U.S. Central Proposes Governance Changes Amidst Calls for More Corporate CEO Board Seats

LENEXA, Kansas – U.S. Central is proposing a change to its board structure that adds more corporate CEO seats while still giving non-corporate CU members a voice. Some of the largest corporates however want corporate CEOs to make up the entire board. They are also questioning whether some U.S. Central products are bringing the corporates’ corporate too close to natural person credit unions. Corporate credit union CEOs will be taking up this issue at the Association of Corporate Credit Union’s Annual meeting being held in Louisiana on Oct. 13-14. “U.S. Central is reaching its 30th birthday next year. From time to time it’s going to need to take a step back and look at the board organization. Our board really looked at this during our planning session this July,” said U.S. Central President/CEO Dan Kampen. Currently the board is made up of nine members elected by the membership. Five of the directors are Class A directors who are required to be either corporate credit union CEOs or COOs, or corporate credit union directors, typically CU CEOs, COOs or CFOs. Right now all five of the Class A seats are held by corporate credit union CEOs. They are First Carolina Corporate CU’s David W. Brehmer, Mid-Atlantic Corporate FCU’s Ed Fox, Iowa League Corporate Central CU’s Tom Kuehl, Minnesota Corporate FCU’s Lew Lambert, and Mid-States Corporate FCU’s David Preter. The four other seats are broken into three classes. There is one Class B director spot who must be a corporate credit union director. Currently it is Paul Mayotte, president/CEO of Jeanne D’Arc CU. Next are Class C directors who represent other members of U.S. Central, such as leagues, associations, CUSOs, Canadian corporate CUs, and others. Currently CUNA EVP and COO Pete Crear and Ohio CU System President/CEO Paul Mercer hold these seats. There is also one Class D director who must be an officer or manager of a natural person credit union and a Kansas resident. The current Class D director is Robert W. Thurman, CEO of Credit Union of America. U.S. Central directors serve for three-year terms and there are no term limits. Kampen said U.S. Central has come up with a proposal to revamp the board that calls for increasing it by two for a total of 11 directors. Under the proposal, seven board seats would be held by corporate credit union CEOs (the COO option is eliminated). Those seven seats will be broken down into three tiers – large, medium, small – based on the capital (Member Capital Shares and Paid-in Capital) those corporates have with U.S. Central. Three of the CEOs will come from the large tier, one each from the medium and small tiers, and there will be two at-large seats. The remaining four seats will be similar to what they are now, two seats for other non-corporate CU U.S. Central members and two corporate credit union directors (credit union CEOs) – the COO option again has been eliminated. Also, the requirement for one Kansas resident on the board will be eliminated. The proposal includes term limits of three consecutive three-year terms. However, after being off the board for two years, a director could return. This proposal does two obvious things: gives corporate credit union CEOs more seats and gives the corporates with the largest stakes in U.S. Central more seats. Some corporates have other ideas about how the board should be structured. The CEOs of the nation’s four largest corporates – WesCorp, Mid-States, Empire and Southwest – authored a paper that looked at U.S. Central’s role now and in the future as well as its board makeup. The paper was authored by the CEOs but written by an outside consultant. In the paper, the CEOs propose that U.S. Central move to a seven-person board consisting solely of corporate credit union CEOs. The seats would be divided into three asset classes, as well as one at-large director. Each asset group would elect two from their group to the board, and the at large director would be elected by all of the corporates. The paper also recommends that U.S. Central set term limits of three consecutive three-year terms. Empire Corporate President/CEO Joe Herbst credits U.S. Central for moving quickly on a possible board restructuring, but believes that making the board larger is a mistake. “It should be a smaller board that can react more quickly to the changing times,” he said. The problem with U.S. Central’s proposal is though it’s a bigger board, there’s still the same difference – four seats – between the corporate credit union CEO seats and the non-corporate CU seats, said Herbst. Herbst also believes since corporates make up the bulk of U.S. Central’s assets, they should occupy all the board seats. Herbst said there are other ways to bring in the views of the non-corporate CU members, such as committees and advisory board members. When corporates and the leagues were separated by NCUA, which also put CUNA at more of distance, the need for the non-corporate CU board seats was lessened said Herbst. Kampen however wants the board to reflect all segments of the membership. “Any board should be representative of their entire membership. We are the one institution where all the business components for the industry can have membership and come together. They range from CUNA, NAFCU, CUNA Mutual and the Leagues. Payment Systems for Credit Unions is a member, as are the corporates up in Canada,” said Kampen. Brehmer, who is on the board, didn’t want to say too much about U.S. Central’s specific proposal but believes all of U.S. Central’s members should be represented with corporates having the most representation. One area where Brehmer disagrees with the U.S. Central proposal and the paper by the four largest corporates is the enactment of term limits. “I just never liked term limits for anything except maybe the presidency. It’s basically saying that voters don’t have the ability to make a tough decision, and you can wind up kicking out very good, committed folks,” said Brehmer. There is a flip-side however. He said without term limits it’s harder to get everyone who is interested in U.S. Central governance a chance to serve. Brehmer said only in the last three years or so has there been substantially more interest in serving on the U.S. Central Board, while in years past there were a fair share of unopposed races. VolCorp President/CEO Bruce Fahnestock believes expanding the board to add more corporate seats does make sense. He feels however that it must be done so as to give the smaller corporates, who rely a lot on U.S. Central, a chance at representation. “You have the smaller corporates who may have 100% of their money in U.S. Central. Their 100% might not be close to a large corporate’s 50%, but they obviously are putting a lot of trust in U.S. Central and should have a voice,” he said. Keep Away From Natural Person CUs One clear message coming out of the paper authored by the four largest corporates was their desire to ensure U.S. Central does not market directly to natural person CUs. They say there have been some cracks in that philosophy recently. “Some of U.S. Central’s new products, such as the Transferable Certificate, feature Natural Person Credit Union investment dollars on its balance sheet – even though the product is sold through the corporate network. This breaks new ground and sets an unwanted precedent,” the report states. Fahnestock said he’s heard this before and it will probably never completely go away, but it’s unfounded. “You’ll always have people who think they’re going after natural person credit unions, but the bylaws don’t allow it and the leadership does not want that,” said Fahnestock. Kampen said U.S. Central knows exactly who it serves. “Our policies make sure we run all our products through for board approval and profitability requirements. I think where this issue comes in is areas where corporates are competing with each other. Our role has not changed. I don’t anticipate it changing. Our job is to aggregate at the national levels,” said Kampen. There is clearly product overlap in the network. U.S. Central offers online services via Corporate Network eCom that some corporates offer on their own. It’s also now starting to overlap with broker/dealer services. A number of corporates have signed on with U.S. Central’s ISI broker/dealer subsidiary, while other corporates have started their own broker/dealer subsidiaries. In the paper, the four corporates touched on their uneasiness of U.S. Central using capital from its entire membership to fund products only some corporates are using. “U.S. Central should utilize only the capital of those corporates that are interested in creating, developing or using a given product as opposed to using the capital provided by everyone to fund the activities of a few,” the paper stated. The four corporates also express concern about U.S. Central having too high of a profile. “Expanded marketing through trade show booths and presence at Natural Person Credit Union conferences indicates a move toward broader acceptance of U.S. Central as a direct product and service provider. U.S. Central should not use corporate capital to fund these and other activities to promote directly to natural person credit unions,” the paper stated. At CUNA’s recent Future Forum, U.S. Central sponsored a number of events. Kampen however says U.S. Central isn’t invisible, but not high profile. He said U.S. Central is very well known on The Street as a fairly large investment house. Because of its large settlement function in the credit union industry, the general CU community is of course aware of U.S. Central. But he maintains U.S. Central is not trying to reach out to natural person credit unions through high-profile efforts. The four corporates also took issue with a component of U.S. Central’s 2003-2005 business plan that calls for partnering with corporates to target a sales effort to the largest 300 credit unions to sell them U.S. Central’s payment and technology services. “This should be a component of the corporates’ strategic plan and not a goal for U.S. Central,” the paper stated. A U.S. Central spokesman said the message it is pushing is cooperation, not going direct to credit unions, and according to that same business plan U.S. Central and corporates have to “cooperate in new ways to jointly grow the Corporate Network’s overall share of credit union business.” U.S. Central also has to be aware of what’s happening with natural person CUs said Kampen. Case in point, the rate situation as it affects mortgages. “I think a major issue right now is tightening of liquidity and rising interest rates. There are a lot of mortgages on balance sheets that weren’t there before,” said Kampen. Those loans were booked in a low rate environment and as rates rise credit unions will need help reducing the risks to their balance sheets. Kampen said this is an issue corporates will be facing, thus U.S. Central has to be prepared for. [email protected]