The recession has had a tremendous impact on all financial institutions, causing dozens of financial institutions to fail.
Economic turmoil has significantly increased the responsibilities and risks of being a volunteer credit union director. Board members must understand their basic duties as directors to avoid lawsuits and prevent exposing their personal assets.
Common law establishes that directors have fiduciary duties, generally divided into two categories: Care and loyalty.
Meeting “duty of care” requires a credit union director to act in good faith or in the best interest of the credit union and make reasonable assessments of issues that are being considered.
Duty of care
Here are some ways to demonstrate duty of care:
►Ask questions in board meetings. It’s simple, and meeting minutes will reflect these questions and demonstrate a duty of care. Ask that questions be reflected in the minutes.
►Ask for additional information. Don’t rely solely on information provided. If necessary, request additional research, articles, or reports.
►Hire outside resources when necessary. Directors aren’t expected to know every detail or have immediate answers. Engaging with an outside firm or consultant can help assess a situation and provide an independent opinion.
►Focus time on business-critical items. This guideline is relative, but business-critical decisions regarding mergers, acquisitions, layoffs, and new markets require time and focus.
►Review all material information. Read the board briefing packet and ask for more information.
►Share and discuss alternatives. Simply putting an alternative on the table for debate can greatly reduce the chances of a duty-of-care breach as long as the alternative is seriously considered.
►Document board meeting minutes clearly. The accuracy and clarity of board meeting minutes are often taken for granted. Ensure all discussion items are clearly documented in case a suit is filed.
Duty of loyalty
A “duty of loyalty” refers to exercising powers solely in the interest of the credit union and its members. Directors must avoid potential or actual conflicts of interest by not acting in their interest or in the interest of family members.
Remember these key items to avoid a breach of loyalty:
►Disclose any conflict of interest to the remainder of the board.
►Provide the credit union with first right of refusal. If you as a director is presented with an opportunity that may be of any interest or value to the credit union (i.e., land development) you must formally present this opportunity to the credit union before proceeding personally.
►Consider others’ perceptions. Duty of loyalty is based on perception.
For example, perhaps a board is considering several new auditors, including a firm that employs a director’s brother-in-law in a different state and industry segment.
The director votes in favor of this auditor but does not disclose the family relationship because she feels the decision is not made to benefit her brother-in-law.
In this example, the director would likely breach her duty of loyalty because of the perception of conflict. One great check is to imagine the headline in a major newspaper: How will it be perceived?
Finally, know if and when a vote by members is required for major transactions, such as a merger, and ensure your credit union has written corporate governance guidelines and a director that is designated to lead corporate governance.
These guidelines are generic and not intended as legal advice. Consult with your credit union’s legal counsel to address specific issues.