Why and How to Improve the Board-Supervisory Committee Dynamic

What does it mean to have a healthy relationship or dynamic between the board and the supervisory committee? We suppose that’s probably as unique as your organization and as individual as your members. That means that there’s no one “right” answer to this.

Kevin and I were recently facilitating a two-day governance workshop and this issue came up. We didn’t end up with a great deal of time to talk it through (as we had a litany of items to talk about), but it did get us to thinking about this as an issue.

The workshop audience was made up of board members. A starting question we asked the 35 or so attendees was: “Do you allow your supervisory committee members to attend the board meetings?” About three-quarters of the attendees raised their hands and indicated a “yes” that they do allow this. We more informally followed up with “Do you encourage it, or simply allow it?” (with a bit of a wry smile). There was a more general murmur and a bit of quiet laughter that made it clear that it was probably more on the “simply allow” side of things.

We’ve heard from plenty of supervisory committee members over the years who have complained of being shut out, refused access. We don’t see any general rule of thumb as to what is the most common practice in our industry. It seems to vary widely from open invitation, to requiring a formal, written request to attend a month or more in advance, to occasional allowance and … out-and-out refusal.

This begs the question to boards: Why would you not allow your supervisory committee members to attend a board meeting?

In our minds, it seems to be something that should be common and a best practice. That said, there are certainly times that the board would need to have board-only discussions. Having, and encouraging, regular supervisory committee member attendance at board meetings fosters a culture of openness and transparency, which is truly valuable.

The supervisory committee members would learn more about the credit union and how things are going from sitting in. On the flip side, refusing access feels like there’s something to hide. (If you’re so innocent, why are you acting so guilty?) And after all, aren’t you all working for the same organization? Shouldn’t you be able to assume that everyone has the same goal of success for the credit union?

And it’s not insignificant to note that the National Credit Union Administration’s regulations (part 715 (b)) for federally chartered credit unions indicate that the supervisory committee’s role includes overseeing the board, to ensure that, “policies and control procedures are sufficient to safeguard against, error, conflict of interest, self-dealing and fraud.”

We have a “gut” response to this. It goes something like this: The supervisory committee is an audit function. Nobody likes the word “audit.” Many people associate the supervisory committee, along with the internal and external audit functions that it oversees, with people poking around to find things that are going wrong, to nitpick, or to point out flaws, in order to bring shame. Nobody likes that sort of thing. So, committees that want to attend board meetings may be treated like nosey-Nellies and refused entry. That’s unfortunate. In reality, the audit function guided by the supervisory committee is essential to provide information and feedback on the reliability of the financial statements and the strength of the internal controls. Without this audit function, the risk to the members’ assets would become astonishingly high.

Or perhaps the board members have their own group dynamic, one that is shut down by the appearance of the relative strangers of the supervisory committee. We get that. That sounds realistic. But our counter-argument is that the board and the committee should know each other well enough to avoid this as an issue. They shouldn’t be relative strangers. This you can get at in a variety of ways, and you should. It doesn’t just have to happen through attendance at board meetings.

It is significant and important that the board and supervisory committee have a good working relationship and that they be able to communicate openly and transparently … for the good of the credit union and its health. You can get at that in dozens of ways, but get at it you should. Fostering trust and transparency can only be good.

Others may feel that the “audit” function should be totally separate and independent from the board. Therefore, distance is essential. While there could be value in this, the reality is that the board appoints the supervisory committee in all federal credit unions and most state credit unions. That alone could be seen as diminishing the independence of this committee. Yet, the system still works. Why? The independence and separateness are essential for the outside audit firm, but not for the supervisory committee. Auditors, especially those performing an “opinion” audit, must be independent. This is enough.

If the supervisory committee is invited to the board meeting, what is their role? It is whatever the board decides it should be. The supervisory committee member or members who come to the meeting are invited guests. They should at a minimum observe the quality of decisions being made and whether any endanger the credit union’s assets or controls. This falls under that legal catch phrase of “safety and soundness.” If the board would like the supervisory committee to be active, they define that that activity would be. However, openness and transparency are essential to the audit process; they are essential to the democratic process of credit union governance; and they are simply good for the ethical health of the credit union.

Ways to Improve the Board-Supervisory Committee Dynamic
(We know everyone is busy, but that’s not a good excuse.)

Seems obvious but spend some time together.

1. Make sure the directors have bios for the committee members and vice versa. (Make sure everyone has read them! This happens on your own time.
2. Have an informal dinner a couple of times a year. Nothing fancy. Like pizza in the board room, set up so people can stand, move around and mingle.
3. Hold an annual board retreat that includes the supervisory committee for at least part of the program. Active team-building should be happening anyway. You’re doing that, right?
4. Invite board and committee members to participate in community volunteer activities along with staff. (Or have some just for the board and committee!)
5. Schedule the board and committee meetings on the same day and have a half hour overlap. Use that time for professional development for both groups.
6. The board chair can schedule lunch with the supervisory committee as a group or individually once a year.
7. Encourage the committee to attend the annual strategic planning event.

Make sure there is some kind of structured professional dialog between the two groups. There can/should be questions going back and forth. If you don’t feel comfortable doing that right now, then you’re not comfortable enough doing your respective jobs. Require it for a couple of months, even if it feels artificial for now. Soon you’ll get used to the idea and it won’t feel like anyone is challenging anyone else, rather just fostering dialogue. These are steps that establish a new culture for both groups.

Reach out regularly – ask if there are any questions. Simply asking and encouraging can go a long way to creating a culture of open dialogue and transparency.

Tim Harrington, CPA, is president and Kevin Smith is publisher at TEAM Resources, in Tucson, Ariz.

Apply It to Your Boardroom

1. What is the current status of the relationship between the board and supervisory committee?
2. Which of the seven steps listed in this article would be helpful to your credit union’s governance?