CU Governance: Keeping Up in an Ever-Evolving Industry

Since credit unions were first introduced to the public in the early 19th century, the idea was that this “un-bank” business would provide all the positive perks of a traditional investor-owned bank, but with better, more beneficial experiences and more opportunities for the consumer. The not-for-profit, member-owned credit unions would provide opportunities by way of a board of directors, duly elected by the group’s members.

Some things have not changed since then, as credit unions have successfully maintained that grassroots concept over the years. However, one thing has changed: Many of those credit unions have increased significantly in size. While their growth isn’t comparable to investor-owned banks, the credit unions are big enough to cater to their members’ needs by diversifying product offerings, increasing members and opening more branch locations in outside communities. The question now is: When the credit union adapts and grows to cater to its member base, should the old-school governance adapt as well? Filene’s report, “Governance Challenges in Credit Unions: Insights and Recommendations” (Pohler, 2017) aims to uncover what good governance looks like, and explores the value and risks associated with cooperative governance models.

Growth Challenges

There is increasing outside regulatory pressure for credit unions to transition away from the norm and model their governing standards after investor-owned banks. For example, the democratic election process for the board of directors may work, but this cooperative governance effort does not ensure qualified board members are in place to assess risks, put strategic plans in place and perform managerial tasks. As a result, some credit unions have moved to create minimum qualifications for specific responsibilities and roles for their boards of directors.

Additionally, attendance at meetings – both large and small – has been suffering. When paired with a steady decline in member voting over the last few decades, the argument for a more modern governance proposal seems to be gaining strength. On the opposite end, proponents of cooperative governance argue that changing the grassroots effort would change the entire core of what a credit union is supposed to be and could ultimately lead to demutualization.

There are understandable arguments to be made for both answers to this question: Should credit unions move away from the grassroots model and do something out of character that goes against the foundations on which credit unions were created?

Adaptation Considerations

If governance changes take place, several shifts will occur as a result, including:

• The business becomes more complex;
• Member needs/wishes are lowered on the priority list; and
• Fewer members become owners as ownership shifts to investors.

With that in mind, the question remains: Is there a middle ground? And if so, what does it entail? Even those for grassroots cooperative governance will tell you that something needs to change, but finding the right something is the real issue.

A Healthy Balance

As markets grow, consumer needs change and credit unions evolve, the best solution may lie in striking a balance between the old and the new. The research shows that the biggest priority for the board of directors across all credit unions is to maintain the level of transparency and openness that members have come to know – and expect – when they choose a credit union over a traditional bank. Everything is on the table with credit unions, and members are encouraged to contribute their thoughts on everything, from how to grow (or not grow) the credit union to how best to adapt the governance process.

The idea of working together and creating a sense of value from the board to the members is a culture that credit union members and boards hold dearly. While traditional banks do not practice these same methods, many credit unions are tapping into other “big bank” practices that could serve a purpose.

Member services, for example, in the investor-owned bank industry is one area that credit unions are studying closely. The question is: How do credit unions preserve their idea of a member-centered business as they create more convenient options that keep the members from coming to the physical location? The ability to handle transactions virtually is a must, as making deposits and other financial transactions no longer requires a trip to the financial institution. Creating that sense of community when the credit union itself is creating opportunities could create conflict.

There are several key suggestions on the table, which include:

• Maintaining a democratic election process of allowing members to choose who fills the seats on the board of directors.
• If minimum qualifications are put in place for those up for election, openness and transparency will be at the forefront of the election to fully inform members of their options.
• The board of directors will assume responsibility for initiating conversations and be open to debate with members regarding changes to governance structures and board selection processes. These communications will not be led by the credit union managerial staff.
• The adoption of growth strategies that will preserve the member-focused values, and communicate the trade-offs and rationales that could compromise those values.
• The commitment to continue exploring and researching other ways to improve and enhance member services – even if they are inspired by investor-owned bank practices.
• The commitment to revisit and adjust community and member engagement as new services and strategies are introduced into the credit union.

How to Make It Happen

One practice many credit unions are beginning to adopt is virtual communications. For example, members are encouraged to log into and join board meetings. This checks all the boxes of incorporating innovative technology, prioritizing member needs (via added convenience) and maintaining the member-centered values credit unions are committed to preserving. The same can be said for introducing online elections for the credit union’s board of directors. Virtual voting brings all the modern-day conveniences while maintaining a member-centered focus.

Change can be challenging on any level. It’s hard enough for the average human to break a not-so-good everyday habit or start a new exercise regimen. So, we can’t expect credit union institutions to change overnight. However, if done properly, the change can have a long-lasting, positive effect on everyone, especially credit union members, who are at the core of the culture that has proven so successful for decades both past and present. As necessary and specific adaptations are successfully implemented, those successes will continue for decades to come.

Stephanie Galligan is Research Manager for Filene Research Institute. She can be reached at 608-661-3755 or stephanieg@filene.org.