This is a follow-up to my earlier post about the growing trend of credit union boards having the ability to be compensated dealing with the positives. From my viewpoint, here are some of the potential drawbacks to this trend.
The primary argument for compensating board members is that it is difficult to recruit qualified board members who will have a grasp of the financials, regulatory requirements and business operations of the credit union due to the amount of time required to be a board member. My concern to this position is a compensated board member does not guarantee a more qualified or involved board. There have been many examples of this in the private sector – Enron, pick any major bank and several smaller ones from 2005 – 2010, etc. In addition, many credit unions will not recruit new qualified board members, but simply pay those that are currently serving.
Another concern is that if it takes compensation to get them to the table, will their focus be on what is best for the credit union and its members or what is best for the board of directors (compensation and other perks).
I was not surprised that a banker in Tennessee publicly favored the legislation in that state. If I were the CEO of a state bank trade association, I would be totally delighted with the recent turn of events. First, one of the pillars that credit unions have used to protect the tax exemption is that credit unions are a not-for-profit financial cooperative owned by their members and represented by a volunteer board of directors. The last part goes away and the attack will be “Yes you are not-for-profit, but you pay your board members.” Second, most likely it will be larger credit unions that compensate their board. Smaller credit unions will not be able to afford the cost. The bank trade associations will use this to finally successfully split out the larger credit unions for tax purposes.
I believe that it will be a longer road for federally chartered credit unions to obtain the right to compensate their boards (unless the banks see the opportunity and jump on the bandwagon). The result will be that more and more credit unions (especially those with the capability to compensate their directors) will convert to state charters in those states that allow board compensation. This can result in significantly shifting the balance between state and federally chartered credit unions causing a potential threat to dual chartering (although NCUA will still be responsible for share insurance in most cases).
What concerns do you have?