Strategic opportunities and critical governance challenges: Evolving the governance response pattern
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The credit union industry now operates in an environment of unprecedented volatility where the past is no longer prologue. Rapid external shifts such as economic fluctuations, regulatory unpredictability, technological disruptions, and changing talent dynamics, are forcing boards to reconcile with their governance structures. Persistent ambiguity can leave boards feeling underequipped and reactive, frequently resulting in governance processes and frameworks developed after a situation has materialized. In these situations, the strategy ends up being subservient to the outmoded governance framework.
To meet future challenges head-on, credit unions must evolve into more complex organizations. The critical opportunity for boards is to ensure their governance frameworks progress at a commensurate rate. Said differently: the purpose of governance (e.g., policies, practices, and people) is to enable the strategy.
This reorientation is crucial to maintaining effective oversight and increasing long-term sustainability for the organization itself. This starts with a board commitment to evolve their governance practices and response patterns. An evolved and futuristic board mindset will stimulate different dialogue and result in more thoughtful governance approaches to nascent realities. Three of the most critical governance challenges that organizations are facing today are:
- How to effectively hold the CEO accountable and reward them to achieve results
- Acquiring and developing relevant functional domain expertise in the governance bodies
- Increasing the likelihood of long-term strategic execution with rigorous succession planning
In the last few years, boards have begun to increasingly embrace the criticality of rigorous evaluation processes that both hold their CEO accountable (risk and reward) for historic results as well as provide constructive feedback for future development and prioritization of efforts. Often when an organization is performing in the bottom 25% of their peer group for a period of time, the board is unaware. The question then becomes, was the board's lack of awareness regarding their competitive positioning causal or not? Sometimes "goals are set" but loosely connected to the strategy and disconnected from the competitive landscape. In these circumstances, boards need to evolve their governance response pattern to effectively hold the CEO accountable to achieve results. This includes improving how it translates organizational priorities into tangible and measurable outcomes. When the organization is consistently performing, the board needs to ensure their reward structure and response pattern is also reflective of those measured outcomes.
Effective oversight of an increasingly complex organization requires advancing oversight responsibilities and elevating skillsets. Firstly, each board's definition of the "right" portfolio of skills will dramatically shift in the coming years, especially as their strategy evolves. As a reference point, ten boards recently benchmarked the future representation of skills and 71% of those directors said having a grasp of the business applications of Artificial Intelligence was either critically underrepresented (30%) or underrepresented (41%). These results were as expected as they were invigorating. Similarly, expertise and insight in how other non-depository institutions have successfully (or unsuccessfully) shifted their branding to appeal to younger generations will become increasingly important as the board declares the long-term strategy. In contrast, 16% of directors from those ten boards most recently setting a benchmark felt that Diversity, Equity, Inclusion, and Belonging was at least somewhat overrepresented as an expertise on their board. Finance (15%), Board Governance (14%), and Accounting (13%) were the next highest ranked overconcentration of skillsets for the future board.
The opportunity for boards is to establish a relevant board-level benchmark for the future. This will inform their oversight, succession, and development opportunities. Some organizations will choose to acquire depth of expertise to bolster the board's oversight capabilities whereas others will educate themselves so they can be a little more dangerous than novices. To round out the governance response pattern, the path forward includes honestly, not overly graciously, assessing the board's current portfolio of skills and expertises against that future benchmark. High performing boards will then regularly update the benchmark to ensure representation aligns with strategy, which will continue to evolve along with the skillsets needed.
Rigorous succession planning is now an even hotter topic with the NCUA's final rule in place. From a governance standpoint, strategic CEO succession is the most critical and all encompassing conversation that occurs because it touches on strategy, organizational performance, culture, governance, and compensation. Beyond the interim and emergency plan, having a meaningful understanding of executive talent and their upside potential years in advance empowers better decisions today that can drastically improve outcomes tomorrow. Too often successors are brought in because rigorously developing the talent that will lead the organization in the future was not important (in practice) to the board or CEO. Attending conferences or receiving certifications is seen as "development" but is not necessarily the stimulus needed to generate an embodied strategic perspective in future CEO candidates.
Having a succession viability conversation can be very dignifying for aspiring candidates; they want to know what their candidacy does and does not bring to the table in the board's eyes. Aspiring candidates want the time to develop missing skills, perspective, and leadership presence. If they're not given a fighting chance, then there are other downstream effects. Beyond that, investments are often only made in those identified as potential CEO successors while other high performing talent without CEO aspirations may not receive the same kind of stretch assignments. The new CEO then inherits a team that is not as competitive as they could be. A critical governance challenge and opportunity is ensuring the organization is developing ALL the talent it needs in the future.
These three critical governance challenges more than highlight "today's" opportunities for boards to evolve their governance response pattern because they center on people. As advanced as technology gets and as volatile the external environment becomes, people are always going to be at the heart of the credit union business model. Boards have the opportunity to normalize the evolution of their governance response to meet tomorrow's challenges with the right skills and the right people, ensuring the organization is on target to achieve meaningful results.
Written by Peter Myers, svp, DDJMeyers
Sponsored by Visionary
