Central 1 is now canvasing credit unions on what the ‘mandatory’ director training program should look like. The survey is well thought out and to be welcomed, but the implications and the potential conflicts of interests need to be considered. The current one year Credit Union Director Achievement (CUDA) program will be expanded into a three program.
The reason why this credit union director education issue has been brought forward is revealed as the regulator’s ‘governance guidelines’. This is a convenient rationale, but it is not complete. There is no good discussion of the ‘problem’ that is being solved. Indeed, the truth is that bank regulators around the world have been raising this issue since 2008, insisting that governance weaknesses caused the 2008 financial crisis; and this conveniently distracts attention from poor legislation and inattentive regulation. But the argument that ‘boards need to be more competent’ also is rooted in the experience of very large multinational banks and insurance companies; it is not necessarily true that failures at these complex institutions implies a similar ‘weakness’ everywhere else.
Indeed, credit unions performed very well through 2008-2012. The events related to inter-bank obligations and use of eccentric derivative instruments that lead up to the Great Financial Crisis did not affect credit unions in Canada. The tight liquidity markets and tensions following that crisis that put some some banks in default, did affect some credit unions but did not cause any calamity. In this sense the boards of credit unions, and the governance policies and practices in credit unions, passed key tests.
So the need for a major revision to required CUDA ‘competency’ training is not made. So, perhaps we should simply consider what the real needs are and where the opportunity for ‘improving’ the existing one year program might be. But this is not the current Central 1 approach. Instead, the proposal is to triple the size of the director training requirement. The implied rationale is that many credit unions now encourage directors to complete all the voluntary CUDA training components, so why don’t we make them all ‘required’. This is not adequate.
Three points need to be made:
- The need for more ‘skills’ on a board is in very large credit unions, where the scale, scope and complexity of the enterprise has changed dramatically over the last 25 years. A two tiered approach to director education is appropriate.
- The onerous added demands and costs of a new CUDA program (tripled in size) that may be placed on small credit unions will further advance the rationales for mergers and consolidation. Some similar biases are already present within the regulatory regimes. But consolidation concentrates risks, reduces competition, and erodes community control/responsiveness.
- The emphasis on director ‘skills’ fails to appreciate the other functions of the ‘board’ in a community organization. Directors of community based enterprises are not ‘risk managers’, they are lay people with a common sense political role in directing the project to the benefit of the greater community. They also function as a robust representative of the consumer/owners.
For traditional ‘savings and loan’ model credit unions the need for a dramatically expanded ‘required’ director training program is not evident. Trap #1 is in the likely unintended consequences; making it harder for small credit unions to recruit and retain volunteer directors, burdening small credit unions with more governance costs. Trap #2 is believing that ‘trained’ directors make a big difference (look at who sat as directors of Lehman Bros, AIG, WAMU, etc.).
Instead, let’s refine the CUDA Level A, one-year program to best suit the needs of a majority of credit unions, and place new requirements on directors of the large and more complex credit unions. It is in large credit unions where we find the more demanding situations: integrated groups of companies, complex real estate arrangements, novel funding agreements, more specialized derivatives contracts, independent card services and IT supplier negotiations, and a variety of commercial and non-standard lending practices.