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At face value

In the complex financial world of IT, cybersecurity, online banking and much more, what traits make a good credit union board director?

Twenty-five years ago, just about any Tom, Dick, or Harry could become a credit union director.

You didn’t need any special expertise, experience, or education. All a person needed was to know somebody who knew somebody who was trying to fill a vacancy on a board. And to be naïve enough to say, “Yes” when asked to serve.

Want proof? My middle name is Harold and for a couple years in the early 1990s I was a director of Starnews Credit Union in Toronto. I was asked to join the board by a union activist who knew tough contract negotiations were coming with the Toronto Star
and wanted to ensure members had a friendly face in place if they had to walk the picket line and needed a loan or some slack in
meeting payments.

The good news is that the 1992 strike ended after 31 days and most members managed to make ends meet. Starnews survived my stint on the board and is thriving today as Luminus Financial Services and Credit Union (5,900 members,$180 million in assets).

A few years later, in 1998, 26-year-old Shawn Neumann, founder and CEO of web-agency Domain7, joined the board of First Heritage Savings Credit Union in Abbotsford, BC. “The organization and the regulatory environment provided enough patience for someone like myself as a young director to come in, deeply over my head, but have the opportunity to get up to speed and really know the organization,” says Neumann, now chair of First West Credit Union (248,000 members, $10.3 billion assets). “That type of dynamic, I don’t see it being possible now,” he says. “I can’t see a board taking on a person in the same situation that I was in at that time.”

Jack of all trades

Flash forward to now. How do credit unions find and select new directors at a time when boards need to understand IT systems, cybersecurity, payment systems, online banking offerings, complex HR issues and much, much more? Where do they even start?

The surprising answer is: many don’t start by looking at education, expertise, or experience. They look at values and culture.

“Credit unions should recruit board members for values fit and diversity in perspectives, in addition to demographic diversity and specific industry experience and technical skills,” states social scientist and University of Toronto assistant professor Dionne Pohler in the Filene Research Institute report, Governance Challenges in Credit Unions: Insights and Recommendations.

Karen Farbridge, chair of Meridian Credit Union (335,000 members, $16.7 billion assets) agrees. She says the process starts with the board being very clear “about the values and the culture of your board and how you express those values throughout your governance practices.”

“Building an excellent board is more art than science.” – Matt Fullbrook

Frank Chong, acting superintendent of Financial Institutions at the Financial Institutions Commission (FICOM), says that when the regulator issued governance guidelines in 2013 it recommended that boards “should be looking beyond just the hard credentials and look at the personal attributes, the values and behaviours that will make boards function well. Many times we see dysfunctional boards comprised of many professionals,” Chong says.

Chong recalls one new director who approached him a few years ago when he was attending the credit union’s annual meeting. The director said she had been reluctant to put her name forward because she feared she didn’t have the financial knowledge required. But, Chong says, the woman operated a trucking company and clearly had a passion for both her community and credit unions. She also expressed a desire to learn and improve her skills. “I thought: ‘Well, this individual isn’t a lawyer or accountant by training but has a basic understanding of how a business should be run and how a business interacts with a financial institution. She is showing a lot of leadership skills.’ Those sorts of things are very important,” Chong says.

Small credit unions, bigger challenges

Chong acknowledges that credit unions in smaller or remote communities may have difficulty finding board members with the technical skills required. Some, he says, have turned to outside board advisers who can offer this expertise without being voting members. “The one area that we have encouraged boards to think about is how they can bring on individuals who have experience in and understand treasury,” Chong says.

Some have suggested that regulators are pushing credit unions in the wrong direction. “Credit union boards have traditionally been comprised of directors democratically elected by the members, but they are facing increased regulatory pressure to model their board governance structures after those often seen in investor-owned banks,” Pohler wrote in her Filene report.

Neumann doesn’t see it that way. “I don’t think we should point our finger at the regulator as the evil force that is requiring this to happen. This is a natural outcome of existing complexity in the industry and in corporations as a whole. It’s requiring different types of governance for organizations, big or small.”

To ensure good governance at Meridian, the nominator has to be clear about the values the board is looking for in new directors, Farbridge says. Each year a third of its board is up for re-election so there is a constant process of attracting and recruiting potential
directors. Farbridge says the board reviews the activities of each director. “The incumbents are evaluated against the market as well and, interestingly, in the four years that I have been on the board, the nominating committee has never recommended all the incumbents for reappointment.”

As well, Meridian has set a 15-year term limit for directors, to ensure no one overstays their best-before date. This is a challenge identified by board members, academics and regulators. “Credit unions often struggle to balance two competing agendas: a need to refresh the skills and diversity of the board and a desire to reward and retain the service of long-tenured board members,” writes Matt Fullbrook, manager, Clarkson Centre for Board Effectiveness, Rotman School of Management at the University of Toronto. “Nearly every board has ‘dead wood’ board members everyone wishes they would just leave, and nobody’s willing to do or say anything for fear of being unkind,” Fullbrook writes in a Filene report Formalizing the Art of Board Composition.

“Building an excellent board is more art than science,” Fullbrook adds. “There is no magic combination of expertise, personality and demographics that will guarantee effective decisions or good governance.”

Chong notes that lengthy board stays is a problem the regulator is aware of and while it hasn’t set limits, it encourages credit unions to ensure a healthy turnover of board members.

Focus is shifting

Tanya Gracie, chair of Your Credit Union (12,100 members, $316 million assets) in Ottawa says that in her nine years as a director she has seen boards increase their focus on governance issues and strategic issues “as opposed to just being a second executive team.”

Gracie says that when this shift started a decade or so ago, many people were concerned “they were going to have to be super humans in terms of being able to understand legislation, HR, technology and so on. Whereas, I feel like the pendulum has started to settle, in that there is less anxiety about all of these skill sets being held in one person and more about looking at it as a collective, which I think is the right approach,” Gracie says.

In 2018 for the first time, Meridian turned to an outside recruiting agency to help it contact and identify potential board members and do initial screening. Farbridge said a first step in that process was a session with the nominating committee to ensure the recruiter understood the importance of its values.

At First West, the board keeps a close eye on gaps in director’s skills and discusses what skills are needed. The board keeps a master list of potential candidates and directors and senior executives are expected to keep their eyes open for possible directors and pass their contact information on for the list.

“The biggest thing is for individual directors and for the board overall to be committed to learning.” – Tanya Gracie

But Meridian also puts a strong emphasis on education and training. Farbridge says all current board members have professional designation from either the Institute for Corporate Directors or the Directors College.

Chong agrees those programs are excellent, adding that FICOM realizes smaller credit unions often can’t afford the fees, which can add up to more than$20,000 a person. Each year FICOM offers a free regulatory conference in Vancouver so directors can keep informed on hot topics and get a chance to meet their peers. In Ontario, Gracie is a director of the Directors Forum, an annual conference that performs much the same function. She also notes that Cusource Professional Development and Education, operated by the Canadian Credit Union Association, offers many cost-effective courses for directors so they can meet regulatory requirements. “Individual courses are important but group learning, where you can have discussions together, is really important,” Gracie says. “The biggest thing is for individual directors and for the board overall to be committed to learning.”

Fullbrook says his research shows that one of the biggest problems with credit union boards renewing themselves is a culture of civility and unwillingness to hurt anyone’s feelings by pointing out problems. This is one value, he suggests, that credit unions might do well to downplay. ◊