Governance Challenges Concern CUs Worldwide

Panelists cite a need for greater director responsibility and capability.

July 14, 2010
Governance panel
Participants in a Tuesday morning panel focused on recent regulatory developments and challenges around the world. From left: Daniel Burns, moderator and WOCCU director from Canada; Andy Poprawa, president/CEO of the Deposit Insurance Corp. of Ontario, Canada; Gigi Hyland, NCUA board member; and Brandon Khoo, executive general manager for the Australian Prudential Regulatory Authority.

By Michael Muckian and Steve Rodgers

The question of performance standards, capabilities, and remuneration for credit union directors worldwide dominated discussion among regulators and economists who served as panelists during twin general session discussions Tuesday at The 1 Credit Union Conference.

Situations differ for directors in Australia, Canada, Europe, and the U.S., but performance requirements are the same. That means higher levels of both responsibility and risk for volunteer and paid directors at credit unions worldwide.

Participants in a panel focused on recent regulatory development agreed that clearer definitions of board terms and responsibilities would make governance easier to regulate.

Gigi Hyland, National Credit Union Administration (NCUA) board member; Brandon Khoo, executive general manager for the Australian Prudential Regulatory Authority; and Andy Poprawa, president/CEO of the Deposit Insurance Corp. of Ontario, Canada, offered insights into conditions in each of their own countries.

“Currently, there are no board term limits in the U.S.,” said Hyland. “That means some directors can serve 30, 40, 50, and even 60 years. While that’s not necessarily a bad thing, it could mean that directors don’t always have the fresh set of eyes needed to see changes in their credit union and the market.

“Boards of directors need to take a long, hard look in the mirror and ask themselves if they are really the best people to be representing their members.”

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A larger issue in many countries is the absence of board performance standards, which can pose significant risk for some credit unions, noted Poprawa, who also chairs WOCCU’s International Regulators Roundtable.

“Governance is an area of interest and also one of primary risk for global credit unions,” said Poprawa. “The Regulators Roundtable sees this and will be addressing the possible creation of global governance standards at its meeting.”

Poprawa said Canada recently passed legislation requiring term limits for directors, but the law gives credit unions significant leeway in determining those limits.

He said the Canadian regulator would be checking credit unions’ term limits to make sure they were reasonable and in members’ best interests.

“In Australia, we make it the credit unions’ responsibility to develop their own policies for the renewal of their boards of directors,” said Khoo.

Other regulatory panel discussion topics included the future of corporate credit unions and access to supplemental capital.

“Credit unions in the U.S. will have to determine whether or not they want to recapitalize the corporates and, if so, what will be the appropriate services for corporates to provide,” said Hyland. “NCUA is also studying the capital issue, and Congress probably won’t address it anytime soon.”

What lies ahead for CUs?

The second panel looked at what lies ahead for credit unions in different parts of the world. Panelists Louise Petschler, CEO of Abacus-Australian Mutuals and a WOCCU director; Bill Hampel, CUNA senior vice president and chief economist; and Hervé Guider, general manager of the European Association of Cooperative Banks, also tackled the topic of board performance at the request of moderator and WOCCU director Daniel Burns, chair of Central 1 Credit Union in Canada.

“Australian credit unions are regulated to the same degree as banks and all financial institutions,” said Petschler. “Directors must pass a skills test to serve. If there aren’t sufficiently qualified directors on a board, the board may appoint other directors rather than wait for them to be elected by the members.”

Guider agreed directors must be able to demonstrate both independence and qualifications before accepting a board position. While Australian directors are paid, European cooperative bank directors and U.S. credit union directors aren’t.

The U.S. also has no regulated standards for directors, said CUNA’s Hampel, who supported the importance of qualified candidates, but also cautioned the audience, “Having a specific area of expertise on the board does not necessarily guarantee success.”

The panel also touched on the impact that new interchange fees will have on credit unions. Australia passed similar legislation three years ago, and the net result has been less flexibility, higher fees for consumers, and greater profits for major retailers and large banks, Petschler said.

Lack of member growth also became the topic of debate. Ironically, field-of-membership qualifications that once helped U.S. credit unions grow have proven to be an impediment, according to Hampel.

“Field-of-membership requirements used to be a severe restriction on credit union growth, but its legacy has proved to be just a severe nuisance,” said Hampel. “It retards growth and that growth would be greater if we could get rid of the restriction.”

“Credit union growth is also hampered by the fact it’s so difficult to switch financial institutions,” he said. “The process of closing accounts at one institution and opening them at another institution is intimidating enough to prevent many consumers from doing it.

“Also,” he continued, “credit unions are co-ops, and co-ops are frequently less aggressive than their for-profit competitors. All these factors combine to inhibit credit union market-share growth.”

“In Australia, four banks control 90% of the market, and credit unions have the remaining 10%,” said Petschler. “The banks actually got larger during the turmoil in the global financial markets over the past two years.”

“The market-share situation is a little different in Europe,” said Guider. “In Germany, financial cooperatives have about 35% of the market. In Italy, they have 40% of the market and in the Netherlands they also have 40%.”

Michael Muckian is communications manager for World Council of Credit Unions.

Steve Rodgers is editor of Credit Union Magazine.