Aug 04 2010

Tracking the Relationship Between Credit Union Governance and Performance

Report  
Number  
219

his research was commissioned to uncover concrete connections between good governance and good financial performance. But the world of credit union leadership proved messier than that.

Matt Fullbrook
Matt Fullbrook
Manager, David & Sharon Johnston Centre for Corporate Governance Innovation at Rotman School of Management
University of Toronto
Jesse Chen
Clarkson Centre for Board Effectiveness, Rotman School of Management
University of Toronto
Antonio Spizzirri
Clarkson Centre for Board Effectiveness, Rotman School of Management
University of Toronto
Report Number 219

Executive Summary

In Garrison Keillor’s fictional town of Lake Wobegon, “all the women are strong, all the men are good looking, and all the children are above average.” Keillor puts a folksy spin on a perplexing phenomenon called illusory superiority, in which a majority of people tend to judge themselves as better than average, when in mathematical fact, only 50% can be. You see it in drivers, 80% of whom claim to be above average in one famous experiment. You see it in high- achieving students: 87% of Stanford MBA students rated their academic performance to be in the top two quartiles. And, apparently, credit union directors are not immune.

When asked to self- judge the quality of their governance and the strength of their credit union’s performance, the directors who considered their governance practices good also said that their credit unions performed well. But when the directors who claimed good practices were matched with their actual returns on assets (ROAs) over seven years, there was no statistical correlation to above- average ROAs. Well- meaning, but illusory, superiority. This research was commissioned to uncover concrete connections between good governance and good financial performance. But the world of credit union leadership proved messier than that.

What is the research about?

Volunteer credit union boards display a broad range of competence and engagement. This research aimed to identify any relationship between good governance and good financial performance. That connection might be elusive, but the research does identify several best practices that allow credit union leaders to improve both governance and, hopefully, performance. This report expands on two recent Filene governance reports: The Board’s Role in Credit Union Mergers and Recruitment and Selection Practices at Credit Union Boards.

Using in-depth interviews and survey tools, the researchers plumbed credit union board practices in key areas, including the following: time allocation, decision- making processes, board composition, director selection, board performance measures, and credit union performance measures.

What are the credit union implications?

Credit union boards must overcome illusory superiority with a blunt assessment of their place in their markets and of what kinds of directors they will need in order to improve that place during the next five years of regulatory commotion, constricted credit margins, and changes in consumer demand. This research shows several areas ripe for improvement:

  • Time management. Effective meeting management is a challenge, and boards seem to have only a vague sense of how their meeting time is spent. To improve, boards must know how their time is currently spent and then prioritize agendas to spend more time on strategy.
  • Director evaluations. A dearth of board introspection means board chairs and other directors need to be proactive in formally evaluating their own contributions. They should consider implementing annual board effectiveness surveys, formal peer feedback, formal reviews of the chair, and feedback from management.
  • Continuing education. One way to encourage better governance is to demand individual improvement. Surveyed directors who ranked their boards in the top decile of governance performance all had formal continuing- education policies, while those in the lowest decile rarely did.
  • CEO evaluations. The board/CEO link drives financial performance. The only governance practice that yielded a strong positive correlation with actual credit union ROA performance was whether boards felt they had an effective CEO evaluation in place.

Lake Wobegon is a tempting place to live. After all, it is a friendly, collegial town where it’s much more comfortable to assume one is doing well than to take a hard look. But as market forces continue to buffet credit unions, boards can no longer afford to delay introspection and hard choices. Above average demands much more.