Seven Risks a Director Must Understand to Fulfill the ‘Duty of Care’
May 19, 2011
May 19, 2011
Summer is coming and with it the deadline for board ‘financial literacy.’ For federal- and state-chartered credit unions, questions are still to be answered:
- How do I know what I should know about credit union finances?
- How do I know if I know it well enough?
- How would I demonstrate that I have met my responsibilities in this area?
Directors of every type of board have a “duty of care,” which requires “such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” (NCUA Paragraph 704.4(b) Duties of Federal Credit Union Directors.)
The idea of a reasonably prudent person does not provide for a clear-cut definition. At the very least, the director should seek information from reliable sources outside of their credit union’s management. Conferences are a good source for this outside perspective. I recommend each director keep your own records of your continuing education.
Test yourself: The seven risks
NCUA does give some guidance. Here is a quick quiz:
- List the seven types of risks found in depository institutions that the NCUA indicates are essential for a director to understand;
- Define each of the seven; and
- Rate your credit union on each (poor, fair, good, excellent) and explain why you chose that rating.
Consider how difficult or easy that quick exercise was. If you are a director, do you need to understand the risks better or how to evaluate your credit union in the seven areas?
The risks NCUA identified were credit, liquidity, interest rate, compliance, strategic, transaction, and reputation risk.
Test yourself: Your board packet
When you receive your next board packet, consider the ‘dashboard’ metrics provided. Is there information about capital ratio? Member growth? Share growth? Loan-to-shares? These may not be the best metrics for your credit union and your board, but think about what you are provided. Then consider:
- Do you understand how each metric is calculated?
- Is increasing or decreasing favorable for that metric?
- If it is changing, is that movement or that direction expected or unexpected?
- Do you know what the target is? Is there a target?
- How and why is it important to your credit union?
- How and why is it important that the board consider that metric?
Whose ‘Duty of Care’ is it, anyway?
The ‘Duty of Care’ is an individual duty of each director. It is one of the things you cannot delegate to management or to other directors. Three steps toward meeting the duty of care include taking independent action to understand credit union finances, learning about the risks you are responsible to monitor, and asking questions about the financial information you receive at board meetings.
Linda Keith CPA (www.LindaKeithCPA.com) works with directors, managers and lenders of credit unions across the country. She’ll be presenting sessions on good governance, finance for directors and navigating the risks of credit unions at the Volunteer Conference June 24 – 25 in Bend, Ore.
Questions about registering? Contact Education & Business Services Assistant Janet Owen: 206.340.4791, firstname.lastname@example.org.