NCUA board wants to talk succession planning for credit unions

Procrastination is a universally relatable issue. Putting off the homework until the morning the assignment is due. I’ll start that project after the weekend. Why do the taxes now when I can do them in April? Rare is the individual who’s never fallen victim to procrastination’s siren call.

Unfortunately, as businesses are made up of people, they too can suffer the consequences of waiting until some higher authority gets involved. And while the NCUA can be all too eager to find solutions to problems that don’t yet exist, they do sometimes get involved in counteracting a problem of credit unions’ own making.

If you have been to a credit union industry round table, workshop, or collaboration event in the last decade, chances are succession planning came up as a topic at least once. Whether it related to finding new board members or getting ducks in a row for aging leadership, succession planning has been a subject all too easy to include.

The problem? Talk is cheap.

NCUA is taking notice

Credit unions have had plenty of time to establish solid foundations on which to continue the legacy of their organizations, but many have not. Aging boards lament not having younger generations engage and get involved, but at the same time they have a hard time hanging ’em up and stepping out.

Perhaps it is comments like those made by the CEO and Board of South Division Credit Union that have garnered the NCUA’s interest. In their July 2021 Special Meeting Notice recommending merger to their members, they wrote: “South Division Credit Union has not grown in size or membership participation for several years and has been faced with increasing operational, regulatory and compliance expenses; lack of managerial expertise, aging Board of Directors and no effective succession plans.” [emphasis added]

Isn’t it the responsibility of the Board and CEO to ensure they have satisfied those needs?

Worse yet, some CEOs may see the opportunity to merge their credit union as they step out the door into retirement with a fat check too tempting to pass up, an opinion shared by the NCUA.

In its 2018 rule governing voluntary mergers of federally insured credit unions, the NCUA said: “The net worth of a credit union belongs to its members. Payments to insiders, especially in the context of a voluntary merger where a credit union could choose to liquidate and distribute its net worth among its members, are distributions of the credit union’s net worth.”

And yet, we have cases like those reported on by Chip Filson of a merging credit union allotting $10 million for a non-profit organization created and set to be run by the CEO of the credit union losing its charter. A decision that as yet has gone unexplained to the members asking what justification there is for such an action.

Why are credit unions struggling with succession?

According to Harper, a lack of succession planning is one of many reasons for the trend of mergers, adding that one in five credit unions lack a plan altogether. And as a large number of executives approach retirement, a greater need is arising for some sort of plan to be put in place. “With these retirements, flat budgets, and tight labor markets made even tighter in the wake of the pandemic, there is a real need for credit unions of all sizes to focus on succession planning, especially if we want to curtail credit union mergers,” Harper said.

As he sees it, a failure to address this will only continue the trend. Chip sees this as an unfortunate reality: “I am disappointed for members when I read that a CEO’s final act is recommending the merger of their independent institution. The credit union has been the platform for the CEO’s leadership opportunity, industry status, and professional reputation for many years. Instead of their role as a “relay” runner passing on the baton, their tenure becomes a “sprint” to the finish and no one else gets to run.”

The question that needs to be answered is why? Is it self-interest and self-dealing by retiring CEOs? Or maybe boards of directors that have worked with the same CEO for too long to imagine working with another. Are credit unions exhausted by the grind and feeling like they’re constantly climbing uphill? Are there no more young leaders that boards are willing to take a chance on? Or maybe the concept of planning for a CEO’s eventual retirement feels like a tomorrow problem.

NCUA involvement is never cheap

Whatever the reason for a fifth of credit unions’ decision not to create formal succession planning processes, it has now gotten the attention of the NCUA, and credit unions may come to regret it.

Although I see this as a real issue that needs to be addressed, I worry about how the NCUA will approach it, and how credit unions will react. Will the NCUA seek to apply a band-aid to an issue requiring more thought than simply hiring an expensive firm to seek replacement leaders? It remains to be seen what they’ll propose, but my guess is that won’t be far off.

Suppose that is what the NCUA does. Formalizes a process through which credit unions have to spend to satisfy the NCUA’s ego. The worst-case scenario is credit unions comply, but with no buy-in for the need or process behind it. Now we just have more challenges heaped on to struggling credit unions, and more reason to call it quits.

But there is a real need for it. As Chip Filson put it: “Without regular succession processes, the ability to find new leaders, or even generate interest in leadership is squelched. And at any moment, the sirens of self-interest can appear, canceling the credit union’s future for all members.”

A belief in success

Credit unions don’t need an expensive solution. One area credit unions go wrong, says Randy Karnes, is that they see succession planning as having a senior person instead of a senior team. Not only that, but they name that single successor years in advance of the CEO’s retirement. Should those plans go awry, they don’t know how to react.

As Randy sees it, credit union leaders need to identify their senior team. Does your credit union have just six staff members? That’s your leadership team. That doesn’t mean that they all get to make the big decisions today, but it does mean assigning them responsibilities today that they may need to survive tomorrow.

“Instead of focusing on how you will replace that CEO when they leave in a couple of years, focus on how you would replace them if they were gone tomorrow,” said Karnes. “When you have to plan for who would step up in an emergency, you will soon find you have a team you trust to fill those roles and you will invest in them. When the time then comes later to find a new leader, you will hopefully have cultivated a team you can rely on to ensure a smooth transition, whether one of them takes over or not. But more than anything though, credit unions need a primary belief that they can be successful no matter what challenges they face.”