White Hat Smudges Can Provide Valuable Lessons

Credit unions love to talk about their “white hat” image. Although that white hat occasionally gets a smudge on it, credit unions would rather not talk about that. Maybe they should. If for no other reason than to be tuned in to avoiding future smudges. A credit union board of directors is responsible for supervising only one employee, namely, the president and CEO of the credit union. Sometimes, that can be a bigger challenge than managing dozens of people who have a lot less responsibility and opportunity for going astray. Occasionally a credit union CEO will go astray right under their board’s eyes. One of the most egregious examples of a credit union CEO treating the credit union he managed as his own private fiefdom combined with a board not totally on top of their one employee came to light recently, shortly after the long time CEO retired after 42 years. In case readers missed the news report (Credit Union Times) February 11, 2004), John V. Loudermilk’s former CU, Jet Credit Union, a $48 million Indianapolis credit union, has filed a civil suit against him seeking actual and punitive damages of at least $3 million. The list of charges is long and complicated and do not need to be repeated here. Several border on the unbelievable such as his unwillingness to return credit union property. Suffice it to say, plenty of big time smudges. How did Loudermilk get away with the now obvious and blatant misuse of his position as a long time CEO to fashion a credit union that functioned more like his personal piggy bank than a credit union? How could he order his staff to violate the rules with apparent impunity? How is it possible that after some of his misdeeds were uncovered that he could thumb his nose at “requests” to rectify the situation when discovered that he was intertwining his personal financial affairs with those of the CU? All of which begs the most important questions: Why did his board of directors allow him to wheel and deal with member money for his own purposes? Where were the regulators? Where was the insurer? Where was the management staff? Where were the members seeking better service? What makes this situation all the more astounding is the personality of Loudermilk. He wasn’t known to be a mousy little guy whom you would never know was in the room. Quite the opposite. Many of us remember him from years ago standing up at a CUES conference bragging that he was not only the smartest CEO, but also the highest paid credit union CEO in the room. Many at the time thought he was just blowing smoke, at least regarding his pay. He wasn’t. For his size and type credit union, one that not surprisingly has grown little in asset size and members offerings under his management, he was bringing in a six-figure paycheck, plus, plus, plus, a compensation package unheard of back then even for the CEOs of large, rapidly growing, well-managed credit unions. He also boasted, without being specific, that he had lots of other enterprises in the fire. He neglected to mention that it was the credit union’s resources that was making them possible. How can these kinds of situations happen? Are some boards simply intimidated by the Loudermilk’s of this world? Do they think CEOs of his ilk know best and don’t question their on-the-edge actions? Or don’t they realize that it is their responsibility not to allow their CEO to ignore established credit union policies and procedures? The good news is that the Loudermilk smudge is finally out in the open and being dealt with. Eventually the mystery of where all the credit union money went (deferred comp, pensions, bonuses, loans with direct personal connections, released collateral, etc.), and all the conflicts of interests will be pieced together. It has to be for many reasons. Because it is the right thing to do for Jet members, of course, who have suffered long enough. Because of the pending lawsuit. But also because Jet Credit Union will be no more because it is being merged into Credit Union 1 in Illinois, a credit union that will also be remembered years ago as the focus of a high-profile CEO and one of his board members gone amuck. A really big smudge! But that’s history now. Possibly the best thing about getting the Loudermilk/Jet CU smudge eventually removed from the credit union white hat is that it can and should provide a valuable lesson for all credit union boards and CEOs. For boards: to stay on top of what their one employee is doing; to make certain that proper and necessary check and balance controls are in place; to insist that those actions requiring board approval are brought before the board before, not after, the fact; and to get out of the ivory tower and compare their credit union with other CUs of similar type and size. Also, to not be overly influenced by lavish CEO instigated board perks; and to never get so cozy with their CEO that they would be tempted to look the other way when something doesn’t appear to pass the smell test. For CEOs: to never forget who owns the credit union; to remember at all times who has been charged with the responsibility of setting policies that are safe, sound, and always in the best interests of all members; and to fastidiously avoid even the slightest appearance of a conflict of interest. Also, to seek a compensation package that is fair and in keeping with the size and make up of the credit union being managed; to never forget that the credit union is a member owned financial cooperative; and to be a constant example of strictly ethical behavior. Tall orders? Sure! Necessary? Absolutely! Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail [email protected].