NCUA's Focus On Corporate Governance
Download MP3Treichel: Hey everyone, this
is Mark Treichel with another
episode of With Flying Colors.
Today we have a topic that we've
referred to in a lot of past podcasts.
We've referred to in a lot of discussions
with credit unions and our clients.
And I'm excited again to be back
with Todd Miller and Steve Farr of
my team and also formerly of NCUA.
Guys, how you doing today?
Steve Farrar: Enjoying the fall.
Enjoying the fall.
Treichel: Very good.
Very good.
And just in case we have new listeners
today who are listening to With Flying
Colors for the 1st time, why don't you
give a little bit of your background?
Todd, we'll start with you.
Todd Miller: Okay I was
with NCUA for 34 years.
During that time, I can probably break
my career into 3 pieces, about a 3rd
of it as an examiner and a problem case
officer, a 3rd of it as a regional capital
market specialist, and a 3rd of it as a
director of special actions, supervising
problem case officers, capital market
specialist, regional lending specialist.
Very enjoyable career.
Most of it, even my time as a capital
market specialist spent a lot of it
dealing with troubled credit unions
at the heart of troubled credit
unions is corporate governance issues.
So today will be a fun
topic to talk about.
Treichel: Indeed.
And Steve your background.
Steve Farrar: Yeah, it's
more specific to this topic.
I'll address it in my
career was also in 2 parts.
The 1st, 15 years was out in the
field as a problem case officer.
And then the 2nd part was 15 years
in the central office in the field,
though, I got to work with troubled
credit unions and it'd be funny.
We'd come into the ones that.
Poor corporate governance is why they
ended up being in a problem case and
we did have Todd and I worked together
on that and we have a large number of
credit unions We worked with that were
extremely troubled that are turned
around and are still in existence today
And I think that you don't see a lot
of those turnarounds being quite as
successful today as they were then.
So it's even more important to not end
up in that situation that the ones that
we were able to turn around happen.
Then in the central office, I got to
be involved in a lot of the policy
development and our efforts where we would
be trying to provide guidance to credit
unions on the issues that were upcoming.
I think that'll be helpful as
we go through this subject.
Treichel: Very good.
Yeah.
And, we used to be able to help credit
unions before prompt corrective action
and utilizing whether it was 208
assistance to actually allow capital
to go negative when prompt corrective
action came around that, that challenged
the ability sometimes to work with
institutions a little bit more freely.
So while it was a rule that other
banking regulators had, and it made
sense theoretically to give it to
credit unions, it did take away.
Some of the flexibility, so well,
so corporate governance, we've been
seeing it a lot in exam reports.
We've been talking about it in
references to code for code 5
podcast, which we recently did.
But how would you guys
define corporate governance?
Why don't we start there?
Todd Miller: If you Google a
definition for corporate governance,
you'll get 720, 000 results.
So there's a lot of
variations on this definition.
I think what we'll use is the FDIC has
one that is more institution specific.
Maybe we'll use that one as a
starting point from the FDIC.
They say corporate governance is a
set of processes, custom policies and
laws affecting the way a corporation
is directed, administered, controlled,
how it manages risk, ensures
compliance with laws and regulations,
including consumer protection laws.
And regulations and the community
reinvestment act, not applicable to
credit unions, corporate governance
also includes the relationships
among the many stakeholders
involved and the corporations goals.
It's a comprehensive 1.
But basically, when you
summarize all these definitions
down and compare them all.
It's basically a structure of
rules, practices and processes.
You can actually distill that down
to corporate culture, which is
really what a board is responsible
for is that corporate culture.
As we both Steve and I alluded to poor
corporate governance, it often leads
to the failure of an organization.
I don't know how many times when
we go into a problem case and.
We'd sit down and lay out
the issues for the board.
The boards would just say,
I was totally unaware.
And along those lines, though, as
Steve said, we fixed a lot of them.
I think we should maybe throw a shout
out there to all these corporate
directors and credit union directors.
Those men and women, they
devote a lot of time.
Most of them are unpaid with a
few exceptions in a minor states.
And by and large, they're very
dedicated and they do a very good job
of keeping our system safe and sound.
And I was always surprised in trouble
credit unions when we tell credit unions.
Boards and they'd say, Hey, we
didn't know what was going on.
They didn't resign and walk away.
They always stayed there to help fix it.
And that always amazed me over my
career, their dedication to restore
their institution to good health.
Treichel: Great points there, Steve, any
thoughts on what Todd had to stay there?
Steve Farrar: Yeah, I tried to what's the
simplest way to break down what you're
trying to do with corporate governance?
And it's I came up with, being proactive,
smarter risk taking and 1 that I is near
and dear to my heart is ethical standards.
Is Todd and I can tell you that some
of the ones that where the board
members probably weren't part of the
solution were places we went into
with really poor ethical standards.
That was always the most frustrating
1, because it's greed takes hold in,
in, in some of these cases, and it can
make people do really poor decisions.
Treichel: Great points
by all of you there.
I'm going to, I'm going to
highlight a couple things.
The shout out to those who serve
great point Todd with the fact
that that people don't walk away.
A, the fact that they're there to
begin with, but B, that when it
gets tough they circle the wagons
and and strive to, to make it work.
On the ethical standards side I can
think of cases where I was involved and
I can think of client situations where,
for example, there were write offs that
had to happen whether it was accounting
issues or conversion issues and What
happens with NCUA when there's a write
off like that, they're in there is, NCUA
thinks, is there an ethical issue, right?
Were these write offs legitimate
write offs and errors or did
somebody benefit from it?
And we've seen that over the last couple
of years, we've seen that, during our
career where there was fraud or there
was just situations because of the,
Quality of the books and records.
There was the opportunity for fraud
and that can get into a hyper focused
whether or not it was fraud or not.
The fact that there's a write off gets
into a really focused on what happened
there were their ethical challenges, etc.
And then Todd, you mentioned in
that definition from the FDIC side
Community Reinvestment Act, and
it doesn't apply to credit unions.
There are some rumblings from
NCUA's Chairman Todd Harper, who
was asking on LinkedIn if CRA should
be expanded for credit unions.
That triggered a letter from the
Defense Council BCUC Trade Association
saying, no, there shouldn't be.
I actually, it was the first
time I commented on a post by an
NCUA board member since I left.
I said, no, you don't need a Community
Reinvestment Act because we you
have the ability through the modest
means requirement of the Federal
Credit Union Act to do whatever you
need regulatory and guidance wise.
So I've got a podcast queued
up for that topic coming out.
And so that's just a heads up to that.
But hopefully that doesn't get
any legs because it would just be
another burden for credit unions.
Any comments relative to my
response to where we're at on
the definition and those things.
Todd Miller: No, I think
we'll expand on this as we go.
Treichel: You got it.
You got it.
Maybe
Todd Miller: a good place to start here
now is maybe let people know where are
some resources for partying director.
Say you're a new director, you're
a board and you've done a self
assessment and you're trying
to figure out, our way forward.
How can we.
Improve.
There are various resources out there.
In many cases, NCOA might not be your best
one, but NCOA does have some resources.
First off, they actually lay out
the director's responsibility
and the rules and regulations.
It's in 701.
4 and just by regulations, Directors are
supposed to have the general direction
and control of the credit union.
They may delegate a lot
of operation functions.
They let management implement a
lot of the policies, but ultimate
responsibility for each credit union's
board is that they're in charge, they
have direction, they have control
of the credit union and that general
direction and control in the regulation.
And the regulation says
that's non delegatable.
They don't get to foster
that off on their management.
So in the regulation, it lays out some
things that expects that parties carry out
their duties as a director in good faith.
They expect them to be fair and impartial
without discrimination to any 1 group of
members over another group of members.
There's an expectation for some board
basic financial training and regulation.
And then there's The regulation expects
them to direct the operations of the
credit union in conformity with the law.
The act, their bylaws, this regulation,
and they have this catch all phrase in
there, sound business practices, which
they don't really define anywhere.
So that's a somewhat interesting piece.
When you go beyond that.
Actually has very little specific
resources for credit unions.
They have some stuff in the
exam guide that talks about a
director's responsibilities and
board and committee minutes.
They have a flag in their exam guide that.
There's an upcoming and under development
chapter for directors at one time,
and I used to publish a handbook for
directors or board members, little
blue handbook that doesn't exist.
It's not on their website anymore.
They probably haven't updated it
since it was done a long time ago.
But other than that, NCOA doesn't
have a lot of specific resources
specific to board governance.
They do for some corporate credit unions.
If you dig through some old corporate
letters but in general, you have to
infer what NCOA's expectation for
board members are from that regulation.
And from their bodies and
letters to credit unions,
which covers specific topics.
There's not really one out there that
talks about general door governance.
So what I would suggest for credit
unions is you go look at the
FDIC and the other regulators.
The FDIC does have a
pocket guide for directors.
It's six, seven pages, maybe a
little bit shorter, depending on
how big of a font you make your
Internet page when you print it out.
They keep it updated.
It's done very well.
Back in 2016, they did
a supervisory insight.
So they did a really longer commentary
on that supervisory guide or on
that pocket guide for directors.
It's actually really good.
It's not a very long read
either, only 10, 15 pages.
And then something unusual, and
we'll let Steve talk about this
because he's an expert on it.
The FDIC actually has proposed guidance.
I don't know if the comment period
is closed on it or not on corporate
governance for larger institutions,
so as you start getting more complex,
if you look through all the corporate
governance literature, it will always
say your systems should be commensurate
with your size and complexity.
You don't need to be perfect thing in
a small credit union, but as you get
larger and more complex the duties of
your directors become more involved
and those internal controls and those.
Risk management structures
and that strategic planning.
It all has to change as you grow in
size, but this proposed guidance that the
FDIC is issued for larger institutions.
It's a good guidance to give you an idea
of where you might want to be as you grow
larger and expand and size and complexity.
Steve Farrar: One other tool that
I mentioned that came across as
we were doing research on this
that FDIC has out there is.
They have a youtube video
that's on corporate governance.
So you just go into youtube and type fdic
corporate governance They'll bring it up.
It's a good introduction I would say
for a board member in a half hour brings
them through You know a an overview Of
corporate governance and it might be
something that somebody after listening to
this podcast might want to look at Because
they give you a half hour some more tools.
So you want to take if you're
going to You Discuss it with
your board members, but one more
resource that was unique out there
Treichel: and I'll put
links to all of those.
Sadly, most of the links will be
to FDIC as Todd kind of summarize.
There's not a lot out there from N.
C.
U.
A.
And by the way, Steve, I did see
you sent me that YouTube video.
I've converted that into a podcast for the
sister podcast, the credit union guidance,
and I put FDIC guidance on there as well.
I downloaded that turn it into an MP3
and it'll come out I think next month on
that, on our other podcast credit union
regulatory guidance in the voice of NC
with an intro from Samantha shares and
in the voice of of those folks on NCOA.
So if someone likes audio book
style, that'll be out there soon.
It's interesting with it, it
may be not interesting, might
not be the best word, but it's.
With the frequency that we're seeing
corporate governance referred to in our
conversations with credit unions that
they're having with NCUA, for there to
be this big blind spot in guidance from
NCUA, because, as we've talked about, if
you have a problem in topic A, B, C, D, E,
F, Z, it seems to be linked to corporate
governance from NCUA these days, and
it it's an area where hopefully they'll
catch up with the FDIC and have have some
guidance coming out relative to that,
but that's more of an editorial comment.
As far as the best document that's out,
there seems to be this FDIC proposed
rule, which I think if I remember, the
comments are due to FDIC by December.
So they're still taking comments on that.
Steve Farrar: It was probably
December of last year.
'cause it came out one year
ago in October of 2013.
So I think your chancellor
comment is well passed on that.
Very good.
They still haven't approved it yet,
so they haven't moved forward on it.
And, I think, that's being affected
by, things that not necessarily
related to the policy itself.
Treichel: Got it.
Very good.
And Steve, with that, you you've
read this guidance from FDIC.
I think much more than Todd and I have.
We've made reference to it.
But why don't you give us our
take on the pros of that guidance
from FDIC and what credit unions
might be able to take from it?
Steve Farrar: Yeah, I get Todd accuses me
of carrying this around in my back pocket
because it's a, I refer to it pretty
constantly and while it is just proposed.
Guidance for credit unions
over 10 billion or more.
It is a great document.
It outlines and we'll go through the
outline all the parts of of a good.
Corporate management and explains,
we talked about that it's important
because of failures, but they note in
this proposed rule that this failure of
signature bank found that the root cause
of failure was poor management without
adequate risk management practices and
controls and the same as silicone bank.
They're big losses, they
directly attributed to this
poor corporate governance.
I'll just go through and hit the, kind
of the outline of the of the rule under
corporate governance, I'd like that
it starts with the board of directors,
general obligations, as Todd talked
about, that the, the board is ultimately
responsible for complying with, as Todd
pointed out, governing laws, And here's an
issue that we've discussed about it about
you have to look at the board composition
and the, it is important as your credit
union is a bigger and, maybe your field
of membership becomes more broad that
the board is looking at what kind of
skills are they looking for and need.
To have a well rounded board with the
right professional knowledge to be able
to work through all of these issues.
And I think that's an issue
that's passed on a lot.
I'll ask if you guys have, any
comments on, the importance
of that board composition.
Treichel: I have some thoughts, but Todd,
let's hear what, if you have any first, I
Steve Farrar: have
Todd Miller: a good story about that.
It's interesting.
You mentioned signature bank, but if you
look at postmortems, there are almost
all for governance and board failures to,
but in board composition, it's important
that you have diversity of skills on
there and diversity of backgrounds.
I had a troubled credit
union one time in California.
But every director was a retired teacher
in their 60s or 70s, and you start
looking at their services and it's just,
there's, that's another thing you find
in trouble cardians is you're generally
a breakdown and services and you start
mentioning things to the board that.
Really, the way you guys are offering
services to your members, it doesn't
fit your membership demographic.
Basically, all the policies fees,
everything were skewed to retired people
and it never hit home for the board.
They said that wasn't applicable to us.
They yelled at me when I told him
that, but we come back 3 months
later, and the director just says,
hey, thanks for bringing it up.
He said, I asked my open accounts for
all my grandkids and they all closed
them because our service was terrible.
And it took that to get the
directors to get off their stools.
But you do just need to be
aware of that diversity amongst
your directors is a strength.
You can create blind spots in your board.
If everyone is from that same exact
demographic and in background.
So those skills are necessary, but.
Very demographics and different
points of view are important
to be on that board as well.
Treichel: That's a great comment.
That reminds me of one of my
favorite books, The Wisdom of Crowds,
which I've referred to here a lot.
But you have those blind spots if you
don't have the diversity of thought.
Todd, you said the diversity of skills.
And then, of course, just the diversity
for different minority groups.
And I'll take this as an opportunity
to refer to NCUA's proposed rule on
succession planning, which requires Many
things which will likely require many
things as it relates to key positions
and succession planning, including
diversity, they actually tiptoe into
the diversity and they include the board
as key positions, which makes sense.
And now, of course, we wrote a comment
letter on that, and all 3 of us
believe that guidance would be more
appropriate than regulations, but.
Be that as it may, I think by the end
of the year, NCOA will probably have
that rule in place, and credit unions
should should watch that and look to
see what the diversity requirements are
there, and it does make sense to have a
diverse board in all of those areas so
that you don't have those blind spots.
Any other thoughts on that, or do we want
to jump to the next major category of this
Steve Farrar: proposed guidance?
I'll go ahead and move us forward.
The next one is a big area here.
It talks about and lays out that
has it sees in terms of corporate
governance, the duties of the board.
And number one is great set an appropriate
tone, that corporate culture is a big deal
I mean we taught and we've talked about
the problems and the ones that failed It
did start at the top and resonated through
so Yeah, we all probably have things
that we could mention real quickly about
that setting appropriate tone you know
more and how did any of our Places change
from the inappropriate tone at the top
to correct, corrected corporate culture
Treichel: thoughts on what
Steve had to say there.
Todd Miller: That tone from the top,
it, it starts from the directors.
A lot of times it gets heavily
influenced by executive management.
I don't want to take Steve's thunder
away that, the biggest responsibility
of a board is to pick their management
team, their CEO And they need to
keep that whole culture in mind
and not pick a CEO that's going to
dominate and determine that culture.
It needs to come from the board.
And this is 1 of those things
where the board is independent.
They still have to work very cooperatively
with their management team, but
they got to keep that independence.
And it's important that board set the
tone and a lot of boards just, yeah.
Some are really good at it, and some
just do it informally, and they don't
even realize that they're doing it.
And that's when you get those breakdowns.
Treichel: Now that's a great point.
I think about, my time at
NCUA and different boards
that set the tone differently.
And of course, I had the ability
as executive director or deputy
executive director to set my own
tone in my conversations with staff.
And I look back to when I was
deputy executive director.
And versus, 15, 20 years later when I
was the executive director and, just
the importance of when you meet people
on the elevator and instilling in them
the confidence of what's going on.
And I might have been having a
bad day on the 7th floor at N.
C.
U.
A.
But it was important for that to stay
on the 7th floor and for the discussions
with staff to be focused and be positive
and be ethically driven, which we're
going to get to, et cetera, et cetera.
But, yeah, the tone from the top.
It's easy to lose sight of that as
you're busy getting things done, but it
really needs to be ever present in the
mind of the board and the mind of the
executives and the mind of the tellers
as they're dealing, because it trickles
down while they're not at the top.
It trickles from the top to the middle,
to the front line, and to the members,
which is why it's so important.
Steve Farrar: Yeah, and 1 other
way that NCOA can dramatically
change the tone that's at the
top is through conservatorship.
I was involved in a large crediting in New
York that NCOA conserved and it was really
because of poor corporate governance and
that we brought in a huge new management
team and that was our number 1 goal is
to, change the tone that the employees
are getting from the top, that it was
not going to be, the business was not
going to be done as it had been before.
All right, and then the other important
one moving on is approve a strategic
plan for the covered institution.
That's the strategic plan is if
you start working with us 1st
thing, 1 of the 1st things we'll
ask for is your strategic plan.
So we want to know where you think
you're going and what tool you're going
to use to hold management accountable.
It has some points in here for strategic
PAN, articulate an overall mission
statement and strategic objectives
to contain a comprehensive assessment
of risks that currently affect the
covered institution, explain how the
covered institution will update as
necessary, its risk management program,
and explain how the covered program
will review, update, And approve
the strategic plan as necessary.
So that's just a, that's just a
drop in the bucket on strategic
plan which is, could be a whole
topic for a whole separate podcast.
But just to how that affects
corporate governance.
I'll throw that out there.
I can
Todd Miller: break that
down into 3 questions.
Where are we now?
Where do we want to be?
How do we get there?
I always thought it was interesting in
really high performing credit unions, you
could go talk to the little tellers in
the lobby and the loan officers and they
had a pretty good idea exactly what was in
that strategic plan and their roles in it.
And it's just something you notice in
high performing credit unions, that whole.
Culture and that whole plan is
communicated all the way down from
the board to management to staff,
executing it on a day to day basis.
You just see that over and
high performing organizations
Treichel: and I can think of some
client conversations we've had where was
critical of their strategic plan and what.
What seemed to have been driving
it in most instances was.
The strategic plan said,
we're going to do a, B and C.
And then what they did was be.
X and Y, and there was not a lot
of discussion about that pivot.
So the credit union had
what they perceived to be.
A good opportunity that wasn't in the
strategic plan, and it may, which may have
may or may not have been the case, but
there was not a lot of indications in the
credit unions records that was something
that was fully vetted with the board.
And it was, there wasn't an
addendum to the strategic plan.
There wasn't a big discussion in the
board minutes, et cetera, which goes
back to, The board being ultimately
responsible, and we've seen some
situations where pivots were made from
the strategic plan that weren't properly.
At least documented in, in.
In making sure that it was clear
that the board wanted to go in that
direction and the board saying it
after the fact doesn't cut muster
within because they view that as.
As cleaning up the record, as
opposed to establishing a record,
Steve Farrar: we have experienced
some disagreements between credit
unions and NC way as to what kind
of a, how long of an outlook.
So the strategic plan have most of
our research has come up with 3 to 5
years is the general recommendation
on the length of time it should
be doing your strategic plan.
Treichel: That's a great point.
And if you look at how NCUA does it,
it's a five year strategic plan, which
may be updated sooner than that if
there's a change in the presidency
of the United States, because that
means there's a change At the board
level, but they also then do an
annual plan that pivots a little bit.
So here's the big strategic plan,
and then annually they'll revisit it.
And I always thought that was a
pretty good way for nnc a to do it.
And if a credit union has a three to
five year strategic plan, they should
be looking at it obviously annually when
they're doing their budget, et cetera.
Maybe tweak it a little bit,
but it doesn't necessarily have
to go back to that bigger plan.
Todd Miller: I had one credit union,
a very troubled one that became a very
high performer under new management.
They actually had a policy on these
kind of one off things like this.
These new opportunities
come up and it dictated.
Here's the business case that we're going
to make and present to the board when
these opportunities come up that we didn't
think about in their strategic plan.
And it was a whole risk
assessment and a formal.
It was a formal listing of here's what
you bring to the board if we're going
to do something that's outside our
plan, because we have a new opportunity
that comes up, the world changes,
business condition changes, but they
had a formal process to deal with those
one offs and get them before the board
and to make modifications as business
opportunities presented themselves.
Treichel: I like that.
I like that.
Steve Farrar: What's next?
Steve 1 that we probably don't need
to spend much time on because it's
pretty self expanded approved policies.
The board is responsible for
establishing and improving the
policies that govern and guide the
operations of the covered institution.
In accordance with its risk profile
and as required by law and regulation.
I think that topic is
Pretty self explanatory.
We all have experience with
good policy And lackadaisical
policies for lack of a better word
Treichel: You know on that topic ncua
Here's a kudos to ncua which which I
don't always give out As frequently
as saying something's missing like
not having good corporate governance
You They do have a page that lists
what policies are recommended, what
policies are required with references
to to those citations, et cetera.
And that was one of the over the last
year and a half, one of the better things
I saw into a put out on their website.
I think I turned it into a PDF and
I'll put that in the, a link to
that in the show notes as well.
Todd Miller: It also gives,
does a good job of saying how
often boards should review 'em.
General guidance to boards is review as
necessary, but in most of the financial
regulators, there's various policies that
are required to be reviewed annually.
Others not so much in that resource
page that you mentioned, it does
actually list out which ones are
required by law to be reviewed annually.
So good resource for your board calendar.
Treichel: Very good.
Very good.
Steve Farrar: All
Treichel: right,
Steve Farrar: next
Treichel: up number
Steve Farrar: 4, establish
a code of ethics.
The board should establish a written
code of ethics for a covered institution,
covering directors, management
employees, and then, addressing conflicts
of interest, self dealing how to
report illegal and unethical prepare
behavior, and so employees know who
it is that they would need to go to.
Having just, a platform there.
So employees know that there is a
program there and that it's found
to be important by both the board
of directors and senior management
Treichel: thought.
Steve Farrar: Any
Treichel: thoughts on that?
Todd Miller: It's just super important.
A lot of the bonding companies
actually require you have FARD.
Fraud policies and ethics policies
for employees and directors.
It's something that
every organization needs.
Now you just need that
enforcement mechanism.
Cause like Steve said, people that
operate outside those bounds of ethics
create problems more often than not.
Treichel: As we're talking
through this one and how to
report it, a light bulb went on.
I think we all had this
situation when we were.
Examiners where, we did our loan sample
and we said, we want these 25 loans.
And then when the stack came, there
weren't 25, there were 27, right?
And there were 2 other loans that
they thought we should look at.
You recall any any situations there?
And of course, there's
a direct link to ethics.
Probably if they're saying you
might want to look at these, there
might be some ethical situations.
It could have been a board
member that got favoritism.
It could have been a staff member.
Or it could have been in
some instances fraud, right?
Todd Miller: Yeah, I had a
similar thing happen in Ukraine.
And it's so they were missing a lot
of loans on their commercial loan
appraisals, they were missing appraisals.
And, an employee just comes in
and puts a junk drive on our desk.
It's you might want to see this and
it's appraisals for all these properties
that they tell us they don't have.
And of course they're significantly
valued under the loan balance.
Decorating ended up in conservatorship.
Treichel: Wonderful.
Yeah, those conservative, those
conservatorship war stories
tend to pop back into your mind.
In good and bad ways as we think back
on the history of our time at NCUA.
Very good.
What's what's up next, Steve?
Steve Farrar: Provide active
oversight of management.
The board should hold management
accountable for adhering the strategic
plan and approved policies and
procedures to ensure the covered
institution's compliance with safe
and sound banking practices and all
applicable laws and regulations.
Now, this is the one that, we've been
seeing a bit as comments on unhappiness
with the evaluation process that the
board's doing with senior management.
The, you need to have that strategic plan
so that they know what you're holding
their feet to, but, you need to hold
professional management accountable and
that strategic plan and those directions
that you provide, allow you to do that.
But you need to make this process.
Appropriately rigorous.
Treichel: Appropriately rigorous.
I like that.
Todd, any thoughts on this?
Todd Miller: It's a huge one.
So many times we get into
trouble with credit unions.
Directors need to be independent,
but they still need to work
cooperatively with management.
And often what is they let management
take over that supervision of
management isn't there that.
Appraisal of management isn't there.
Management reporting leaves
the board in the dark.
So the crediting board hasn't
set up appropriate controls.
It's especially issues.
It seems like in smaller rural areas
where rather than the board hiring
the CEO, you have the CEO recording.
Recruiting all the directors and
there's nothing wrong with that.
But sometimes that whole relationship
gets skewed and that's quite
often can lead to problems.
So I think probably the most important
role of board has is hiring appropriate
management to carry out the day to
day operations of the credit union.
And.
Supervise them appropriately.
And that means a very rigorous,
as Steve said, appraisal process.
And, this is probably a topic for a
separate podcast, but it requires a
reporting process where management
is demonstrating compliance with all
those board directives and policies.
Treichel: Great point.
And it also reminds me of when it
goes awry, sometimes you'll see NCUA
ask for an organizational review.
We recently.
At a podcast on what to do if NCOA
requires an organizational review and
I believe that might have actually been
this week, this past Monday's episode
but that can be something when NCOA is
not comfortable with how involved the
board is, how they're appraising staff,
et cetera, that you might get that
dropped into your examination report.
Steve Farrar: Which is actually, so
we've already covered the next topic
which is good, because it's selecting a
point that qualified executive officers.
And so we've got that
1 covered quite well.
And we understand the importance of that.
Very good next on that is provide ongoing
training to directors and I think that's,
isn't is important because things.
Things move pretty fast.
So it's, it is a challenge
because, people are now developing,
enterprise risk management things.
And it's what is your board properly,
have enough background to where they could
evaluate and be a participant in that.
So those types of issues are coming up.
Todd Miller: I think an important piece
of that too is good boards are going to
do a self assessment of where they're
at and figure out that training plan.
Now, let's go back to something we
said in the beginning and regulation
actually has a bullet point on
board training in the regulation.
It's directed for new board members,
but the ongoing training is super
important in this day and age
Treichel: and there's a Podcast
from a couple of years ago where
I interviewed the CEO of Quantum
Governance, who does a lot of training
for America's credit unions and other
groups, other trade associations.
And I've seen their work at some credit
unions and they're very passionate
about this whole governance topic.
So that if you're a board looking to do
some of that training and you're looking
for somebody who might be able to do it.
You might want to listen to that podcast.
See if they're a good fit for you.
All right, Steve, what's next?
Steve Farrar: Self assessment, the board
should conduct an annual self assessment,
evaluating its effectiveness and meeting
the standards of the guidelines that
are in their risk management program.
That's pretty
Treichel: self explanatory.
Todd, any thoughts to add on that?
Todd Miller: I already mentioned it, and I
didn't mean to take Steve's thunder away.
I don't have the document open.
It was just a comment.
I threw out there just in
line with the board training.
But, yes, it is important
and high performing boards
Steve Farrar: Do that.
Treichel: Very good
Steve Farrar: and the last item
under board responsibilities and
this is a big 1 is a compensation
and performance management programs.
Compensation is a big issue and how that's
structured one thing that has to always
be taken in place is your compensation
structure resulting in changing your
risk profile because it's focused too
much on growth or it's focused too much
on a growth in a particular type of loan
and so in trying to meet that part of
what's put in the strategic plan, is
that causing you to, To deviate from your
risk appetite that you think you have.
The structure of your compensation
program is something that
needs to be done with care.
Great point, God, any thoughts on that?
1?
Todd Miller: Part of that is
also your performance management.
So it's not only important for
the board to be doing that.
Performance appraisal that CEO,
it's important that they have a
good system in place for that.
So that occurs throughout
the organization.
Does have specific
regulations on compensation.
Lending people specifically.
Don't get incentives to increase risk.
It doesn't come up very often and see
why it does have a regulation buried away
that if you're a troubled credit, you
can't be changing your golden parachutes.
Compensation is a difficult thing
for directors because you want to pay
your executives fairly to retain good
talent, but you also don't want to get.
To the point where you're overcompensating
them and being overly generous either.
So it's a big challenge for directors.
A lot of them use outside consultants
to guide them along that process.
If they don't have directors with
specific experience in that area,
because it's very important.
It's part of that corporate culture.
Treichel: Great point and as you're
walking through that, it reminds
me of a succession planning.
Rule the presentations they've
made the comments they've made
relative to that where they're
talking about looking forward.
You're you may see that
smaller institutions.
Aren't compensating their staff enough
for what actually needs to happen.
How however, the pivot from that
is attacking their ability to
continue to utilize appropriate.
In my opinion, what are
appropriate fee structures.
So while the same time they're saying
you need to do succession planning
and look at compensation and make sure
they're compensated enough they're
putting these smaller institutions
that are already having difficulty
making a profit in harm's way by.
Making it more challenging to have some
levels of fees which I think is going to
lead to increased mergers in that arena.
But I digress.
All right.
Wow.
Anything else?
Anything we missed here?
Relative the obvious.
There's a lot we missed because
like we said, you could take a month
long class on corporate governance,
but any, anything else we want to
highlight here today, gentlemen?
Steve Farrar: I think 1 thing that
we're not going to go into on here
that is in this proposed rule of it
has a lot of focus on the role of
audit and internal audit, which for
us, I think makes it appropriate for a
separate podcast subject, but you can't.
That is a tool that the board of
directors has their ability to make
sure that in helping hold professional
management accountable, provided that
they appropriately control that function.
And you said, but
Treichel: I think you meant
FDIC, the proposed rule.
Yeah.
Yeah.
Okay.
Or at least I thought I heard that.
And, as you mentioned that 1
thing that popped into my head
was the 3 lines of defense.
As it relates to this any thoughts on
the three lines of defense relative
to what we've seen where NCOA has
been dealing with, internal audit
and enterprise risk management in
some of the bigger institutions
that, that we've been associated
with or any general thoughts on that.
Steve Farrar: Go through
Treichel: how you're defining
Steve Farrar: the three
lines of defense there, Mark.
Treichel: So the frontline units
who are responsible for managing
risk in their business areas.
Independent risk management, which would
be overseeing risk taking activities
across the credit union and then
internal audit, which ensures compliance
with the risk management program.
Todd Miller: Okay.
Outside it's interesting.
This goes back to guidance.
I don't know what year it was.
Miss mass was a chairman.
They wrote a letter to credit unions
isn't required this whole 2nd line
of defense chief risk officer that
actually is under the whole realm
of enterprise risk management.
Just by definition we're seeing
that more and they require it
of ones type credit unions.
It's requirement for
corporate credit unions.
There is a letter to corporate credit
unions about it, but it's not required
for many credit unions that said, when
I was a director of special actions,
I got a troubled credit union over
a billion dollars assigned to me.
They weren't leaving me until they
were down the road to implementing an
enterprise risk management program.
I've just seen real world successes
through the last recession, the natural
person credit unions in the Sand States
and California and stuff, they performed
admirably through that last recession.
I know these enterprise risk management
systems are extremely effective.
There are probably a topic for
another podcast, but like me,
there was never guidance that
said accrediting had to do it.
I just as a supervisor said, you're
going to do it because that's where
sound business practice takes you.
But we're seeing that from
other examiners at to even.
Though there's not a requirement for
it in these credeins outside of WANs
and outside the corporate credeins, we
are seeing examiners put doors in place
at much, much smaller organizations
that says, this is what you need.
And realistically, for directors, you
start crossing that billion dollar path,
you need to go down that road to ERM.
It's going to become a business necessity.
And you will have blind spots in your
organization and your performance will
suffer if you don't put those types
of risk management tools in place.
That's one person's opinion.
Treichel: Great.
I would agree with that.
That's a great summary and a great point.
All right, guys.
As always this is, this was fun.
It brought up some past war stories.
I think there's a lot to unpack here.
And I think we referred to other
subcategories that we might put
on our list for future podcasts.
Thanks so much for your time today, guys.
Take care.
And listeners, I want to thank
you for listening as always.
I hope you'll listen again soon.
This is Mark Treichel signing
off with Flying ColorS.
