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Radical Candor in the Boardroom

To promote high performing teams, approaches like radical candor can be of great value. The concept of challenging directly but caring personally creates a better environment. Boards of directors should make concerted efforts to establish honest and trusting environments. Used thoughtfully radical candor can inspire change and growth.

By Kevin Smith

Recently, I ran across the concept of “Radical Candor” from Kim Scott, while preparing a session I was presenting at a conference. The terms itself, Radical Candor, feels much edgier and biting than what I had been looking at and it drew my curiosity. Naturally, everything I dig into quickly gets reframed as to how it relates to credit union boards of directors. This was no different. But here it wasn’t a perfect fit, though there is serious merit in how this concept could (should) get traction with boards.

The Source

Author Kim Scott has quite a professional pedigree, having been part of AdSense, YouTube and DoubleClick teams at Google, as well as a CEO coach at Dropbox, Qualtrics, and Twitter among others. She’s been a manager, a boss and a leader in a lot of different scenarios. She’s very candid about how she learned, the mistakes she made and how she developed the concept of radical candor and wrote the book.

The Concept

The concept is fairly simple and it uses a 2×2 which is the rule for card carrying consultants. 🙂 The x axis is the degree to which you challenge your employees directly. The y axis shows the degree to which you care personally. (See graphic and cover.) That’s really it. As she puts it, “You don’t have to choose between being a pushover and a jerk…you can be kind and clear at the same time.” The key to this approach is to be direct with people, but to “give a damn” about them and make it clear that you support them. It’s really simple. Of course, the implementation of this opens a variety of cans of worms, because, after all, we are human beings that are complex, nuanced … and emotional.

The Goals

The book is absolutely geared to making people better “bosses.” So how does this relate to boards of directors who operate distinctly outside of a corporate hierarchy by being peers in the boardroom? Scott indicates that the three core responsibilities of bosses are to:

  1. Create a culture of compassionate candor
  2. Build a cohesive team
  3. Achieve results collaboratively

These are goals for the board as well.

The Need

My experience with boards of directors around the United States suggests that we could use a lot more radical candor (compassionate candor) in the boardroom. This is hard enough for bosses to achieve with their direct reports and the board setting has further challenges. As groups of directors, it’s critical that we address issues, failures and lack of performance from colleagues on the board. This doesn’t happen nearly enough and many boards “tolerate” certain director who don’t live up to the needs of the organization. Of course, this candor has to be accompanied by deep personal care for each other and the support that this requires.

Now, I’m giving very short shrift to Scott’s concept here, providing only a thumbnail sketch of everything involved. I encourage you to read the book, explore some articles or videos on the concept and see what you think. She provides a very detailed approach and order of operations for executing this along with great examples of the process.

How to Adapt

Unfortunately, this isn’t a hand and glove fit for boards, as we don’t have bosses. And I haven’t worked through all of the nuance that Scott does. But I want you to consider how this might be a value for a peer group like your board. There’s significant value here. Don’t you think?

Here’s a suggestion from Scott as to how to start building this culture:

  1. Be the first to solicit criticism from your peers.
  2. Gauge the conversations as you give criticism: If your listener is upset, ratchet up the care personally side of things. If they are not hearing you, challenge more directly.
  3. Encourage all candor and discussions.

We owe it to each other and to the credit unions to which we pledge an oath of office to work at the highest level possible.

I want to hear your thoughts.

 

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

Are We Family? Should We Be?

There is a long history of credit union staff taking pride in being more than a financial institution and more like a family to colleagues and members. While this may feel right, it is an attitude that can challenge the productivity of organizations that have become extremely complex. It is often not effective to behave like a mom-and-pop shop anymore.

By Kevin Smith

This may not be a very popular post. But I hope you’ll hear me out and consider the perspective that I’m bringing. Too be absolutely clear, this is not a clear-cut issue with easy sides to be on. It is a complicated tight-rope walk for credit unions. Those who figure out how to navigate this balancing act my lock onto a great differentiator and market advantage.

During my recent travels, during a keynote session I was giving I asked about some of the concerns the board members were having. Someone spoke up from the crowd with a troubled look on his face. He said something to the effect of, “We’re always talking about how we’re ‘family.’ But I have a problem with that. We’re NOT a family. We are a business, and we need to act like it.” This took me off guard, precisely because in the credit union movement, particularly in smaller and midsized credit unions, we talk like this all the time. It was a minor stir in the room, with some chatter. Some looked thoughtful, some concerned, and some puzzled. The gentleman spoke up again to say sometimes acting like family is getting in the way of us getting things done, because we are not acting professionally enough in an industry that demands it in order to keep up, much less thrive.

He’s got a point. I don’t love it, but he does have a point.

Two (Or More) Sides

We credit union people love to be something other than bank-like and other than corporate. It’s a way for us to set ourselves apart and differentiate ourselves from cold, profit-driven businesses that don’t care about us as humans, who only want our dollars. There’s a lot to be said for this human approach to members and colleagues.

But there’s a difficult side to this approach as well. Often when we treat people like family rather than colleagues we don’t take the rational and pragmatic approach to getting things accomplished. We all know that we’d generally give family more chances at redemption than we would others. Blood is thicker than water, as the saying goes. And you can’t choose your family; you’re just stuck with them. (I know it’s more nuanced and complicated than this, but there’s a point here.)

With as much consolidation as there is and as many mergers as there are, we know that there are some that are not making it. It is a challenging and complex industry that does not look like it did ten years ago much less than its inception a hundred years ago. I’m not saying that this is all due to this family approach. But are we evolving as much as we need to?

Can We Balance This?

I have to tell you that I’m really uncomfortable with the direction this blog post is going. I don’t like it. No sir. Not one bit. The family aspects of this industry are a draw for me. At the same time, the change that I’ve seen over my 18 years here are jaw dropping.

Perhaps there are ways to walk this tightrope between family and business. Maybe you know how to do this or have examples of this done right. I’m eager to hear. Send them along. The right balance might just be the magic approach. And I’ll say very quickly – some of you think you’re doing this already. I’m not sure I agree.

Family Versus Humans

There’s a distinction necessary here: it’s two different approaches between treating people like family and treating people compassionately as humans, with some serious overlap. Simon Sinek and Gary Vaynerchuk (and others) are proponents of the empathetic human approach to business. It’s distinct from a family approach.

Kevin Isn’t Sharing Any Advice

Surly you’ve noticed that I’m not doling out any advice as to how to navigate this. (Yes. And don’t call me Shirly.) The truth is that I’m not sure how to handle this. It was a thoughtful, thought-provoking comment from a board member at a conference. Hurray for that. Kudos to him for bringing a challenging idea to the table. I certainly hope that happens as often as possible, because I see an awful lot of opportunity to collaborate on these difficult ideas.

Sometimes I’m thrown off. I’m sure I need to think about this one more. But it’s been weighing on my mind for a bit and needed to get it out there for you smart people to work on. Let’s face it: some families are dysfunctional.

What do you think?

What do you see?

If you think you’re doing this balancing act well, what makes you so sure?

I 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.

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.

Who’s Doing the Talking in Your Board Meeting?

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

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.

 

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