By Fred Johnson
Directors of federal credit unions need to have a solid understanding of their institution’s financial situation and take a fuller responsibility for their role in creating that financial situation, according to proposed rule §701.4 from the National Credit Union Administration.
The explanatory notes in the Federal Register for proposed Sec. 701.4(b) (see the legal language for the proposed rule here and at the end of this post) say directors would need to live up to a standard of care for members and their money, demonstrated by keeping themselves informed of material information that could affect their decisions.
The notes on this part of the proposed rule suggest that directors would be required to have or gain a working familiarity with basic finance and accounting within three months of joining the board. And, the notes state specifically that directors would have to understand the credit union’s balance sheet and income statement, and be able to ask substantive questions of management and auditors.
Part 701.4(a) of the proposed rule would limit how much federal credit unions can protect their directors from blame in the case of “aggravated breach of duty of care when a breach affects members’ rights and financial interests.” Paul Peterson of the NCUA Office of General Counsel told the Credit Union Times that the agency purposely made the exemption from indemnification "very narrow," so that it takes effect when the decisions involved impact the financial situation of credit union members and when a court of law determines there is negligence or misconduct.
As an association dedicated to developing current and future CU industry leaders, CUES has spent a lot of years thinking about director development, as well as the best ways—and what—directors need to learn to be effective.
Based on this experience and an evaluation of the proposed rule, the CUES Board submitted a comment on the proposed rule, stating that the board believes that the proposed standard, while admirable, needs to go further to establish guidelines for the skills required by the credit union director. Specifically, a credit union director cannot reasonably be expected to keep current on issues relevant to his/her decision making without ongoing education related to strategy, the economy, and best business practices.
In addition, the CUES Board believes CU board members need to do more than simply understand the balance sheet and income statement. They should also have a strong knowledge of the key ratios that reflect the credit union’s performance and understand 1) the strengths and weaknesses of each measurement and 2) how changes in one ratio affect others.
Of course, board evaluation and training will play a key role in helping directors establish and strengthen their skills and knowledge. However, the CUES Board also acknowledges that participating in training is not enough to ensure proficiency, and so we also recommend that each credit union director’s knowledge of financial literacy be assessed, with results recorded in a learning management system, such as the one used by CUES Director Education Center, free to CUES Director members.
For your reference, here is the legal language from both sections of the proposed rule:
Sec. 701.4(a) The management of each Federal credit union is vested in its board of directors. While a Federal credit union board of directors may delegate the execution of operational functions to Federal credit union personnel, the ultimate responsibility of each Federal credit union board of directors for that Federal credit union’s management is non-delegable.
Sec. 701.4(b) Carry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
Fred Johnson is president/CEO of CUES.
