To Shelley McDade and many others in the credit union movement, the question of whether credit union service organizations should pay their directors seems like an easy one.
“None of the directors in CUSOs I am involved with get paid,” says the CEO of $412 million Sunshine Coast Credit Union, Gibsons, British Columbia. “In most cases, we are looking for cost savings or quality enhancement, and we are more or less in start-up mode. The CUSOs I am involved with only serve (their CU) owners, so we would in essence either give up savings or have to contribute capital to pay directors.”
She says she’s familiar with four or five CUSOs in Canada, all of which have solely volunteer directors from the owner credit unions, even though paying members of CU boards is more common in Canada than in the United States.
That’s consistent with the experience of Sean Lesy, a CUES member and chief investment officer for $1.7 billion CU Central of Alberta, Calgary.
“Most CUSOs in Canada [that are not owned by the central credit unions] are smaller partnerships between two to four credit unions,” he explains, “so in these cases it would make sense that managers would volunteer their time as an extension of their management role at the credit union. We tend not to have meaningful non-central CUSOs here, given the role that the provincial centrals have historically played. That is changing, though.”
On the other hand, board members of CU centrals or other entities that are widely system owned through the centrals are usually paid, albeit modestly compared to directors on non-CU system boards, Lesy says. Additionally, Canadian CUs are provincially regulated, so board compensation rules and practices depend on where the organization operates.
In the United States, the vast majority of U.S. CUSO board members—including all those at federally chartered CUs—are unpaid. Part of the reason is that U.S. National Credit Union Administration regulation Section 701.27(d)(6)(i) prohibits paying credit union executives for serving on CUSO boards.
“Credit unions that invest in CUSOs cannot have any of their senior officials, by regulation, receive any benefit directly from the CUSO,” explains Guy Messick, attorney at Messick & Lauer PC, Media, Pa. “So if you are a director of a credit union, or if you’re staff of the credit union, you can serve on the CUSO board, but you can’t receive any money as a result of that.”
That’s not to say there’s no financial benefit for CU executives who serve on CUSO boards. For one thing, many CUs set the compensation levels of their CEOs with the understanding that their job description includes CUSO board service. For another, Messick points out, if staff members from a CU are serving on the board or doing other tasks for the CUSO, the CUSO can and should reimburse the CU for the time that that individual spends on CUSO activity. But that’s a reimbursement to the organization, not to the individual.
Cost savings, tradition and regulatory constraints are sound reasons to recruit CUSO directors only on a volunteer basis. But there are exceptions to the rule.
“Typically, directors from inside the management of the [owner] credit unions are there to maintain the consistency of the vision of what the credit union is trying to do and what they want the CUSO to do, and they’re volunteers because you want to comply with that section of the NCUA code,” says CUES member Neil Archibald, general counsel and chief fiduciary officer at MEMBERS Trust Co., an investment management CUSO in Tampa, Fla.
“But there can be directors from outside the credit union movement, too. When you’re dealing with a CUSO that is for a very specific purpose, you want to attract a board that can give you guidance on areas of expertise that your credit union management wouldn’t otherwise have. So you’re going to end up having a mix of inside and outside directors, and that necessarily drives the issue of compensation.”
Pay to Play
The reality is that when CUSOs are looking for certain kinds of subject matter expertise, they may have to compensate those outside experts at the market rate.
“If you have a business that the credit union does not have expertise in, and if you can find an outside director, that would be most advantageous to you, because you have somebody who knows the business,” Messick says. “And if you have to compensate them according to what that industry would compensate a director, then that’s something you should consider.
“I have seen situations where credit unions have run things like broker-dealers, and they totally control the board themselves,” he adds. “But that’s not their [expertise], and I think the business struggles because of that. The board is a strategic asset. You have to have people with knowledge and experience if you’re going to have an effective decision-making process.”
Not every CUSO will need this kind of outside aid, of course. There are some CUSOs that do special lending, Archibald notes, and lending is an area where credit unions can provide all of the needed expertise. They may also have, for example, mortgage or investment expertise in-house. It depends on the individual circumstance.
For those that do need to recruit outside expertise, the market determines the price.
“In my communications to different boards over the years, people generally get paid anywhere between $500 and $1,500 a board meeting,” Archibald says. “But that is just the overall range, not necessarily the best numbers. Because the truth is, on really good boards, directors usually receive a good amount more than that. So it really depends upon the commitment of the credit union to the CUSO, both in its capitalization and in its ongoing operations, and the type of CUSO they’re getting into.”
Expertise isn’t the only thing outside directors offer; some can open doors and help to broker deals, or introduce CUSOs to future business partners in the communities they serve.
“You ever watch ‘Game of Thrones’?” Archibald asks. “Between the different fiefdoms, people tend to marry to help ensure peace and ensure stability. Well, in many respects, that same concept applies when you’re choosing directors. You might be in a particular market and want to move into some specialty area, and you know that there are some well-known people in the community who touch on that. By having them become a board member, they also become your advocate, and they also become your automatic wedge into that space.”
Messick agrees, with one caveat: “The problem sometimes is finding someone who doesn’t have a conflict of interest, because you don’t want to have someone serving who’s going to be competing against you,” he notes. “So maybe you try to find somebody who’s retired.”
Shelling out credit union funds on compensation for CUSO directors could seem to run counter to the frugality and start-up mentality, McDade cited. But Archibald says it may be a good long-term investment for the owner CUs, now more than ever.
“Right now we’re in what feels like an epoch of low interest rates,” he says. “You don’t get a lot of spread off of your deposits and your loans. Non-interest income has to take more of a prominent role in helping to bring income into the credit union.”
A CUSO can help fill that void, Archibald says, and that’s why it can be important to pay for directors with the most expertise in the CUSO’s service offering. “Then you have this non-interest income that’s coming in, that’s not dependent upon your deposit and loan mix,” he says. Still, many credit union executives remain skeptical of the concept of paying directors.
“I know there are situations where CUSOs do pay individuals to sit on the board, and I know there are CUSOs that have thought about doing it,” Messick says, “but very few, because most credit unions want their CUSOs to be run by people they already know and trust. Very few and far between are the situations where you find the right person [from outside].”
That situation may evolve over time, however. Messick expects that as more CUSOs delve into service offerings that are outside the purview of the financial services industry, they’ll need more outside help to manage those institutions. “I do think that as CUSOs mature, you will see more and more outside directors who are participating on the boards,” he says. “But I think credit union staff will still have the majority control.”
Directors are humans, too. Do credit union executives sometimes feel a little bad sitting on a CUSO board for free when the person in the next chair is getting paid?
Messick laughs. “Sure they do,” he says. “People are very sensitive about money. But if they’re there in the role of the credit union, they understand that it’s in the regulations.
“Plus, hopefully, the director says ‘What’s right for the credit union and the CUSO? And what does the industry require in order to get the level of quality of management we’re looking for? Even though they don’t pay me, I’ll sit next to somebody who gets paid for their time, because I have another role in this organization.’”
Depending on how you look at it, it’s not really unpaid service. As mentioned previously, many CU executives are compensated by their credit union with the understanding that serving on the CUSO board is part of their job. On top of that, their service on a CUSO board enriches the offerings of a CU, benefiting employees, members and the community at large.
For example, CUES Supplier member CO-OP Financial Services, a technology CUSO in Rancho Cucamonga, Calif., does not compensate the 11 directors on its board. They’re all executives from inside the movement, so payment is not an option in the first place—but service on the board is also part of the expected duties of the execs because it benefits the members of their home institutions.
“We are fortunate to have some of brightest minds in the credit union industry as our board members” says CFO/Executive Vice President Kari Wilfong.
CUSOs are part of the overarching mission of credit unions, and they’re fulfilling it, Archibald says, including being an important source of non-interest.
“They [inside directors] are there trying to provide a deeper bench of services to their members, which helps them raise the profile of the credit union overall,” he adds. “Outside directors are not part of that mission from an organic sense, so the way to bring them in is to pay them. I think there’s a broad understanding of that.”
Jamie Swedberg is a freelance writer based in Georgia.