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

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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.

Who’s Doing the Talking in Your Board Meeting?

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Who’s Doing the Talking in Your Board Meeting?

Here comes the new “talking” audit.

It’s not unusual for the CEO to do the most talking in board meetings. But it’s critical to get the right balance of voices and to have input from everyone in the group. Paying attention to this balance and making some intentional changes can move the board and the organization towards greater strategic focus.

By Kevin Smith

Let’s do another poll and see what comes from the question, “Who’s doing the talking in your board meeting?” See below. You have to take the poll before you read on. Ok? Pinky-swear? And be honest. There are only three questions.

Okay, now that you’ve taken the poll, I’m willing to bet that it’s the CEO who does the most talking in most board meetings. It seems intuitive, doesn’t it? Let’s examine that more closely. Why is the CEO doing all of the gabbing? There are reports to give, detailing updates to projects, updating the numbers from last month, last quarter, last year. This is the person that the board entrusts with the operations of the credit union and the execution of the strategic plan. So, the CEO has the most to say. And if the board has questions, generally they go to the CEO (or a delegate thereof).

If you take this as “matter of fact”, then you’re probably asking yourself why I’m bringing this up. High performing boards and organizations spend their most precious limited resource – time – on strategic stuff, on strategic discussion. That’s not effective if there’s one (or two) voices that take up the largest chunk of the speaking opportunity.

The Common Scenario(s) That We See

What I gather all too often is that the CEO spends an extraordinary amount of time preparing for board meetings (another topic to dive into), where they are mostly reporting out about status and updates. Don’t get me wrong. This is work that needs to get done. But too often directors view the board meeting as simply a place for those reports and updates. Updates can be handled in other ways. Focus on the strategic, the future oriented and the discussion.

So, if you didn’t say that the CEO talks the most, then the next guess is the chair, or perhaps one misguided director who can’t help but talk constantly. At TEAM Resources, we look for those poignant board chairs who ask the right questions, quickly, and then spend more of their time listening and drawing everyone out.  And for that one offender with verbal-diarrhea – it’s up to everyone to let them know when to shut-up … respectfully. (We’ve all seen it one time or another, but too few of us will speak up to make it stop. Some of you have heard me railing on the problems of “Midwest Nice” lately and know what I mean.)

How To Deal With This

There are a lot of ways to get after this problem. (Yes. It’s a problem.) The first thing to do is take an audit of who’s doing the speaking and for how much of the time. You could do this secretly, I suppose. That way no one would modify their behavior knowing what’s going on. But that feels a bit sneaky and sly.

Next, you address any processes that are in place that reinforce the static unbalance of voices. This is all of the “this is how we’ve always done it” features that may not be obvious until you dig in and look carefully. This may be as simple as how the board agenda is structured to give all of the air time to the CEO.

Now, you talk about this as an issue. Give it air time and acknowledge that it’s going on and suggest that it could change for the better. This can be the chair, or any director, or the CEO. Anyone who notices. It may take a bit of gumption to bring it up.

When everyone agrees that this could be more balanced, you decide how it’s going to be addressed. Keep in mind that not everyone who is typically quiet is going to speak right up. It may take time to work up to this. Remember that introverts do NOT like to be put on the spot. They like to have time to think things through and craft a response. So issues may need to be teed up before the meeting for people to prepare. (Do you know who on the board are introverts, ambiverts, or extraverts? Or do you just presume? You might be surprised.)

The Elephant in the Room

Now, I might get some blowback on this, but here goes nothin’. I’ve seen some, and heard about plenty of CEOs who intentionally take up all of the oxygen in a board meeting. The goal is to stall, deflect, divert, obfuscate, all in order to keep directors away from hard questions, or things going awry. It’s a well-known tactic. By monopolizing the time, they can control, well, pretty much everything. I didn’t say this was ALL CEOs, nor is it even a LOT. But if I’m here to educate, then I have to relay the red flags so you know what to watch out for. 

Shake Up the Status Quo

Now – all of those CEO updates and reports: Consider how those might get handled in a different way. They could be written, or recorded. And for cripe’s sake, if they’re written out, don’t make the CEO go over them again at the board meeting! Set the expectation that everyone will do the necessary preparations and come with thoughtful questions. [Please don’t mistake this as an effort to shut down the CEO and shut them up. This is about the balance of voices.]

These steps help you to influence the culture of the boardroom, to move out of the status quo, to move towards the strategic. Directors have a job to do that is more than just oversight; it’s about setting strategy and having good discussion. That can only happen with a multitude of voices. Are you willing to take a closer look at who’s talking in the board room (and for how long)?

What am I missing on this? What do you want to argue about? What’s your “yeah, but …”? I wanna hear. I wanna discuss.

Cognitive Bias in the Boardroom

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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.

 

Protect Your Board Meeting Time & Agenda Like a Mama Bear!

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The time at the board meeting should be carefully thought out and protected as the limited and valuable resource that it is. Boards that meet once a month for about two hours need that time focused on the most strategic and the most valuable items. Not on operational details, updates and review (rear view mirror) items. 

by Kevin Smith

That’s right! Like a mama bear protecting her cubs. That’s how fierce you should protect your board meeting time and agenda. Modern credit union boards that I work with generally meet for a couple of hours once a month. That’s not a lot of time. Boards need to use that time very wisely. It’s a scarce resource. The idea that things have become more complex is so commonplace that it’s an overwhelming cliche now. But it’s true, which makes the need to protect the agenda and the time all the more critical. Don’t let “busy work” get in the way of “important work” and discussion at the highest level.  

What Happens a Lot

When we survey boards about board time use (“Do you focus on what’s important and strategic?”), we get a regular “oh, yeah, sure we do.” But what we observe, and what the one-on-one conversations tell us is about the amount of time spent on the trivial, the operational, or on the distractions. We witness it first hand often enough, too often. There’s a lot of good intention here. But also a lot of slippery slopes about what’s important. 

Many board meetings are taken up with updates on projects, or extensive reviews of last month’s or last quarter’s numbers. There’s time spent reviewing policies and updating them. All of this is required by the board, and it’s necessary work. But does it need to happen during the limited time of the board meeting? (Pssst… the answer is “no” unless there are concerns or discussion needed.) CEOs and CFOs spend an awful lot of time giving verbal updates during board meetings, taking up valuable time for strategic discussion. (See below.) 

Often, board members aren’t as prepared as they should be for meetings. This results in people needing to rehash or explain things, taking up valuable time for strategic discussion. 

What Should Happen

First things first: adopt the consent agenda if you haven’t already. It seems like most have done this. It’s a huge time saver and it keeps things focused. However (comma) this only works if everyone does the preparation and the pre-reading. If members aren’t fully prepared for the consent agenda, then in reality you are just skipping things. You must hold each other accountable for coming prepared. 

Do as many pragmatic things as possible in between board meetings. Use your board portal and electronic tools as much as possible. (Again, hold each other accountable for doing this.) There’s a lot of review that directors do via the portal electronically before the board meeting. 

Have the CEO and any other staff members giving an update record these updates via video. (No, don’t have them write these updates because it will take them too long and you’ll doze off while reading them.) Make sure that you communicate to them that these videos should be casual, that they don’t have to be rehearsed or take too long. This should be the same thing they’d do in the meeting, just done ahead of time. Board members MUST review these and send their questions before the board meeting. (Accountability!) 

Structure your agenda so that the strategic discussions come early and have time allotted for them. There’s nothing worse than having several updates, or pragmatic issues “run long” and take up the time of a strategic discussion and cut it short (so that the meeting can be done “on time.” 😕 )

What Isn’t Going to Happen

Things aren’t going to get easier. They’re not going to get less complex. They aren’t going to suddenly take less time. But you CAN protect the meeting time and the agenda for the best work. 

If this all sounds like a lot of work or too much work, I’m not going to mince words: then this isn’t the right job for you. (Yes, it’s a job, even if it doesn’t pay anything.) Credit union board work is harder and more complex than it used to be, requiring the right kind of skill, focus, and, yes, time. We can not expect things to be like they were in the “good old days.” 

Let’s face it – strategic discussion is the most rewarding work of the board. You can structure things so that they’re as efficient as possible. You can hold each other accountable for doing the work in the best time and place. And you can improve the performance of the board. We all need to aim high. It’s a fabulous job worth doing. Our members need us. 

P.S. 

Check out the interesting results from last month’s poll about Boards Behaving Badly! It was interesting to see how spread out the results were. None of these personalities seems significantly more pervasive than the rest. As of this writing we had 96 respondents. Go ahead and keep adding to it! Make sure you check as many as you need and click the “Show Results” button on the bottom. 

As always, we encourage you to leave comments. 

Boards Behaving Badly

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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!

“Nice” Can be Deadly for a Board

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Nice Can Be Deadly to a Board

Midwest Nice, Board Culture & What to Do with Evaluation Results

Great board culture is more than simply having everyone “get along,” and having good discussions. It requires mutual accountability, a culture of ongoing learning, and increased complexity. Boards that want to thrive must move past old school habits of collegiality and evolve to higher performance.

By Kevin Smith

 

When I ask board members how things are going in the boardroom. Mostly I hear about how well the board members and the staff get along. Now, I presume that everyone is familiar with the concept of “Midwest Nice,” but just in case you’re not, or you need a good refresher, have a look at Charlie Berens’ work here. I grew up in Ohio and live in Wisconsin. I’m steeped in Midwest nice, which has many, many wonderful aspects. But here’s another truth: Nice can be deadly for boards.

The Irony of Collegiality

Yes, there’s a healthy dose of irony here to deal with. Of course we want and need directors to be collegial, and to get along, and to enjoy working together. But this goes too far when the result is a lack of accountability.

The Boardroom is Tricky

We already know that the boardroom can be a tricky space. There is no hierarchy in this space, no boss. (I’ve talked to a few of you board chairs that really believe that you are the monarchs of the board. Consider this a less than gentle reminder that you’re wrong about that.) The board is a group of equals set out to represent the membership, to set strategy, and provide oversight. No individual director has any authority outside of the collective decisions made by the board. This is our superpower, but not without some kryptonite. Most of us don’t come to this setting with great experience in governance and collective decisions. Most of us come from backgrounds with ingrained hierarchies. This can be a problem in holding each other accountable. This is where my struggle with Midwest Nice comes in.

Two examples that I’ve come across:

  • At ABC Credit Union, everyone on the board and management team knows that board member X is not up to the task. But board member X will continue to be on the board because it’s an issue that no one has confronted or dealt with.
  • At XYZ Credit Union, the board is dedicated to improving board diversity, they have a strong set of policies and high expectations for directors for engagement and ongoing education, etc. The problem is that “many board members don’t know when it’s time for them to step down of their own accord.” But they don’t want to have term limits. They just want people to “know.”

I could write down dozens more examples. Directors who fall asleep. Board members who are clearly not prepared. Those who ask questions that are waaaayyy off topic and cannot be reigned in. (Feel free to comment or to send me your versions. I love these stories. I believe in the power of the cautionary tale!)

Too often, it’s the wonderfully human “nice” in us that prevents these circumstances from being dealt with. That coupled with the structure of this group of peers makes us not to deal with anything that feels like confrontation, particularly among equals. This version of “nice” also prevents people from speaking up, and for festering groupthink. Nice can be deadly to a board.

This isn’t about confrontation. This isn’t about being mean. This doesn’t have to sour the tone of the boardroom and make people less friendly. This is about accountability and making sure everyone is doing the job to the standard that is required for a modern board, to the board’s expectations. And in the board setting, that means putting systems and policy in place to create the guardrails.

How To Do This

Written Policy. You’ve heard me say this before, and I’ll keep harping on this: write it down as policy. The board has to ratify policy with a vote. When it’s codified, everyone has a tool for holding each other accountable. It’s not personal; it’s about the policy that we agreed upon.

Board Evaluations. Again I will repeat myself. Annual board evaluations can be a tremendous help in this regard. I’ve been beating this drum for years. Still there aren’t enough boards incorporating evaluations. Part of this is that it can feel like confrontation and a lack of “nice.” I also have a word of caution for those of you who ARE using board evaluations. (First of all, kudos to you for doing it. Really!) Make sure you’re doing something substantive with the results. Evaluations are not just for patting yourselves on the back for a job well done. This is for finding ways to improve and identifying those areas. Ergo, you must follow up the evaluations with an action plan for improvements.

(True story: I once went through a stack of almost ten years of evaluations from a single board. Without fail, one board member is highlighted year after year for his lack of preparation, his constant comments about operations, sleeping in board meetings, etc. Yet, he’s still on the board.)

Evaluations don’t mean anything if you don’t use them for improvement. But the tendency is to use defer to “hope” in the evaluation report. That is, to “hope” that particular board members will see themselves and their failings in the report and self-correct. That does happen, occasionally, rarely. The better approach is to use the evaluations as the tool, the catalyst for human conversations in the interest of improvement. “What can we do to be better?” Which must be followed with a written action plan.

There’s a lot of talk about culture in organization and in board rooms. Creating culture is an ongoing effort with no finish line. My experience tells me that the culture in board rooms is entrenched and slow to change even with the most strident of efforts. It can be done though. My struggle is with wanting a too vague notion of “culture” and hope to solve problems that arise as part of “nice.” And for people to just “know” (as a result of that robust culture) when it’s time for them to step down, or to change their habits. Again, it can be done. What I’m saying is that tools like written policy, and evaluations with action plans, among other things are part of that culture building process that provide guardrails for accountability. This approach can maintain the “nice” while pushing the board forward.

The expectations for credit union boards is not going to go down. Our responsibilities are too significant and increasing in complexity. This requires evolution and progress from everyone including the board.

And finally, before I sign off, make sure to tell your folks I says “hi.”

The Board of Director’s Education Policy

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Ad hoc or lassaiz faire approaches to director education are no longer good enough. The board must have a formal approach, codified into governance policy. The benefits are many: transparency, higher expectations, tracking and accountability among others. The credit union world is complex, requiring directors to have ongoing education to keep up.

By Kevin Smith

Do you have a formal, written policy that covers the education requirements for directors and committee members? (Some of you do. I’ve seen them. Great! But you’re not totally off the hook yet.)

Tone in the Room

At one credit union, I asked about director education. There was no written policy and the approach was only verbal, “If there’s a conference you’d like to go to, just come and ask.” And I never quite got clarity about who was asked. The chair? A committee? And it felt a little like a kid coming to ask a parent to go to the movies. As a result, some people went to conferences, others never did, and never asked. And that was the end of it.

At other credit unions that I have visited, I’ve witnessed a “culture” of training and education, and a general “expectation” that directors and committee members would attend training. Which was working out okay, because people talked about it regularly and that set the general tone of the organization. But the only formal part of this approach for many is the conference fee and travel budget allotment. This is better, but not good enough for our times.

Write it Down

It’s time for boards to have a formal, written governance policy that addresses the training and education expectations for the directors. Directors should discuss this, like everything else, and come to agreement about what this means, beyond a dollar amount.

The education policy should set the expectation that every director or committee member will be required to do some training and education each year as part of board service.  Ideally, this program is customized to the experience and background of each director. But it is also a good idea to establish a standardized curriculum for new members. This approach helps guide their entrance into the industry, speed their onboarding process, and it takes some of the decision-making complexity out of the rookie’s hands, making this easier.

Getting Buy-In

By writing this down, the board must have discussion and buy-in, enough to get the motion passed. This buy-in is very important in establishing a standard and expectation. The written piece then becomes a way to hold each other accountable for doing the work of professional development. A verbal, and cultural “expectation” is not enough. Too often this can be sidestepped, ignored or misinterpreted.  

This is also valuable for new directors. This establishes the tone formally. Newbies know clearly what they are expected to do. The alternative is generally that new directors spend a year or more “absorbing” the prevailing culture and fuzzy expectations. (We don’t have time for that anymore.)

Setting Expecations

So what are the expectations? Well, like all fun things, the answer is “it depends.” And it needs to be customized. I’ve seen this handled in a variety of very effective ways.

It could be:

  • Everyone goes to at least one conference, local or national.
  • A minimum number of directors go to GAC every year.
  • Requirements to go to the state league annual meeting, or acceptable substitute.
  • Require a certain amount of course work online to “earn” the travel and training budget for conferences.
  • A standard list of sanctioned credit union related events as options. (Pre-approved)
  • Events beyond the pre-approved list need to have a clear rationale and an outlined benefit to the director’s service. (Don’t overly limit what a director can pursue, but ensure the connection and value. For example, I’d love to see more chairs taking courses in facilitating difficult conversations, which is not on the CU conference agenda. But the local university or training group may be offering outstanding options.)

This list could be endless. But the bottom line is that each director should pin down what training they will pursue each year. It can be flexible.

I’d like to say that credit union directors everywhere understand the importance of ongoing education and training. But I can’t. It’s great to go to conferences and to speak to directors about these topics, but often I’m preaching to the choir. There are too many directors who don’t think they need to do this. Many who “learned everything” 20 -30 years ago when they started and don’t keep up. Some who simply don’t know what they don’t know. It’s dangerous for organizations and for the movement. What we do is far too complex and dynamic these days. We must have educated and curious strategic visionaries at the board level. A discussion and a formal written policy can be enough to nudge things in the right direction.

New Rules and the Board’s Role for Succession Planning

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New Rules and the Board’s Role for Succession Planning

New Rules and the Board’s Role for Succession Planning

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

By Kevin Smith

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

What the Proposal Says

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

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

*Full language of the proposed rule is here.

What I’m Paying Attention To

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

Necessary Skills and Competencies

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

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

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

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

Strategies for Alternatives

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

Why Is This Necessary?

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

Short Term and Long Term

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

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

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

Boards: Take Care of Yourselves and Monitor the Rest

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

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

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

The Problem With Consensus

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When boards have a culture of consensus, the problem with consensus is that directors can use it as a weapon, to shut down things that they don’t like. In general, we like to have agreement and consensus, but too much of a good thing can go bad. Healthy boards know how to disagree and move on.

By Kevin Smith

Can consensus be a bad thing? That’s a loaded rhetorical question. Of course, it can. You read the title of the article. So, as I lead into my thoughts hear, take a moment to think about your board’s, your committee’s culture. Do you have consensus in general? Are your votes mostly unanimous? Always unanimous? The follow up then is – if there is disagreement, do you try to “work thought it” before you have a vote? Doing so is making efforts towards consensus. Mostly that’s a good thing. But let’s examine how that can go sideways.

The Problem with Consensus: Anecdote Time

The Problem with Consensus

Not long ago I was doing some governance work with a board. At a break, the chair pulled me aside to have a quiet conversation. He told me that he was struggling to communicate with an individual board member who was objecting to an issue. (I don’t want to color the discussion by identifying the topic, but it was a very significant issue.) As the chair told it, the rest of the board had agreed on the path forward but one director was a holdout. This director had flat out rejected the data to support the issue, but the rest of the board had accepted it. The first approach was to add additional research to convince the holdout of what the board (and management team) was promoting. This was unsuccessful. I asked the chair if he had called for a vote. He said, “no.” It was clear from the lead up discussions where the dissenting director stood. And his further response was, “we like to have everyone on the same page. We work on consensus.”  

Unwarranted Veto Power

In effect, this one director had absolute veto power. The board was not going to move forward until they had consensus. And one director had dug in their heels and put a stop to something they didn’t like, despite the fact that the rest of the board wanted to move forward. One director was (is) holding the board hostage because of the “culture” of the board.

The Power of Culture

My suggestion to the chair was to hold a vote and move on. It sounded awfully easy to me as an outsider. “Sometimes you’re on the losing end of a vote,” I thought. Big whoop. But I forced myself to consider this more carefully and reflect on how powerful “culture” can be in all settings. To suggest simply upending what was probably decades of established culture in the board room, would not be as simple as the way I had tossed it out.

While acknowledging how powerful culture can be, I stand by the idea that the right answer is hold the vote and move on. It just may take a few more steps to get to that. But I hope you can see how big the problem with consensus can be. Now imagine a step further: if a board has trouble with a single holdout, how would they deal with a contentious 5-4 situation? Would they be traumatized?

What to Do About It?

If you’ve kept up with what I write about in this space, you’ll know that I’m a big fan of arguments in the boardroom. Easy for me to say, I know. But when directors are able to have disagreements about positions and talk it out, in general that means there is enough trust in the room to air these discussions. This is a good starting point. Many boards I know struggle with this basic level. There is no back and forth discussion, and it’s always total agreement. This is just as bad as extreme contention. So consider pushing back gently on ideas and issues (that you feel strongly about). The room can/will get used to debate.

But in the anecdote above, at least one director clearly didn’t have any problem with pushing back. In this case, I would suggest that the chair be willing to call attention to this and have a discussion about it. It may not be easy to say, “we’d like to have consensus on this, but it’s too important to be held back for long. We will vote if necessary. What are your thoughts on this?” But it’s necessary.

Small Steps

Now that you’ve thought about the culture of your board – consider what small steps you might take in each board meeting that will get everyone used to hearty discussion, that will increase trust in each other (so that you can argue and come away positive colleagues). You might even bring this up as a topic of conversation – Do we have too much consensus? Are we in danger of having one person highjack an issue? Are we willing to take a contentious vote? My first sentence would be, “I’m giving all of you permission and encouragement to push back on me.” If you never have this, you need time to get used to it. Start now.  

Carefully Consider Your Nominations and Re-Nominations

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It’s more important these days for boards to give a critical eye to every director that is that is up for re-nomination. Too often this is treated as inevitable rather than a privilege to be earned. Too often boards don’t express candor to underperforming directors. Creating a checklist of expectations establishes transparency  that pushes towards higher performance.

by Kevin Smith

Succession Planning
So … the NCUA has new proposed rules about the board’s involvement in succession planning. (You do know that, right?) They’re concerned that the board’s relative lack of involvement is undermining the futures of some credit unions. As a last resort from lack of plans, some merge away. We’re not big fans of that.

Succession planning is about preparing to have the right people in place for the future of the organization. That includes discussion of the directors currently in their positions now. We are here today, friends, to talk about incumbents and the re-nomination process. And we’re here to suggest that re-nomination isn’t or shouldn’t be the result of simply asking the incumbent if they want to run again. Re-nomination should be tied to criteria about the board member’s performance over their term.

Recently, Tim created the “Incumbent Director Re-nomination Checklist” that you see here. It came out of his desire to see board members holding each other accountable and setting a transparent process that outlines the responsibilities of directors who want to be renominated for another term. In 18 questions Tim has created a comprehensive review of the incumbent’s performance. This checklist is to be filled out by all other board members. The checklist sets a (fairly minimal) standard for directors to live up to.

The Fatal Flaw of our Checklist
This is tricky territory we acknowledge. And we’re here to head off your criticisms from the get-go. This checklist clearly has a fatal flaw. Pause for a minute and consider what you think that flaw is. (I’m happy to wait.)

OK, did you think of something?

So, in my opinion, the fatal flaw is the fact that most directors won’t be candid enough in their responses in the checklist to make it work. Directors won’t be truthful enough in their ratings. They aren’t candid enough with underperforming directors as it is. What makes us think that a checklist is going to change that? That is my very real fear. But that’s no reason not the have the checklist anyway. I’m here to argue that having the checklist is still worthwhile and that it will nudge progress in the right direction. Simply by adopting the checklist, by having a discussion about using it and agreeing to take it on begins setting a tone about the requirements and need to hit them. When the first re-nominations come around on the calendar after you’ve adopted these, you’ll have to have that reminder conversation about the expectations that the board agreed to. That is already progress. Now, if you go through all of this and directors are still overly soft on incumbents, it’s not ideal. But it’s a starting point for another conversation.

So … that was the fatal flaw that you came up with, right? Oh, it wasn’t? Well then, I’m going to need you to write your own version in the comments below. Tim and I think this is a good idea and it’s relatively new. But if you see issues here, tell us. We like to think things through and hear from you.

The Other Complaint You’re Waiting to Lob at Us
I know you’re just chomping at the bit to let us know your other concern about this checklist approach. (This is going to circle right back to the new succession planning regs.) It’s something along the lines of, “we have a hard enough time trying to recruit directors, and now you want us to make it harder for the ones we have to stay in place?!” We hear you and know the recruiting struggles that boards are having, but the answer is still “yes.” Recruiting and succession planning is more important than ever (see the NCUA letter linked above). The fact that it’s difficult is not an excuse to lower the bar of qualifications and expectations of effort.

Setting the Tone
All of this is about setting the tone of the board and creating clear expectations for performance. Boards have no bosses and have to hold each other accountable. From our vantage point working with boards all over the country, there are not enough candid conversations about performance and not enough accountability. Directors are too easy on colleagues who are not doing their duty. We are a polite, well-meaning crowd that doesn’t like confrontation. It doesn’t have to be difficult. It doesn’t have to be mean-spirited. It does have to be honest and transparent. This is based on trust and candor. A simple checklist can move you in that direction. Download it. Share it with your crew. Have a conversation. Let us know how it goes.

Dedicated to YOUR Success . . .

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