Examining Director ‘Pay’ [Credit Union Management]

As allowable options slowly expand, the debate continues about whether 'compensation for volunteers' is an oxymoron.

It's the best of ideas; it's the worst of ideas.

Ask whether board members should be compensated- either directly or by reimbursing certain costs- and the answers may be as far apart as you'd get when asking the reddest of red-state voters and the bluest of blue-staters about their presidential preference.

Ask CUES member Richard T. Webb, president/CEO of $100 million, 11,300member Atlantic Financial Federal Credit Union (www.affcu.org), Hunt Valley, Md., whether directors should be compensated beyond reimbursing them for insurance or iPads, and he's likely to ask, "Why not a director's fee?"

Ask Dan Clark, a former CU director, president and examiner who's now head of board governance and strategic planning firm Dan Clark Associates (www.danclark.com), Tallahassee, Fla., and he'll refer you to the dictionary definition of volunteer: "a person who performs a service willingly and without pay" - and he'll stress the "without pay" part.

Compensating directors may be getting more attention for several reasons. One is that many states allow CUs they charter to pay CU directors. That can come more to the fore when federal- and state-chartered CUs merge, a situation that's becoming more common.

Another is increased interest in providing directors with long-term care insurance, since NCUA stated in a 2010 opinion letter (http:// tinyurl.com/ltcopiniori) that it can be offered even if the insurance protects against some areas of risk outside of board service. That clarification coincided with increased interest in such insurance among the public at large.

Then there's the issue of what CUs require from directors. A February 201 1 NCUA Letter, No. ll-FCU-02 (http://tinyurl.com/lfcu201102), stated ". . . to be an effective director, an individual must have a certain base level of financial skills, consistent with the size and complexity of the CU operation they serve. At a minimum, directors must have the ability to read and understand the CU's balance sheet and income statement. If directors do not have the requisite skills when elected or appointed, they must obtain these skills in a timely manner . . . ." Although it may seem that such requirements would have been understood all along, many CUs took this as asking directors to meet dramatically higher standards than in the past.

Clark raises both philosophical and practical objections to paying directors, either in cash or by providing insurance, and his position is a firm one: "It clouds the issue to compensate directors in any way, even those allowed by regulators."

Putting himself in the place of a board member, Clark says, "Once you give me something, I'm not a pure volunteer anymore. Am I doing the job tomorrow to keep getting that something?"

What's more, Clark asks, would compensation in the form of long-term care insurance slow down board turnover even further? To those who argue that it would have just the opposite effect, Clark replies, "I don't think we should be incenting people to come on the board."

Webb sees things differently. He, too, has experience as a director; he spent 24 years on his CU's board before taking over as CEO 19 years ago. "When I first became involved, we made 12 percent loans and gave 6 percent dividends. There was a 6 percent spread. We didn't make changes for a long period of time," Webb says.

"Now, there are changes throughout the months, the financial marketplace, the economy, regulations from Congress, Consumer Financial Protection Agency and its regulations- and we are stuck in this antiquated system" where directors, more often than not, aren't paid.

Recognizing Service

Even at CUs that compensate directors, the pay often is more a matter of recognizing service than of feathering nests.

At state-chartered Community Service Credit Union (www.cscutx.com), Huntsville, Texas, the eight board members get a stipend of $50 for each regularly called meeting of the board of directors and these committees: compliance and risk management, facilities, and asset/liability management. In addition, there's a $25 fee for each special meeting, and $100 for annual strategic planning sessions.

"With the expectations that come from NCUA and the state, there's a lot each director has to do," says CUES member Brenda Hooker, CEO of the $76 million, 9,000 -member CU. She especially notes the directors' preparation and fulfillment of their fiduciary responsibilities.

Simply meeting NCUA's minimum requirements isn't going to work, she says; that wouldn't enable directors to do their jobs effectively.

The stipends, Hooker says, offset to some extent the time board members devote. It also helps with the cost of printing and Wi-Fi. Currently, she says, all directors have Wi-Fi at home that they pay for personally. Younger members might be happy with only their smartphones, which they have and pay for themselves already, Hooker points out. And if a director should live in a remote part of the county, the cost of gas to get to meetings might be a burden.

At Atlantic Financial FCU, per NCUA regulations, only one board member is paid. The treasurer receives $200 per month, "primarily because the CEO reports to the treasurer, and the treasurer has the responsibility for signing off on the financial reports," Webb says.

Atlantic Financial FCU also will reimburse directors for travel to and from board meetings if they ask. However, Webb says, "Only one board member has ever submitted a voucher for mileage." The CU has made directors aware that they can deduct that travel on their income taxes since it's in connection with volunteering for a not-for profit, he adds.

But Webb believes NCUA should permit out-and-out payment of directors, and has written the agency and CU trade associations to say so. He saw NCUA Letter ll-FCU-02 as the tipping point. Webb says he wrote that if the agency was going to emphasize financial literacy in such a formal way, it had gone beyond what has been expected of a volunteer.

Today's Boards

Still, it seems the divergent points of view may be more about what a board should be than about specific reimbursements.

"It's antiquated in today's world to say we want a board member who's sophisticated enough to understand a financial institution's operation, but you're not allowed to pay them," Webb argues. He believes most CEOs would agree that paying directors would allow them to have a more qualified board.

"The typical director doesn't have the background to be a board member in today's world, with its regulations and compliance requirements," Webb says. "If you were allowed to pay board members, you could require certain qualifications, such as a related college degree or some experience or background in finance. State regulators have recognized this issue, and every state-chartered credit union I'm aware of provides director's fees."

Extensive knowledge of running the CU isn't part of a director's job, Clark says. Say one director is an IT expert. "He's not supposed to express his expertise as a board member" or to be running IT. If an IT issue comes up, the board should ask management for information.

What should a board contribute to the CU? "What we need from the board is their wisdom, not their expertise," Clark says. "We need better oversight, better ability to stand up to the CEO and to manage that CEO."

Resources

Read "Point of Law: Paid Volunteer?" "Compensation in Sight" and "Determining Compensation" for free. At cumanagement.org/archive, search for "director compensation."

Read "NCUA Rethinks Reimbursement" on the Center for Credit Union Board Excellence. Not yet a member? Sign up for a free 30-day trial on myccube.org.

Get more on governance best practices by attending CUES' Directors Conference, Dec. 9-12 in Palm Desert, Calif. Check it out and register at cues, org/dc.

CUES Director members can download a volunteer expenses policy by logging in at cues.org and choosing "Member Resources." Next, choose "CUES Director Members Share" under"CUES Community" and finally, search for "travel."

Paid for Service?

Credit union experts and CEOs have differing opinions about compensating directors, but what about directors themselves?

One with a unique take on the question is Robert Peplowski, CCD, who has spent 35 years in service to $1.6 billion, 160,000-member Lake Trust Credit Unionwww.laketrust.org), Brighton, Mich., which covers 35 counties in the state. For 20 of those years, Peplowski has served as chair, vice chair, secretary, and member of the board of directors, as well as spending some 15 years on the credit committee.

Peplowski takes a firm stand against directors being paid outright. "If we take compensation to mean being paid to be of service to credit unions, I'm not in favorof it," he says. The problem, as he sees it, is that payment runs against the credit union philosophy.

"The whole idea is people serving people," Peplowski points out. "Our decisions in a credit union should be driven by what's best for our members, who are the owners, as opposed to stockholders at banks." Board remuneration may muddy those waters, he believes.

"Actual payment for attending meetings crosses a line," Peplowski says. So, too, does reimbursing for insurance, he adds.

As for fees helping to attract more and, perhaps, younger board members, Peplowski has another way to do that: expanding coverage of expenses to increase the participation of directors' families in credit union-sponsored retreats and events.

Encouraging spouses to come along to planning sessions, where special activities would be planned for them, would help attract today's busy members to the board. And it would help directors gain family support for their credit union involvement, Peplowski says, calling the value of such backing "immeasurable."

Similarly, such events as an outing to a baseball game, with directors, upper management and their spouses sharing a suite, would allow them to mingle outside the boardroom. "The more we get to know each other, the smaller our problems are," Peplowski observes.

But as for stipends or the like, the farthest Peplowski will go is an honorarium - perhaps a $50 to $100 choice from a gift selection catalog - for giving upa Saturday or weekend for credit union business. He would never give cash, seeing the item from the catalog as a "trophy gift." That means, Peplowski says, when you look at the gift you chose, you remember why you got it.

Charlene Komar Storey is a veteran credit union writer based in New Jersey.