The Buck Stops Where? - Fundamentals of Good Governance

Excellent governance is a prerequisite of long-term success for any credit union. When the board, CEO and senior management have clearly defined roles and the right individuals in each role, the result is a powerful synergy that energizes the organization to fulfill its mission in the most efficient way possible.  

On the other hand, when roles are confused or individuals are not qualified for their roles, the situation can become a dysfunctional drag on organizational progress and in the end destroy member value.  

I facilitate planning processes for organizations ranging from credit unions to Fortune 500 firms. The same question applies to each:  What is the role of the board and what is the role of management?

The short answer is: The board’s role is to provide governance oversight, whereas management’s role is to manage day-to-day activities of the business. Kenneth Dayton, founder of Dayton-Hudson Corporation, puts it very succinctly:  “Governance is not management”.

But that begs two additional questions: “What is good governance?” and “How does governance of a non-profit differ from that of a for-profit corporation?”  [Note:  Credit unions are technically not-for-profit organizations, but their governance issues are very similar to those of non-profit organizations.]

In “Non-Profit Board Governance: The Board’s Role”, Lesley Rosenthal notes non-profit and for-profit boards share many legal precepts, including:

  • Oversight role

  • Decision-making power

  • Place in the organizational structure

  • Members’ fiduciary responsibility

But she notes important differences and argues that non-profit governance places a heightened demand on board members due to:

  • A larger mix of stakeholders

  • A more complex economic model

  • A lack of external accountability

The latter point is particularly important. For-profit corporate boards are subject to scrutiny and held accountable by a number of stakeholders, including: shareholders, market analysts, the media and more.  In contrast, a credit union board often lacks these external pressures for accountability.  Although democratic member control is fundamental to the cooperative model, few members typically participate in director selection or oversight.

Thus, a credit union board needs to set its own high standard by establishing and enforcing disciplines to ensure it fulfills its governance mandate while not infringing upon management’s role.

Fortunately, guidelines exist to help credit union boards determine what best practices to embrace. In “The Director’s Manual”, Browning and Sparks identify two primary board duties:

  1. Ensure the right CEO is in place.

  2. Watch over the fiduciary interests of the organization and all other stakeholders who are impacted by the decisions of the board.

They recommend boards ask three critical questions:

  1. Is the right CEO running the organization?

  2. Does the organization have a robust succession process?

  3. Does the organization have the right strategy?  If so, is that strategy being implemented effectively?

That third question is where boards and management often run into trouble. Whereas boards need to confirm the right strategy is in place and is being executed properly, they are not responsible for developing the strategy. That is the domain of the CEO and the senior management team.  

This interplay of the CEO developing and presenting strategy to the board and the board providing guidance and approval is the essence of effective planning. Getting it right can yield tremendous benefits for all stakeholders.