Contemporary Governance Mitigates Lawsuits
By John Wallace
Since we’ve all had a front-row seat to the recession, it’s easy to relate to the economic impact it’s had on us professionally and personally. These unprecedented and unpredictable times have put corporate governance at the forefront for credit unions and their boards of directors.
According to CUNA Mutual Group, Madison, Wis., insurance claims received during the first half of 2009 related to lawsuits against directors, officers, volunteers, and employees have risen 72% compared to the same period in 2008.
While there isn’t a universal definition of corporate governance, it’s commonly referred to as a set of processes, customs, rules, policies, and laws that guide how an organization is directed, administered, or controlled for the benefit of stakeholders.
Likewise, there are many viewpoints on administering a contemporary form of corporate governance in response to today’s turbulent environment. However, most experts agree that more rigorous corporate governance practices can greatly improve an organization’s performance while reducing the likelihood of costly lawsuits brought against its directors and officers.
At the heart of corporate governance for credit unions are members—their primary stakeholders—whose interests should always be considered.
Credit unions’ secondary stakeholders may range from management, employees, suppliers, regulators, and the communities in which they operate. Every board decision should consider the impacts to its stakeholders.
Five governance best practices
The following practices can strengthen your credit union’s corporate governance and help reduce your professional and personal liabilities:
1. Establish written governance guidelines. These should establish the role of the board and any director qualification requirements, such as a minimum number of directors with a financial or legal background and when a vote by members or the board is required.
Do what’s best for your stakeholders and don’t take the path of least resistance. Your guidelines should reflect this concept.
2. Formalize a written procedure for disclosing conflicts of interest and board independence. Perform this annually to allow directors to compile a list of potential conflicts and submit those to the rest of the board. An example of an independence guideline would be to not allow a vendor or an affiliate of a vendor to sit on the board.
3. Designate a director in charge of corporate governance. A director of corporate governance can promote and establish governance best practices and be part of the buying decision for Director and Officer Liability insurance.
4. Develop written procedures for requesting third-party work. The board must be able to hire third parties to conduct independent analyses and provide independent recommendations, particularly for major transactions like a merger.
5. Create a director orientation packet. Give new directors a good start by providing key information, including articles of incorporation, bylaws and amendments, board meeting calendar, summary of disclosures, requirements concerning conflict of interest policies, and rules of government audits.
Recognizing the importance of corporate governance in today’s volatile marketplace and applying best practices in its administration will help protect your credit union—and you, as a credit union official and individual—from costly lawsuits.
The book, “Corporate Governance,” by John L. Colley is well-regarded resource for more detailed corporate governance best practices.
CUNA Mutual’s new Management & Professional Liability program, which is designed exclusively for credit unions’ litigation risks, will be available on or after Jan. 1, 2010, in most states. To learn more, e-mail email@example.com.