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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.

Bikeshedding and Boards

Boards have made progress over the years in keeping their focus on the strategic and out of the operational “weeds.” But this is an ever-present tightrope walk with many falling regularly into minutia. Our brains may be working against us on this one. Acknowledging and paying attention to cognitive bias will help directors and CEOs keep things on track. It will take some work.

By Kevin Smith

A couple of months ago while preparing for a webinar on cognitive bias I had an “a-ha,” lightbulb moment. I was thinking more carefully about the concept of Bikeshedding, also known as Parkinson’s Law of Triviality. You may remember that I wrote about cognitive bias a year ago, on Oct. of 2022. A quick reminder: a definition of cognitive bias from Gleb Tsipursky, PhD. – “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.” These are aspects of our brains that developed when the world was vastly more dangerous, but also more simple. Many of these biases helped us make quick decisions that kept us alive. However, in our more complicated world, these biases, wired in our brains, can work against us and cause us to make bad decisions that run counter to our rational desires and goals.

 

Board Work and the Implications

Let’s set the stage here before we get to Bikeshedding. One of the first things I learned about board governance almost 20 years ago, was the importance of making sure that boards stay at the strategic level and stay out of the operational ‘”weeds. As a matter of fact, this was the conversation that I heard more consistently than almost anything else. This was (and remains) a persistent issue in board work and one that CEOs bend my ear about regularly (and not because it’s going perfectly). Despite a lot of focus on this desired approach there seems to be an ongoing struggle to stay out of the weeds.

A couple of, ahem, “interesting” examples:

  • I was once privy to a conversation where a board member insisted it was strategic territory for her to have some say on the colors in the logo.
  • Another conversation was a board member who insisted on having a say in which side of the building the drive through was placed. And, no, he was not a civil engineer or anyone with relevant expertise. Just a guy with opinions.

The struggle is real.

 

Bikeshedding

Recently I came across the concept of Bikeshedding, or Parkinson’s Law of Triviality. This is a well-researched cognitive bias, “Our tendency to devote a disproportionate amount of our time to menial and trivial matters while leaving important matters unattended.”

The story goes that Parkinson was a British Naval Officer who explained this through a metaphor of a financial committee with three things on the agenda:

  1. A proposal for a £10 million nuclear plant
  2. A proposal for a £350 bike shed
  3. A proposal for a £21 annual coffee budget

Item 1 was too difficult and complicated and the committee would look past it, giving it short shrift, moving quickly to item 2 and spend vastly more time on it. Finally, they would spend the most time on item 3, the most trivial of the group.

 

The Aha!

It dawned on me (maybe a bit too slowly) that this might be part of the explanation as to why boards fall into the weeds so quickly. Our brains are wired that way. Bikeshedding happens, “because trivial tasks are easier to comprehend than more complex issues; consequently, we feel more comfortable working on and discussing the simple issue.” The majority of directors that I have met don’t show up for credit union service with a great understanding of governance nor a background in board work. More often they have little or none and have to learn (often on the job). And for professionals used to living their working lives in the heart of operational things, focusing here can feel like where we are actually being productive. It takes learning and practice to function at the strategic level if you’ve never done it. And it’s a very different kind of work.

 

Some History and DNA for Good Measure

Eureka! We have reason why boards fall into the weeds. AND it’s based in brain science.

But there may be more going one for us credit union people. When doing governance training, I like to talk about the history of credit union boards and their evolution. We have to remember those great stories of people starting credit unions in factories, schools, police stations, etc. with 7 or 8 people and a cigar box. (It always seems to be a cigar box.) The point I’m trying to make is that it wasn’t so long ago that the board was the group of people literally running the credit union. So that feature is in our DNA. It was the operational work. And we don’t change our board members all that quickly. So that slow turnover can create a climate of “that’s how we’ve always done it.” This is another blog I did some time ago. Take a look here.  Another strong reason why the focus on the operational can be sticky with boards.

 

Fine. Now What To Do About It?

Reasons are fine. Excuses are not. It can be helpful to acknowledge our tendencies, but this is no reason to throw up our hands and accept our inclinations toward the trivial. We have to fight it and work together to do what is infinitely more important, even though the complexity can make us resist it. (And heaven help me here, if I don’t help the CEOs, leaders and colleague board members who have to deal with this on an ongoing basis.) We’ll fight the good fight.

  • Awareness is the starting point for dealing with Bikeshedding. Talk about it. Understand it. Share examples. Laugh about it. But don’t ignore it.
  • Another way to help nudge in the right direction is to make sure there aren’t too many items to tackle at a time. Sometimes, items that are major and complex may demand their own meetings with a strict focus.
  • It can be helpful to assign someone to pay particular attention to make sure we’re not getting in the weeds or spending too much time on the trivial. (Too often the CEO is the default gatekeeper here, which is not fair.)

 

BTW – There is Some Awareness

By the way, this effort to stay strategic is high on the radar of virtually every director and board I’ve met. They are always very well intentioned. But too often, those who insist they stay out of the weeds are not aware enough of what is really going on. I’ve been in the rooms where in one breath a director brags about how strategic they are, and in the next hear them dive into operational minutia with zero awareness. At that point I have eye contact and signals with the CEO to make sure they know, that I know, and will try to help.

I get it. It IS difficult. Particularly when our brains work against us. But it’s important.

Acknowledge. Understand. Learn. Practice.

Oh … and for extra credit: Ask Tim Harrington to tell you his story of being board chair and his colleague directors calling him out for being in the weeds! J It’s a great story. And a great equalizer. We’re all guilty and we’re all part of the solution

As always … tell me your tales. We want to hear from you

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.

How Many Committees Does the Board Really Need?

Committee work on credit union boards is a slippery slope into operational territory. Boards should limit committees to as few as possible and maintain their focus on governance work. Committees of the board should not include staff, but only directors. We recommend the following four: Governance, CEO Relations, Nominating & Recruiting, and Supervisory/Audit.

By Kevin Smith

You might not think it possible, but I’ve gotten into some very interesting, and sometimes slightly heated discussions recently regarding committees. I know, I know. There are only so many governance nerds in the world willing to get fired up about committee work, but it does happen on occasion. And it’s usually because Tim Harrington and I push very hard that credit union boards only need four committees, at most. (Some boards can get away with fewer.) We recommend Governance, CEO Relations, Nominating & Recruiting and Supervisory.

Why So Few?

John Carver, the creator of Carver Policy GovernanceTM argues that committee work is a slippery slope into operational work and that the board should remain at the strategic level of governance and not meddle in the weeds. We tend to agree. This is why we suggest with a very heavy hand that board committees should include only board members as no staff. If staff are included, the committee has already slipped into operational territory which should be avoided at all costs. It’s not where the expertise of the board members’ lies. For you dear readers who are about to demand that I explain what to do about the Asset-Liability Committee, please have patience. I will get to that forthwith.  

With the average credit union board being seven to nine people, in general, you should be able to get things done with the whole group. And indeed, having the full board should bring in an adequate number of voices and points of view on most topics, which really is the point of having a board in the first place.

The Reason for Committees

The reason to have committees on the board is to get more “stuff” done. When there is too much work to do, or there is a topic that needs research and a proposed governance/policy solution, then a committee of board members is appropriate. The committee’s work results in a summary presented to the full board along with a recommendation for action to be voted on by a quorum of the board.

Committee Recommendations

Governance Committee

The TEAM Resources approach is that of strategic governance that the board manages via written policy to establish the values of the board and the credit union, driven by a strategic plan with measurable outcomes. This policy-based approach requires some significant work, particularly when you first implement it. The governance committee:

  • Develops Governance Policies for board approval
  • Keeps Governance Policies up to date
  • Ensures board members obtain necessary education
  • Ensures board evaluations and self-evaluations are completed annually
  • Maintains Governance Calendar and keep board on schedule
  • Holds directors accountable for their self-improvement

CEO Relations Committee

 This committee is necessary because of the increased complexity and ongoing evolution of the CEO’s role in credit unions. I’ve heard too many stories of credit union board who start to sweat and panic about Halloween because they suddenly have about three weeks to gather a full year’s worth of data and come up with a CEO “annual review” and raise. And I still hear from CEOs who have never, that’s NEVER, had an annual review. This is unacceptable. At the organizational level, employees are well past the age of once-a-year annual reviews. The HR world recognizes that regular check-ins (quarterly at a minimum, or monthly) with feedback and measurable goals are state of the industry. This should apply to the CEO too, and the board is the “boss” here. This suggests ongoing work throughout the year in order to make this manageable. The committee:

  • Remains in touch with CEO on important issues
  • Ensures the board evaluates the CEO at least annually
  • Monitors and plan CEO Compensation issues
    • Salary via comparison or other process
    • Retirement
    • Deferred Compensation – Golden Handcuffs
    • Incentive compensation – best if linked to Strategic Plan
  • Works with CEO on Annual Strategic Planning Process

Recruiting & Nominating Committee

We used to call this simply the nominating committee, but that’s not enough these days. Succession planning at the board level is critical and more complicated than it used to be. The emphasis here is on a recruiting plan that will involve the whole board to some degree. Our approach also suggest that a sitting board member must qualify for re-nomination. It’s not automatic. (See the blog and downloadable checklist on renomination here.) The committee:

  • Actively identifies and recruits potentially qualified candidates
  • Reviews evaluations of board members
  • Annually review potential board candidates
  • Recommend qualified candidates to the board for nomination
  • Responsible for orientation of new board members

Supervisory/Audit Committee

Federally chartered credit unions are required by regulation to have a supervisory committee. Some states require this as well, but even if it isn’t, it’s a good idea. This is the watchdog function for the board and the organization. And this isn’t a committee that is made up fully of board members with the same mission as the committees discussed above. So, we won’t go deep on this here. It does need acknowledgement however.

Yeah, but … what about?!

I know where the argument is going, and thanks for your patience. The question is about the Asset-Liability Committee (ALCO). It seems to fly in the face of everything I’ve said so far: It’s got board members and staff members, AND the NCUA seems to want to see the board’s heavy hand on this. You’re certainly not shocked to hear that I don’t agree with everything that the NCUA does or suggest. But frankly, they have waaaay more authority than I do. Take that into account. I follow Tim Harrington’s wisdom on this (and many other) fronts. He suggests that one or two board members attend the ACLO meetings … as guests there to learn. He calls ACLO the “rocket science” of credit union work. As such, it needs the most expert involvement that the credit union can muster. This is not what director’s bring to this committee most of the time. It is, though, a great place to get an education and understand the complexity of the credit union more thoroughly, which board members should pursue enthusiastically. Listen to the experts and their recommendations. The NCUA wants you there to keep an eye on risk, and directors tend to be pretty risk averse in this industry.

Ad Hoc – If You Insist on Others

Like I said, there are some who are adamant that there is other committee work that’s appropriate for the board. I generally disagree, but I’m not willing to carve that in stone. If the right reasons arise for board work that you will accomplish via committee, then please make it an ad hoc rather than a permanent committee. Write into its charter the goals of the committee and a general “sunset” clause for disbanding the committee when you meet the goals. Many of you out there have admitted to me that there are ongoing committees that only really exist because “that’s the way you’ve always done it.” Committees should have strategic/governance goals and should be made up of board members. If your committee just “reviews” things, but never has any other goals, really ask yourselves, “Does this need to happen?”

Charters

All committees, permanent or ad hoc, should have a charter that establishes the purpose of the committee, its measurable goals, the scope of its authority, and, if appropriate, the end of the committee. The charter maintains the good governance practices of the board by providing clear, written guidelines and prevents mission/committee creep.

IT Committees (or any other hot topic committees)

Recently at an event, I was almost persuaded by a director of the value of an IT Committee with board participation. I said “almost persuaded.” My first question is always, “what value do you bring to the committee?” He indicated that he does, in fact, have an IT Security background and that’s partly why he was recruited to the board. (Kudos to the board for getting that kind of expertise represented. But here’s where it gets tricky.) It can feel like this is a good idea. But it’s not the board’s job to do staff work. His argument to me is that he needs to participate on the committee so that he can translate to the rest of the board and make sure the board understands that the staff are doing what’s necessary. He also admitted that this is a way to help rationalize the high IT budget to the board, by having an expert voice. This is what almost convinced me, because I really value the board understanding and supporting what’s happening there for the security of the organization. But here’s where it feels like it echoes our advice about the ALCO. He is “participating” in the committee meetings, not simply learning, which means he is doing staff work under the guise of translating to the board. You can fill in any hot topic that’s very complex and make this argument. (Is the A.I. committee next?) This feels like a communication and a trust issue rather than real “stuff” that board members need to do. Directors have enough to do. Stay in your lane and be efficient there.

(Not) Executive Committees

Here’s another sticky area where I’ll put my two cents in. For the sake of redundancy, I’ll remind you that we like the four committees listed above. We don’t see the need for an executive committee. But here’s where it gets more complicated. Many boards that I have dealt with have an “Executive” committee, but the role that it serves is almost a perfect overlap of what we call the governance committee. Naturally, I don’t have an issue with that. The roles and the goals are most important. Names matter though. The reason this is significant here is that, historically, the executive committee of a board consisted of the officers. Beyond that, this committee was given significant power and authority to wield in the absence of the full board. It was a concentration of power. This is problematic these days. Boards needed this historically when there were emergency decisions for the board to make, but it was difficult to communicate with the full board (and that might be 25 or more people). These issues don’t exist for us now but there are still some boards that have aggregated power in the executive committee. It’s a recipe for problems. Make sure you’re reviewing the charter and the bylaws to make sure they are up to date and there’s nothing that the board is taking for granted.

There. I’ve said it. I’ll step off of yet another soap box.  But Tim and I believe that this approach works best for the board and for the CEO. It allows more time for strategy and learning. As always, I’m eager to hear your thoughts and approaches. I’m always up for a scrappy argument. I learn a great deal when I do.

Your Budget is a Statement of Values: Treat it with the Appropriate Diligence and Respect

The annual credit union budget is a statement of its values, the things the organization thinks are important. The values in that budget should reflect (and be directly tied to) the strategic plan that the board and senior management has developed together. It is critical that the board have a clear understanding of how the budget has been shaped, and takes pains to make sure that it’s appropriate.

Kevin Smith

I’m pretty sure that the fact that I’ve picked May to write about the budget is some sort of Freudian avoidance of trauma approach given what I’ve been through. I’ll be curious to hear about how you feel about the budget cycle. You’ve gathered some insight as to my feelings. Here we are in May, headlong into the 2023 budget but pretty far from next year’s budget development. That feels pretty safe. But come November things get a bit more messy.

Politicians from all sides and businessfolk like to spout the aphorism, “A budget is a statement of values.” And I agree with this. Where you’re putting your dollars reflects where your priorities are. But I’m not always sure how closely board members follow this idea even when they agree.

Stereotyping

Here’s my broad stereotype from lots of experiences in this area: The board and senior management do their strategic planning sometime in the fall. Then not too long after, the CEO, after some voodoo, witchcraft, and pencil chewing with the staff in a secret room, submits a draft budget to the board that they will finalize by January. The board reviews the draft budget mostly by looking at the big round numbers on the right side of the page, and the amount and percentage that they went up from last year’s number. They ask a few questions for clarifications and it’s off to ratification/approval.

For Instance

Let’s play the “for instance” game. For instance, your strategic plan suggests that the organization is going to have to build a new focus on wealth management services for your older membership to keep them at the credit union. Building that out as a new service is going to require funds. The board should make sure that’s reflected in the budget.

For instance, the strategic plan involves a shift from front line staff to a heavier call center approach, but also a focus on sales and service. I’ve seen this one play out in a variety of ways where directors completely understand the amount of $ that goes to technology for the call center, but not get why the training budget has doubled and salaries for call center staff have to be raised. (Sales and service skills require a LOT of training and proper rewards.) Here’s the curve ball – six months later one rogue director yells after a trip to the lobby, “what do you mean we don’t have any money for MSRs?!?!” Because he hasn’t internalized the values that the budget reflects and are tied to the strategic plan.

What Should Board Members Do?

The review of the budget should be an exciting event, not a perfunctory task once a year met with a yawn. (I know. Some of you are skeptical.) The board’s efforts here are to ensure that the values of the organization are given the priority that you have discussed and agreed upon. To make sure that the budget is tied to the strategic plan in a noticeable way. It sounds like I’m inviting the board into the operational weeds to nitpick. Nothing could be further from the truth. This is a call for thoughtful analysis of the budget at a strategic level.

  1. Don’t underestimate the pain and suffering that may be involved when the staff creates a budget. Respect the process and the analysis they give you.
  2. Ask thoughtful questions about how the budget is tied to the plan, not just “why did line 12 go up so much?”
  3. Reel in your rogue directors if they aren’t getting this. (I know that some of you are thinking about how you understand this but there’s that one director on your board who just doesn’t.) It’s your job to hold them accountable and make them understand, for the sake of your CEO and staff.
  4. Make sure you incorporate ranges for results. The budget is not a crystal ball. This also means that you need to know how to adjust when the environment has changed along the way.
  5. Be prudent with the members’ money, which is not the same thing as being cheap with the members’ money. Support thoughtful investment and make sure that you understand what it costs to do business these days. (Versus comparing everything to the value of your first car, house, candy bar from decades ago.)

The annual budget is as important as the strategic planning process. In fact, they are intertwined. Often the budget gets short shrift. Don’t let your eyes glaze over in the volume of numbers in the spreadsheet. Get excited about the promise of value to the members that you instill in the budget and provide support to the CEO to execute this vision.

In Camera or Executive Sessions for the Board (Without the CEO)

It is a good practice for each board meeting to include an in camera or executive session where board members can meet privately, without the CEO present. In camera is simply Latin for “in chamber” or private. These sessions provide the board the opportunity to have candid discussions without non-board members present.

By Kevin Smith

First, let’s deal with this wonky phrase, “in-camera.” This is one of those holdover Latin phrases that, like many others, are going by the wayside. So why am I still using it instead of simply “executive session”? The simple reason is that some non-profit boards still have an executive committee of the board, a subset of the full board. This is increasingly rare I’m happy to say, but there are a few. So, to call this an executive session can lead some to think of a meeting of that committee. What I’m talking about here with the phrase in camera is a meeting of the full board without non-board members (primarily the CEO) present. We can use both phrases here so long as you know what I’m getting at. (And I’m a sucker for anachronistic phrases in non-English languages.)

Why Hold In Camera/Executive Sessions

In camera sessions provide the opportunity for board members to have a space to speak candidly, to ask questions of each other that they might not be comfortable asking in a meeting with non-board members present. Consultant Christie Saas puts it this way,

When handled correctly, an in-camera session is used for private discussions about legal matters (fraud), hiring/firing of employees that report directly to the board, annual evaluation of employees that report directly to the board, and the annual audit.

When handled incorrectly, an in-camera session is used to gossip, socialize, or to intentionally exclude non-board members from being part of meeting procedures.

I agree with these comments, but would take this a bit further and suggest that these sessions are valuable beyond discussion of problems, like fraud or hiring/firing. They can be helpful places where are director can say that they aren’t comfortable with something, or if they have sensitive questions to ask, or simply to get a candid “temperature check” of how the full board is feeling about a topic.

What Happens if This is Rare

Let’s be clear – if the board only uses in camera sessions very rarely, or only for the difficult topics that Christie Saas suggests above, then the CEO is going to get the jitters as soon as its called. In these circumstances the session is going to appear to be a giant red-flag to the CEO. In our experience, it’s not uncommon for other senior leaders of the credit union to come and go from board meetings depending on the needs. They generally don’t see that as unusual. But on the other hand, we see CEOs who are involved with every minute of every board discussion. In many ways that makes sense given the complexity of our industry. So when the board calls an in camera session the hairs on the back of the CEO’s neck stand up in warning of trouble ahead. That’s not a healthy scenario, and the sessions shouldn’t always be about difficult or negative topics.

Some Guidelines to Consider

  • Add an in-camera session to every board meeting agenda. It can be short or uneventful. Or it may delve into significant topics. This regularity makes this an expectation that everyone gets comfortable with. It may also draw out more candid commentary from quieter board members.
  • To start the session, a director makes a motion that the board must pass to do so.
  • Take minutes in the session including deliberations and reasoning behind motions and votes. But these minutes are not included in the general board meeting minutes.
  • The general topic of the in-camera session should be in the board minutes; however, the content specifics are confidential.
  • The board can approve the in-camera minutes at the next open board meeting, but only by those who attended the sessions.

This approach will provide that transparency expected of a not-for-profit board while maintaining the confidentiality needed for the sessions.

And do yourselves a favor and give the CEO a heads up that you are going to take on this process and explain why. That way when it shows up on the agenda, they don’t immediately scream, “Are you firing me?!”

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