By Ray Birch
BIRMINGHAM, Ala.—NCUA’s new proposed rule on succession planning could lead to issues for credit unions—including driving more mergers among small credit unions, even though one of the agency’s stated goals is to slow the pace of those combinations, according to Dennis Dollar.
The former NCUA chairman is concerned the proposed rule as it currently stands is too prescriptive, does not consider the individual nature of credit unions, and places additional regulatory burden on smaller CUs already struggling to keep up with compliance.
The rule is now out for a 60-day comment period.
“As a credit union consultant, our firm has helped over 200 credit unions draft succession plans, so we definitely think it is good for credit unions to strategically look at their futures regarding executive leadership,” said Dollar, who is now principal partner with Dollar Associates. “However, an NCUA regulation telling credit unions how a federal agency thinks they should do their succession planning and putting examiners in the position to review the adequacy of what their succession plan should look like—even though it will bring my firm a lot of business—seems like overkill and unnecessary one-size-fits-all thinking.”
The One-Third Figure
Dollar also addressed some of the assumptions behind the new rule, that retiring CEOs are leading to retired charters, which all three NCUA board members and members of the agency staff discussed during the January board meeting, as CUToday.info reported here. The board was told that up to a third of credit union mergers occur because of a lack of a succession plan when a manager/CEO retires.
“But some credit union boards may have simply determined that their members would better be served by merging with a credit union that can provide them more products and services than by struggling to survive and trying to find a new CEO in a tough executive recruiting marketplace,” Dollar said.
As for the statistic that one-third of CUs merge due to the lack of a succession plan, Dollar said, “Every merger is strategically thought out by the board and then voted upon by the members, with transparency and extensive disclosures that must be approved by NCUA, to disclose how the long-term best interests and service needs of the members were evaluated and determined,” said Dollar. “It does not seem that a regulation trying to force credit unions that are struggling, not growing and having trouble competing in the marketplace to go through the cost of developing an executive succession process—when the board as fiduciaries feel it is in the best interests of their members to merge with another credit union so those members can be served better—is consistent with the safety and soundness responsibilities of NCUA to protect the insurance fund.
“If credit unions want to have a succession plan to build and grow for decades to come, they should have one and will do so without a regulatory mandate,” continued Dollar. “Current NCUA guidance and Letters to Credit Unions specify this as a best practice.”
‘Not a Bad Thing’
Dennis Dollar
Dollar said he believes a merger is “not a bad thing” if a credit union’s board and members prefer to join with another credit union that can serve them better and is on financially strong footing.
“They really don’t need a regulatory mandate to develop a costly succession plan or hire a search firm if merger is the best fiduciary decision for the members,” said Dollar. “The credit union fiduciaries should decide whether their credit union needs a succession plan or a merger, not the regulator.”
Taking the “merger reasoning” for small credit unions off the table, NCUA’s proposed regulation will require every federal credit union, large and small, to have a written succession plan that will have to meet NCUA’s approval at examination time, Dollar pointed out.
“Sometime a merger is best for a credit union when there is a CEO vacancy,” added Dollar. “Sometime hiring a new CEO with fresh ideas is best. That should be a credit-union-by-credit-union call, not the regulator's or the examiner's call.”
Potential Overreach
Dollar emphasized NCUA has the right to examine a credit union and through its supervisory authority question whether any hiring decision was the right one based upon results.
“But it is overreach, in my view, for NCUA to enact a regulation requiring credit unions to get their advance approval of the steps and options the credit union fiduciaries will follow in making an executive hire,” said Dollar.
From either a merger avoidance perspective or from an executive hiring process point of view, a succession planning regulation is placing a federal regulator in the middle of the fiduciary decision-making process rather than its “proper role” of examining the outcomes of the decision, Dollar reiterated.
“This is the very definition of federal agency overreach,” he said. “From the calls I'm receiving with concerns about this proposed rule, my guess is that the commenters will be overwhelmingly negative on the proposal when the comment period opens.”
A Regulatory Irony
Despite assurances from NCUA the rule is not intended to be burdensome, Dollar believes it is exactly that.
“And, as does regulation most times, the concern is that it will creep over the years—into hiring, compensation and benefit management by the regulator of the credit unions they regulate,” he said.
“From our experience, and from reasons cited to us most often for merging, the credit union’s inability to keep up with regulatory burden is the primary reason,” said Dollar. “It is ironic that the NCUA board has proposed to help slow down mergers by increasing the very regulatory burden that is driving more and more mergers.”