,000 = ______%

 

Provision for Loan and Lease Losses Ratio

PLLL / Average assets

$________ / $227,000 = ______%

 

Non-Interest Income (NII) Ratio (Fees, Service Charges, etc.)

Total NII / Average assets

$___________ / $27,000 x 100 = _____%

 

Return on Average Assets (ROA)

Net income / Average assets

$___________ / $227,000 x 100 = _____% 

 

Your answers (our answers are at the end of this manual)

                                                                               Your Calc.    Nat. Avg. (12/31/22)

Yield on Assets                                                   ______            3.38

Less: Cost of funds                                            ­­______            (0.52)

            Net Interest Margin (Spread)                 ______             2.86

Less:  Operating costs                                       ______            (2.85)

Less: Provision for loan losses                         ­­­­­______            (0.25)     

    Net loss before other income                        ______             (0.24)

 Plus:  Non-Interest Income                                            

            (Fee income, Service Revs, etc.)           ______              1.13  

Equals: Net Profit or Loss                                  ­­­­______              0.92

 


Some Important Explanations

Capital
Capital can be called Capital, Equity, Net Worth or Reserves.

Formula:  [All Reserves + Undivided Earnings] ¸ Total Assets

Industry Standard:  Depends on amount of RISK at your credit union. Prompt Corrective Action (PCA) considers a credit union with capital of 7% or higher as ‘Well Capitalized’.

How to Improve:
Since profits increase Capital and losses decrease Capital AND this is a ratio of Capital to Assets:

  1. Increase Profits faster than Assets are growing
  2. Decrease Assets and make a Profit
  3. Hold assets steady and make a Profit

Generally, the higher the percentage the better. But too much capital can create some issues


Asset Quality
(aka: Net Interest Margin Analysis)

This is actually two ratios: Delinquency Ratio and Net Charge-Off Ratio

A. Delinquency Ratio

Delinquency Measures:  Quality of Loan Portfolio based on what percentage is currently late by 60 days or more

Formula:  Dollar Amount of Delinquent Loans (60+days) ¸ Total Loans

Industry Standard:  Somewhere in the 0.50% to 1.50% range, depending on strategy. Credit Unions that lend to members of modest means will often have a much higher delinquency ratio than lenders who favor A and B credit rated borrowers.

How to Improve:  Tighten underwriting standards (higher credit scores, Lower debt ratio, more disposable income, etc.); higher risk loans can be discontinued or curtailed; collections can be strengthened.

B. Net Charge-offs Ratio

Measures:  Quality of Loan Portfolio based on the percentage of loans removed from the books (so far this year) as non-performing.

Formula: [Charge offs – Recoveries] ¸ Average Loans (Charge-offs and Recoveries must be annualized)

Industry Standard:  Somewhere in the 0.25% to 0.75% range, depending on strategy. Credit Unions that lend to members of modest means will often have a higher net charge-off ratio than lenders who favor A and B credit rated borrowers.

How to Improve:  Tighten underwriting standards (higher credit scores, higher debt ratio, more disposable income, etc.); higher risk loans can be discontinued or curtailed; collections can be strengthened.


Spread Analysis
(aka: Net Interest Margin Analysis)

Measures: Profitability and how it was attained

Formula:  Each of the key balances on the Income Statement is divided by Average Assets (for simplicity, we used Total Assets in our example instead of Average Assets)

The Spread Analysis is a ratio of key balances on the Income Statement compared to the credit union’s asset size. This allows a comparison between periods and between financial institutions based on their asset size. You can look at the Spread Analysis for any bank or credit union of any size and compare your results with theirs. The tool gives you an apples-to-apples comparison. It is considered a “Common Sizing” tool.

Since credit unions earn most of their revenue from their major assets (Loans and Investments) and their highest expense is often from their major liability (Deposits), measuring the effect of the Income Statement against the size of the Assets makes sense. This is a standard ‘banking’ measure.


Loan to Share Ratio

This is a measuring of lending efficiency. It measures how well a credit union loans out its deposits. Deposits is the main source of funds, and they cost money to borrow from members. Therefore, it is important to utilize the deposits in the most lucrative way possible, that is to loan them out to other members.

Measures: Percentage of deposits (shares) actually loaned out

Formula:  Total Loans ¸ Total Deposits (Shares)

Industry Standard:  The industry average changes with economic conditions but generally runs in the range of 70% to 80%

How to Improve:  Increase loans or decrease deposits.

Loans can be increased by loosening underwriting standards (lower credit scores, lower debt ratio, less disposable income, etc.); make more higher risk loans; market more; add new loan types


Answers to Sample Credit Union Financials

Yield on Assets

Interest Income from loans and investments / Average assets

$12,500 / $227,000 x 100 = 5.51%

 

Cost of Funds

Dividends and Interest paid / Average assets

$4,200 / $227,000 x 100 = 1.85%

 

Net Interest Margin (Spread)

Yield on Assets less Cost of funds

5.51% less 1.85% = 3.66%

 

Operating Expense Ratio

Total operating expenses (excluding Provision for Loan & Lease Losses) / Average assets

$7,800/ $227,000 = 3.44%

 

Provision for Loan and Lease Losses Ratio

PLLL / Average assets

$1,000 / $227,000 = 0.44%

 

Non-Interest Income (NII) Ratio (Fees, Service Charges, etc.)

Total NII / Average assets

$1,900 / $27,000 x 100 = 0.84%

 

Return on Average Assets (ROA)

Net income / Average assets

$1,400/ $227,000 x 100 = 0.62%

 

 

In a Spread Analysis Format

                                                                                 Your Calc.    Nat. Avg.

12/31/22

Yield on Assets                                                           5.51               3.38

Less: Cost of funds                                                  ­­­­   1.85             (0.52)

            Net Interest Margin (Spread)                          3.66              2.86

Less:  Operating costs                                          ­­­     (3.44)           (2.85)

Less: Provision for loan losses                                 ­­­­­  (0.44)            (0.25)     

    Net loss before other income                                  (0.22)           (0.24)

Plus:   Non-Interest Income                                   

            (Fee income, Service Revs, etc.)                       0.84               1.13  

Equals: Net Profit or Loss                          ­­­­­­                     0.62               0.92


If you’d like a downloadable version of this material to use and share go here and scroll down to the Financial Decoding Manual, check the box next to it and click “Submit” at the bottom of the page. Make sure you take a look around those free downloads; there may be other things that you can’t do without!

The Undervalued Use of Mentors for Boards

Peer mentoring is a powerful piece of an onboarding program. Boards can use these to great effect and in a variety of ways. It may be speeding up the learning time of a new director or improving performance and rapport. Organizations can and should formalize these programs to make sure they cover the full range of the many items and provide some accountability.

 

By Kevin Smith

The topic of mentoring came back to the surface for me recently while working with a local nonprofit here in Madison, WI where I live. (When I say that 99% of my work is with credit unions, now you’ll know where that other 1% is.) A director who had joined the board last year was talking about how overwhelmed she was with the role as board member. And she had been volunteering with the organization for years previous to her invitation to the board. She was struggling to find out where her voice was relevant and wanted. There were cultural issues where she learned about the two people who did most of the talking in the meetings. Some logistical issues arose about finding documents in the Google drive and who was allowed to edit or touch what in the files. The rest of her colleagues then lamented her experiences and talked about how they could’ve helped her. It was a clear case where a formal mentor program would have made all the difference.

Anecdotally, I can say that more credit union boards are incorporating mentoring programs, but I don’t get the sense that it’s nearly as common as it should be, nor are they as comprehensive as would be ideal for those that are using them. This is a great opportunity.

From Informal to Formal

If you’ve heard me speak, you’ll know that when asked a question, my answer is typically, “it depends.” Like most things in the credit union space, what kind of program you set up will depend on the nature of the board, its culture and resources. And these will range from informal to formal on a wide spectrum. I lean towards the more formal side of this spectrum. The complexities of credit unions and board work in order to be higher performing are moving in that formal direction with a need for guardrails and accountability. But let’s consider some of the things that I’ve witnessed on both sides.

Informal

Some “mentors” and mentorship programs are simply a veteran director who offers to “help out” a rookie. This is often very lax and reactive, where the mentor offers an email and a cell phone number and in invitation to “call if you have any questions.” While helpful, new directors often don’t know what they don’t know and need some more directed guidance.

Formal

On the formal side of things, I’ve seen programs that are so overloaded with meetings, checklists and trainings that it overwhelms both the mentor and the mentee. This removes the human element that we love so much about our industry, as well as the flexibility to address the volunteer nature of the work.

I defer these days to the slightly more formal approach to make sure that this is comprehensive, organized and that it gets done in a proactive way for the mentee.

Timeline

A good program should be at least a year, maybe more. It depends. (My favorite phrase.) In the first few weeks and months several calls and meetings are important. My approach is to let that evolve to a monthly call or meeting, with another review just before board meetings. These can be short, 30 – 60 minutes, to be efficient and avoid overwhelming either participant. This also allows for some repetition for material that will take time to sink in.

Topics

If I say “it depends” again you’re going to close this, run away and never come back. So, I’ll suggest that you take a close look at the background of the mentee to determine what topics need the most attention. But here are some obvious choices:

  • Credit union financials (these can take a long time to really understand).
  • Review of the board’s agendas over a year and several board packets.
  • Industry trends and strategies
  • A full year of events at the organization and how the board is involved.

*These suggestions are beyond the formal training courses that are required of the new director, and there should be some.

A Less Obvious Choice

Mentors can really help a rookie by giving a human description of the personalities of the people on the board, the CEO and senior leadership. This includes a discussion of the culture of the group. (“Oh, when Ralph brings something up, you have to know that he’s an extravert and has to talk things out to know what he really thinks. He doesn’t expect us to act on everything he brings up.”) These discussions are invaluable in giving a rookie confidence and understanding quickly, so that they can contribute as soon as possible.

Who’s a Good Mentor

Be careful in your choices for mentors. Not everyone is cut out for this. Look for those who are willing, experienced, dependable, with available time. A good mentor will be proactive and identify areas that will come up and be consistent but flexible.

You Can’t Do Things Differently Without Doing Things Differently

Credit unions as an industry have had to lean in towards rapid change and evolution over the last decade, exacerbated by the pandemic. Boards of directors are starting to (finally) acknowledge the need to try to lean in to these changes. Yet, despite these good intentions, often the lean in turns to lip service when they fail to actually “do things” differently in the boardroom.

By Kevin Smith

There certainly aren’t a lot of silver linings from the pandemic. As a matter of fact, I don’t even like presenting it in this light. But one angle that I think we can all agree on is that credit unions, who aren’t known for their speed in change, found out that they could pivot on a dime when they had to. It was fabulous to see worried credit union leaders and their staffs adapt and figure things out pretty quickly. It’s my hope that we all embrace this as a new skill set and keep flexing that muscle. Indeed, many have.

In that light, we also saw some slow to move boards have their eyes thrown wide at the steps necessary to keep working towards the credit union’s purpose. Directors faced the unsettling predicament and supported their leadership and staff as they made fairly radical moves to keep the organization open and serving members who desperately needed their help. Most rose to the challenge and it was fantastic to watch (stressful as it was).

I Worry About Lip Service (and everything else)

Now when I worry (and I do worry), it’s about falling back into old patterns, inertia and complacency. Mostly what I notice from directors is significant embracing of the language of change, particularly when they talk about their leadership and the operations. But what I’m seeing less is boards leaning in themselves to changing their patterns and approaches in the board room and in their governance work.  

It’s not exactly lip service to embracing change that I see. Board members seem very genuinely supportive of the need for faster evolution and development at the operational level. Though it looks a lot more like lip service in regard to changing at the governance level. The two need to happen in synchrony to be most effective.

Snark Alert

Hence the snarky title of this post: You can’t do things differently, if you don’t do things differently.

  • Does your monthly agenda basically a template reused month to month?
  • Do your board meetings have a very predictable flow?
  • Are the same people talkative (or quiet) without fail?
  • Has your board packet had the same format for, oh, over a decade?

These may be red flags that the board is in a rut.

*(Here’s a fun, or maybe terrible, exercise: Challenge the senior leadership to do the funniest skit possible, while performing as the board of directors. This “court jester” approach will reveal any predictability and stereotypes that bubble to the surface. Warning: you may need thick skin for this, but it will certainly be educational.)

Yeahbuts

Naturally I come prepared for the Yeahbuts.

  • “Yeah, but it took us a long time to develop this approach and it works really well.”
  • “Yeah, but we have a lot of work to do and this is efficient.”
  • “Yeah, but the regulators are expecting xyz.”
  • “Yeah, but you’re suggesting change for change’s sake.”
  • “Yeah, but all of this change is going to cause a lot of extra work for the board and the staff.”

I’m not suggesting reinvention every month, or change for change’s sake only. I am suggesting that the entire board look carefully at what they do, question it, and evaluate it in light of the changes the world has made around you. Make sure that anything that fits the category of “this is the way we’ve always done it” gets careful examination for relevance.

Suggestions for Inspection

  • The board agenda: are there interesting discussions, not just monthly updates?
  • Once a year (or as needed), make a determined effort to refine an element of the board packet that makes it easier. [Some of you may need a full revamp. This is more effort. Tackle it. Others may be able to do a regular tweak.]
  • Board chairs: review the personalities in the room. Find out how to change the dynamics of predictable discussions. (Have a one-on-one chat with all directors and ask them for help.)

Support for the Change-Hesitant

Not everyone embraces change. Some actively push back against it. But the adage holds true: “The only constant is change.” So, I encourage directors to have a discussion to really understand how you may be doing things differently to support the change in the operations. You will need to support and understand those who are resistant and help them face the approach with strength. It’s worth it.

What Does ChatGPT Know About Credit Union Boards? (And Do You Want to Know?)

I asked ChatGPT what is the biggest failing of credit union boards of directors. It spit out a very interesting (dare I say “thought”-ful?) list. A healthy director and board will consider these potential failings with a hard look in the mirror.

By Kevin Smith

ChatGPT

What does ChatGPT know about credit union boards of directors?

I’m generally not a bleeding-edge adopter of technology. But I’m no Luddite either. My preferred category is fast-follower. So, this whole AI, large language model of machine learning thing has finally gotten my attention. (Given it’s prevalence in the media, it’s no wonder.) And I decided to try it out. What’s this got to do with credit union boards of directors, you say? Well, let’s see.

I decided to find out what ChatGPT had to say about something I felt I knew something about: credit union boards, so that I could evaluate the response. And the prompt that I chose was this:

What is the biggest failing of credit union boards of directors?

And here is ChatGPT’s Response to the prompt:

While credit unions generally operate with a member-centric focus and strive to fulfill their mission of serving their members, they are not exempt from potential challenges and failings. One of the most significant failings that credit union boards of directors might encounter is a lack of diversity and inclusion. Here are some aspects to consider:

  1. Lack of Diversity on the Board: Credit union boards may suffer from homogeneity in terms of demographics, professional backgrounds, and experiences. This lack of diversity can limit the board’s ability to consider different perspectives and adequately represent the diverse needs of their membership.
  2. Insufficient Expertise and Skills: Sometimes, credit union boards might lack specific expertise, such as financial, technology, or marketing knowledge, which are crucial for making informed decisions and staying competitive in the financial industry.
  3. Limited Understanding of Membership Needs: If the board is not adequately connected to the credit union’s membership or lacks insight into their evolving needs, it may lead to misaligned strategies and services that do not effectively address member concerns.
  4. Ineffective Governance and Oversight: Boards that do not have clear governance structures or fail to provide proper oversight might face challenges in ensuring financial stability, managing risks, or maintaining compliance with regulations.
  5. Resistance to Change: In rapidly evolving markets, credit unions must adapt to new technologies and member preferences. If the board is resistant to change or slow to respond to shifts in the financial industry, the credit union’s ability to remain competitive and relevant could be compromised.
  6. Inadequate Succession Planning: A failure to plan for board member succession can lead to a lack of continuity in leadership and a loss of institutional knowledge. Effective succession planning ensures a smooth transition and fosters a long-term vision.
  7. Weak Communication and Engagement: Boards that do not actively engage with their members and fail to communicate transparently may lead to dissatisfaction among members and weaken the credit union’s sense of community.

It’s important to note that not all credit unions will experience these challenges, and many credit union boards effectively address and overcome these potential failings. By promoting diversity, fostering a culture of continuous learning, engaging with members, and maintaining strong governance practices, credit union boards can improve their ability to serve their members and fulfill their mission effectively. Regular assessments, training, and ongoing self-evaluation can also help boards identify areas for improvement and ensure they are meeting the evolving needs of their members.


End of ChatGPT and back to Kevin. 

Keep in Mind

Keep in mind that what ChatGPT does is “scrape” the interweb-tubes for its information, which means that what you see above is information that came from humans at some point.

What do you think? What do I think?

What do you think of this list of “failings?” Does it resonate with you? With your board? With your experience of the credit union movement?

What I think is that people in our industry don’t like to dwell on the negative for fear of being seen as pessimistic. But a lot of what is said above, is also said in hallways outside of conference rooms, or in one-one-one conversations. And I agree with most all of what’s in that list … to one degree or another.

Before You Get Defensive

Now before you start drafting a salty comment or email to me about how your board isn’t like that and isn’t failing, etc., please take a breath. I make a clear caveat quite often: This list of failings that I agree with represents a broad generalization about boards in the credit union movement as a whole. Notice very carefully the final paragraph from the results, starting “It’s important to note that not all credit unions ….” Isn’t that interesting how ChatGPT has its very own caveat about this not being true of every organization? I’m giving it some added style points for that flourish as I wasn’t expecting that.

What Do We Do With This?

Every board would be prudent to review this list and put it on an agenda for discussion. (This would be a great topic to bandy back and forth on your board portal.) Every board should reflect in an honest way about where they stand on all of these issues. It’s very important to acknowledge that it can be very difficult to see your own failings, to have anything but a rosy view of how your board is doing. No one ever says, “Yes, it’s me. I’m resistant to change.” But it is very clear that credit union boards can be prone to this issue. What’s worse, is when there’s one board member with this problem that is holding back the full board but no one will confront them on it.

This requires candor. It requires trust. It requires a full-fledged desire to do what’s best for the credit union. And it’s very worthwhile.

So, thank you to ChatGPT for this interesting exercise. Now … what do you think? As always, we’d like hear your thoughts.

When I Worry About Credit Union Board Members …

Credit union board members are dedicated volunteers for the credit union movement. They are the embodiment of the CU adage, “People helping people.” As the job gets more difficult and more complex, it’s my job to worry about directors and to figure out where they need help and how to help them. I look around to get help in this endeavor myself.

By Kevin Smith with a little help from some trusted friends.

I worry. I’m a worrier. It got so bad in my early days of grade school that my mom set an ultimatum. She told me, “You’re not allowed to worry about something unless I tell you to.” It didn’t really take, but she was trying hard. Those lines on my forehead (that I try to hide in my pictures), showed up very early in my life. So, yes, I’m a worrier. And naturally, since I care so much about credit unions and credit union board members, I worry about you.

Now … this blog post comes off as negative here. And some of you are going to get your feathers ruffled and clap back with, “I/we don’t do that! How dare you?” Please keep in mind that I’m painting with very broad strokes. I’m generalizing. I’m not calling you out specifically. But I spend time with hundreds and hundreds of board members each year, and some things show up as trends. If my worries below don’t represent you, huzzah! Celebrate. But keep your eyes open, and don’t get complacent.

You’ll also notice that I have included some other people’s worries as well. I reached out to a handful of people that I like and respect to see what they had to say on the topic and have included them (with their permission) as well. (I don’t want you to think that Worry-wart-Kevin is the only one who thinks about this and has concerns.)

When I worry about board members, I worry that …

  • They’re not always honest with each other about performance.
  • They aren’t willing to have difficult conversations (see above).
  • They don’t understand the financials and business models of credit unions well enough.
  • They underestimate the challenge of CEO succession planning.
  • They will judge their members’ use of credit and other products rather than serve the actual needs of the membership. (“I would never overdraft, or let my credit score drop, so why would they?!”)
  • They don’t put in the appropriate effort to do the job (because they’re just volunteers).
  • They don’t have a clear enough understanding of the complexity of the business.
  • They don’t separate their own professional backgrounds that are sometimes less complex than CU business.
  • They undervalue ongoing education about the industry.
  • They don’t make enough, or the right targeted effort when trying to recruit new directors.
  • Sometimes the response to problems is “we’ve tried absolutely nothing and we’re all out of ideas. (see recruiting)
  • They don’t spend enough time on the job (that gets more complex everyday).
  • They don’t share the absolute passion that they have for credit unions far enough.

Tim Harrington, TEAM Resources

  • They don’t get the urgency for change.

(I don’t need to introduce you to Tim. But he was my first mentor in the credit union governance space and I owe an awful lot to him.)

Don Arkell, CU Lending Advice, LLC, https://culendingadvice.com

  • That coming into an economic downturn, they will overreact to ordinary credit losses.
  • That they will come back from a conference and derail a plan for the business that was previously agreed upon with management.
  • That they will look to the wrong metrics to measure success.

(Don is our “go-to” guy when we have questions about lending or if we need to refer people who need some help. He’s fantastic. He really knows his stuff. He’s been tremendously generous with his knowledge.)

Steve Rick, Chief Economist, CUNA Mutual Group (And credit union board member) www.cunamutual.com

  • That as the baby boom generation of board directors retire, the turnover/churn rate of directors is rising.  The new board members do not possess the same level of institutional memory of the credit union nor the commitment to the credit union that the prior generation may have exhibited.

(I used to work with Steve at CUNA and he was instrumental in my learning and understanding the complexities of the CU movement and the greater economy. I can’t tell you how much I learned from him while working with him on the CUNA Economics & Investments Conference and then bullying him into doing a monthly video series.)

Matt Fullbrook, Ground Up Governance, https://groundupgovernance.substack.com

  • That they don’t all walk into the boardroom with a clear and common understanding of what good governance even means, let alone how to be a great director.

(I stumbled across Matt’s name in a report by Filene.org years ago and made it a point to follow him and read as much as he would print. He’s helped me add tremendous layers of nuance to our governance approach and my understanding. Matt has a new thing going with Ground Up Governance. You HAVE to check it out. It’s tremendous, and often very funny! Who knew you could do that with non-profit governance? And BTW … he’s a hellva bass player. You need to look up his band too!)

Mark Arnold, On the Mark Strategies, https://www.markarnold.com

“When I worry about credit union board members, I worry about three issues:

  • Alignment—do they believe in the direction senior leadership is taking the credit union? Please note there is a difference between consensus and alignment. A healthy board does not agree 100%. But a healthy board is aligned.
  • Clarity—does the board know where the credit union is going and does the board know what makes its credit union different (without using the words service, member or community). If the board does not know the return it is getting from marketing, they should consider conducting a marketing assessment. 
  • Communication—how well does the board communicate with each other and with the CEO? And how much time are you spending communicating about strategic rather than tactical items? Successful boards communicate about strategy and don’t spend much time discussing minutia.” 

(I’ve known Mark since way back. I hired him a couple of times for CUNA programs and quickly learned how sharp he is. He’s the kind of guy that I’d ask for an email with a couple of sentences of advice and he’d set up a call and talk to me for an hour. When it comes to marketing and branding, that’s who we turn to and refer to. He’s a mensch. I hope that as a Texan he knows what that means. 😉 )

What do you worry about when you worry about credit union board members? We want your input as well, those of you who are out there in the trenches experiencing this on the daily. Share your stories, because we will learn from it. We will help each other to get better all the time.

Don’t Go Back: Boards Returning to In-Person Meetings

After Covid forced boards into virtual meetings, directors learned to adapt. But just because we can, doesn’t mean we should require everyone to meet in person again. There’s value in keeping flexible with virtual and hybrid meetings. Make sure you’re doing what it takes to make them work effectively.

By Tim Harrington and Kevin Smith

We recently received several questions on the topic of hybrid, in-person and remote board meetings. Running a two-day governance workshop recently, this topic popped up and became a lively discussion in the room with 36 directors. Coincidentally enough, we received the same question from a director via our website almost at the same time. It’s certainly bubbling about in the air these days and our approach to this may surprise you.

What We’re Seeing

Here’s a synopsis of what we’re seeing:

  1. A few boards are moving back to in-person only. But they are the minority.
  2. Most boards are using hybrid meetings where members can choose how they attend: in-person or virtual. This requires the board meeting room to have cameras, screens, microphones and speakers that allow all to hear and be heard. 
  3. Some are moving most meetings to in-person with several, scheduled virtual meetings per year.
  4. A few are moving to mostly virtual meetings with a few in-person per year
  5. We don’t know of anyone who is remaining totally virtual.

The most common we see is the hybrid option. Along with this method, boards are adding a policy requiring directors to be physically present for several meetings during the year and at the planning session. This is to allow for the human interaction that can only occur in near proximity. 

A few boards who are going hybrid have actually scheduled several required, in-person meetings. This means that at two or three meetings per year, all of the directors are present in-person.

This is the Modern World

We strongly recommend that the boards go hybrid. This is the way of the modern working world where employees meet regularly via virtual meetings. If you want to attract and retain younger directors, we believe this is a requirement. Otherwise, they will see the board as not meeting their needs. 
Digital and virtual are the new norm in the world. It is important for boards to recognize this and embrace it.

How to Make This Work

Don’t misunderstand us. We know that as the world has worked, in general, face to face meetings generally yield better results. We agree with that. But as a practical matter going forward, hybrid meetings offer a lot in the way of flexibility for board members. This is good for diversity, for recruitment and for boards in general when you can make it work.

And here’s the deal – you have to make some effort to make this work. It’s not going to happen by accident. And you know very well by now that simply plopping things into Zoom or whatever hybrid approach you’re taking, and running things like you did in the “good old days” of the beforetimes is a recipe for failure. Hybrid meetings require adaptations so that everyone can get the most out of them.

Considerations for improving hybrid meetings

  • Spring for decent equipment: cameras, microphones, displays, etc. (Don’t simply “make due” with what you have or get the cheapest options held together with duct tape.)
  • A great big monitor in the boardroom (or at your desk) can let you continue to see body language and facial expressions from participants on camera.
  • Set expectations for learning and using technology. No, it’s not perfect. But we’ve all been in the meeting with the one guy who still can’t find the mute button and know how frustrating it can be. Everyone must take the time to know how to do this smoothly.
  • Part of these expectations are about giving your full attention to the meeting as if you were there. We’ve heard too many stories of people making dinner during the hybrid meeting, or having people in and out of the room. These are unacceptable.
  • Adjust your approaches for having discussions –
    • Hold up a post-it note if you want to talk (and avoid talking over each other)
    • Get a sense of the room with 0-5 hand votes. (“How comfortable are you with this proposal? 0-5. Everyone votes on the count of three.”)
    • Make sure to bring in the voices of those not there in person. Being hybrid is not a license to be silent.
    • Participants – be broad with your head nods for yes and no, you’re thumbs-up or down, and your palm to the camera for “wait.” Don’t be subtle here.
    • Get presentations done before the board meeting in writing or on video and set the expectation that everyone will be prepared and submit questions ahead of time. Be efficient with your meeting time.
    • Be flexible in the time of day for meetings.

The Chair’s Job

Much of this is under the heading of meeting facilitation which we generally put on the shoulders of the board chair. This is appropriate. Chairs – this is the job you signed on for and it takes a bit more work in this setting. However (comma) we don’t believe that ALL of this HAS to be on the chair’s shoulders even if technically that’s where it lies. ALL directors should take on some responsibility for holding each other accountable and for making an effort to make this work.

Removing Limitations

We believe that with a little effort that hybrid meetings can be just as effective as your old-school in-person events. We caution you about rushing back to strictly enforced all in-person events simply because it’s what you know and are comfortable with. Your adaptability will have an impact on who you can recruit for the board and flexibility for how you get things done.

Cognitive Bias in the Boardroom

Cognitive bias in the boardroom is a danger to decision making. Boards can (should) mitigate the effects of this by understanding it and calling attention to where it can and does come up in the board room. As a group, directors can hold each other accountable and address bias. A learning board will create systems to counter heuristics that can introduce “sever and systematic errors.” 

By Kevin Smith

Boards of directors are not immune from the effects of cognitive bias any more than any other humans. In fact, the group dynamic of the board room of equals my just up the ante on this issue. Do you know where you’ve had cognitive bias in the boardroom? It’s time for some reflection. 

What is Cognitive Bias

Here I’m going to use the definition from Gleb Tsipursky, PhD. (There are many similar definitions with nuanced differences in this fairly new area of science.) Cognitive bias is “a predictable pattern of mental errors that result in misperceiving reality and, as a result, deviates from reaching goals, whether in relationships or other life areas.” This comes from The Bind Spots Between Us (2020).  This is different than social bias, which is learned and is between different groups and is specific to societies. Cognitive bias is common to all of humankind. It’s hardwired in our brains.

The idea of cognitive bias was introduced by Amos Tversky and Daniel Kahneman in 1972 and grew out of their experience of people’s innumeracy, or inability to reason intuitively with the greater orders of magnitude. Tversky, Kahneman, and colleagues demonstrated several replicable ways in which human judgments and decisions differ from rational choice theory. This discovery grew and developed the science of Behavioral Economics. It’s a relatively new and still unfolding.

https://en.m.wikipedia.org/wiki/Cognitive_bias

The Benefits … may have mostly wanedCognitive Bias Codex

The mental shortcuts, or heuristics, developed as part of our brain’s evolution. In simpler times they helped us make quick decisions that kept us from dying. But that was a different environment than our very modern and complex societies. Nonetheless, our brains are still wired this way, which can push us to decisions that are not supportive of our goals.

There are How Many Cognitive Biases?!

As of a 2020 Wikipedia page, there’s a great illustration of 188 cognitive biases. (Included here. Click it to make it larger.) There are surely more by now. Rest easy. We’re not going through all of them here. But this demonstrates the wide way that these biases can impact our lives and decision making. And studying these can provide great insights to decision making issues in every facet of our lives. Understanding these can help you to counter their negative effects.

What Do Directors Need to Pay Attention To?

So, what is it that directors need to pay attention to in the context of the role of the board of directors? Well, if you listen to Matt Fullbrook of Ground-Up Governance (and you certainly should!), his definition of good governance is “actively creating conditions that are likely to result in an effective decision.” So directors need to examine these biases, understand them and then reflect on how they have, or could, or will, come into play in the board’s decisioning. Identify where you may have already been guilty of succumbing to bias. Then ask what can be done to prevent this going forward.

A Truncated List of Cognitive Biases

Of course, we can’t go through every cognitive bias here. And some of them will be more relevant than others or not relevant at all to the credit union board space. But I’ve identified a short list here that I invite you to review and reflect on. These are things that I see coming up regularly as issues in the credit union space based on the number of board rooms I’ve been in, the number of planning sessions I’ve led, and the number of directors I’ve talked with over the years.

Anchoring Bias

The inability of people to make appropriate adjustments from a starting point in response to a final answer. It can lead people to make sub-optimal decisions. Anchoring affects decision making in negotiations, medical diagnoses, and judicial sentencing.

The Bandwagon Effect

The tendency for people to adopt certain behaviors, styles, or attitudes simply because others are doing so. (Fashion trends are a good example; or remember the GameStop stock event?)

Blind Spot Bias

Recognizing the impact of biases on the judgment of others, while failing to see the impact of biases on one’s own judgment.

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms or supports one’s prior beliefs or values. People display this bias when they select information that supports their views, ignoring contrary information, or when they interpret ambiguous evidence as supporting their existing attitudes. The effect is strongest for desired outcomes, for emotionally charged issues, and for deeply entrenched beliefs.

The Framing Effect

Where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain. (Think of marketing that says “95% Fat Free!” rather than “5% Fat.”)

Frequency Illusion (Baader-Meinhof Effect)

After noticing something for the first time, there is a tendency to notice it more often, leading someone to believe that it has a high frequency of occurrence. It occurs when increased awareness of something creates the illusion that it is appearing more often. Put plainly, the frequency illusion is when “a concept or thing you just found out about suddenly seems to pop up everywhere.” (It’s happened to everyone who’s bought a car and now sees that car everywhere!)

Sunk Cost Bias

People demonstrate “a greater tendency to continue an endeavor once an investment in money, effort, or time has been made.” Such behavior may be described as “throwing good money after bad.” (This bias plays on at least five other psychological factors at once.)

Zero Risk Bias

A tendency to prefer the complete elimination of risk in a sub-part over alternatives with greater overall risk reduction.

This last one plays heavy on my mind as I work with credit union boards. We are a very risk averse movement. But sometimes we don’t help as many people as we can because of this aversion.

And I have my favorites: the frequency illusion or Baader-Meinhof Effect. This fascinates me. I also think that the Dunning Kruger Effect is a big deal. No. That’s not on the list above. I’m going to make you look that one up.

What to do About This

Awareness is key. Simply knowing and understanding these can mitigate the effects. But you can also put structures in place for your board meetings and decision-making processes to call attention to these. Before making a big decision, call some of these out and make a conscious check that you are not falling prey to your minds subconscious heuristics.

Here’s my challenge to you: At the start of the next board meeting, ask the room, “have you ever heard of Sunk Cost Bias? Do you think we’ve ever been caught by this?” Then have a conversation.

Resources

I refer to Dr. Tsipursky’s book above.  He makes some recommendations for De-baising Techniques:

  1. Identifying cognitive biases & making a plan to address them
  2. Delaying our decisions & reactions
  3. Probabilistic Thinking
  4. Making predictions about the future
  5. Considering alternative explanations
  6. Considering your past experiences
  7. Reflecting on the Future & Repeating Scenarios
  8. Considering Other People’s Points of View
  9. Getting an External Perspective
  10. Setting a policy to guide your future self
  11. Making a Pre-commitment

And I follow Graeme Newell (Better Decisions Through Brain Science). He does a great job of explaining these things in a way that helps you take action. Check out his work here.

 

Boards Behaving Badly

We’re doing things a bit differently this month. It’s time for some audience participation. Click on every example of board bad behavior that you’ve experienced. And fill in any that we missed below or in the comments. We hear about a lot of these privately. But we don’t hear about these being called out and addressed. That’s a problem. 

Make sure you click the “Vote” button at the bottom. You’ll be able to see the results as well. 

 

So, how do you tackle these behaviors? Yes. Some of these are worse than others. This is a governance issue … for the whole board. Sure, we’d like to see the chair handle some of these with private, one-on-one conversations. But you’ve heard me harp on it before: written policy to address norms and expectations requires the board to discuss, then vote. It’s then easier to talk to an individual about these issues. (But I’ll also point you to last month’s episode about being too nice in the board room, which can be deadly.)

One of our readers suggested this approach should address things like the definition of a “prompt” response to an email or voicemail. Yes, these things sometimes need to be spelled out. People have different definitions. Our characters above, like Ivan Idea and Mum’s-the-Word Mary, don’t see a problem with what they’re doing. Calibrate!

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