If Your Credit Union Wants a Future, Plan for It

The old Benjamin Franklin saying, “if you fail to prepare, you are preparing to fail,” rings true even today when credit unions fail to plan for their futures.

For far too many credit unions, especially smaller ones, the failure to adopt and implement a succession plan needlessly exposes them to the whims of outside interests and the potential that a merger is their only option when senior leaders leave. An NCUA analysis found that poor management of succession planning was either a primary or secondary reason for nearly one-third of all credit union consolidations. While the pandemic initially slowed the pace, the number of mergers is now, once again, increasing. And the lack of a succession plan is a primary reason why.

A succession plan allows an organization to prepare for the unexpected and thereby minimize service disruptions during management transitions. A credit union board’s failure to plan for the transition of its management could come with high costs, including the potential for the unanticipated merger of the credit union upon the departure of key personnel.

Previously, I served on the board of a small non-profit organization and saw firsthand the benefits of succession planning. At the time, that organization had annual revenue of approximately $650,000, and it underpaid its leader. The board’s foresight in developing a succession plan, including what would happen if the leader departed suddenly, and increasing the salary structure allowed the organization to withstand the uncertainties created during a management transition. At approximately the same time, another non-profit with a similar mission, in the same vicinity, and more than twice the revenue folded when its chief executive abruptly left. What was the difference? That organization lacked a succession plan.

Having a succession plan in place is even more important today because of several external factors underway. First, there is the steady, long-standing decline in the number of credit unions. This trend has remained relatively constant across all economic cycles for more than three decades. We are losing credit unions much faster than we can replace them with new charters. Small credit unions are the core of the credit union movement, and we must find ways to keep them viable over the long term.

Another reason for a heightened focus on succession planning is the ongoing retirements of the “baby boomer” generation. The COVID-19 pandemic has accelerated the pace of retirements among this generation. And according to a leading mutual insurance company spokesperson, even before the pandemic started, approximately 10% of credit union CEOs were expected to retire between 2019 and 2021. Succession planning is critical to the continued operation of those credit unions for the board members and executives who are part of this retirement wave. It is no coincidence that the word success appears so prominently in the word succession.

The NCUA has long touted the benefits of succession planning in its guidance to credit unions, which includes considering succession planning in the management component of the CAMEL(S) rating. However, given the extent of credit union mergers, we must consider a new approach. The NCUA board recently proposed a flexible rule requiring succession planning. Although the proposal would only apply to federal credit unions, this rulemaking at its core would help ensure credit unions of all sizes have strategies in place to fill crucial positions and remain viable for generations to come.

Instead of applying a rigid methodology for such strategic planning, this proposed rule would provide credit unions the flexibility to develop succession plans that best meet their needs. If the rule is adopted as proposed, it would at a minimum, require that the plan identify key positions, necessary competencies and skill sets for those positions, and strategies to fill vacancies. It would also require the credit union’s board to be aware of the plan and review it annually. Those credit unions with a succession plan already in place would not be required to alter their existing plans.

Succession planning is a top priority for the NCUA, and it must be for all credit unions, regardless of size. I encourage credit unions and other stakeholders to review the NCUA’s proposed rule and provide comments and feedback by April 4. We want to understand what the industry thinks, so we can finalize a rule that is effective and useful for credit unions and the credit union system, and one that ensures an unplanned, last-minute merger is not the only viable option.

We want the credit union system to succeed. We want to keep small credit unions. We want to get this right.

Todd M. Harper is Chairman of the NCUA in Alexandria, Va.