How Strong Boards Can Drive Governance Success Richard C. Powers Rotman School of Management University of Toronto

C U directors want to spend more time looking forward

Board Composition Member based Election based Skills based?

Strategic / decision-making capabilities Credit union boards value decision-making and oversight capabilities over past experience Strategic / decision-making capabilities Past experience

Other factors to consider How many other boards? NFP, Corporate How many other committees? How many officer positions? Attendance? How many years have they served? Terms?

Nominations Process in Credit Unions Over 85% use “word of mouth” Almost 80% consider CEO recommendations?

But what do most boards prioritize when actually nominating candidates? Industry expertise Senior management experience Board experience Known to current board members WHY?

Latest research Almandoz and Tilesik (2016) Impact of “domain experts” on corporate boards Focused on failed local banks in the US (1996-2012) Focused on the composition of the boards The higher the proportion of “domain experts”, the greater the likelihood of failure!

Why? In stable (normal) conditions, the “domain experts” were helpful In situations of high decision uncertainty, unpredictability – negative impact! “more ambiguous the situation”, the more likely the CEO is likely to look to the board “experts”

The Problem “Domain Experts” do have experience But they are usually older and hold on to previous problem-solving skills that have worked for them Bias – overconfidence and old assumptions, and… They often shut down challenges to their views What is a CEO to do?????

Solutions to counter “domain experts” Open up the organization – encourage thought leadership Data-driven decision-making 3rd party verification Pre-mortem analysis

Diversity OMG!!!! What does it mean? Gender? Age? Ethnicity?

Women on Boards Credit Unions take a bow! Avg. % women - credit union boards – 33% Corporate boards – USA – 15% Corporate boards – Canada – 13% Corporate boards – Europe – 40%

Age and Ethnicity of Directors Less than 25% are under 50 years of age Less than 8% were under 40 years of age 33% were over 80 years of age Only 11% represented visible minorities

Board Diversity Policy Only 40% had one Of those that did – 80% felt their board represented their client base Of those that did not – only 40 % felt they were representative of their client base

What can credit unions do to optimize board composition? Observe turnover rates and tenure. Would your board benefit from regular renewal? Consider implementing formal board renewal processes/structures Elections Evergreen list Term/age limits

Are there any other solutions? Yes – appointments! Respect the democratic process Bylaw review and changes if required Experience in Canada

Skills Matrix Perform one! What do we need Tied directly to succession Experience Organizational Board Due diligence

Board Evaluations 40% is the average Smaller the credit union (under $500M), the less likely they are to do evaluations Formal, rigorous evaluation process Confidential assessment and one-on-one interviews with Chair

Why evaluate? Research is pretty clear Formal evaluations lead to better boards More emphasis on skills Renewal is also positively impacted Why – regular assessment - identification of skill gaps/ overlaps

CU board compensation: Pros and Cons Attract/retain Skills enhancement Increased accountability Increased time commitment CONS $ on directors = $ not spent on something else Entrenchment Counter to co-op philosophy

Those CUs that compensate directors … do so modestly

CEO Succession Planning

CEO Succession Less than 60% of credit unions have a formal succession plan Large publically traded companies – over 80% Why?

Finally…..Cyber Security Not a question of if, question of when Are you prepared? Hindsight – what has happened already Oversight – crown jewels, current security framework Foresight – stress testing, security breach scenarios (Home Depot) Insight – what will we need in 5, 10, 15 years

Monitoring and Compliance Code of Conduct Code of Ethics Legal framework Ethical Audit Stakeholders Products/ services Corporate objectives Hypernorm values Reputation Risk

Aligning Values for Ethical Motivation & Action Board of Directors Sets Vision, Mission, Strategy, Policies, Codes, Compliance, Feedback, Compensation, Appoints CEO, CFO Identify ALL Stakeholders Assess & Rank ALL Interests Integrate into Corporate Value System & Actions Corporate Risk Assessment Prepared by Management for Board Review & Approval Corporate Culture Created by Management Leads to Corporate Action Actions Motivation Beliefs Values 28 28

Thank you 29