Board Governance John Collins April 30 2016 www
Board Governance John Collins April 30, 2016 www. alloyacorp. org
Introduction • John Collins, SVP, Risk Management and Administration at Alloya Corporate FCU • Responsible for: – Governance – Strategic Planning – Enterprise Risk Management • Started in credit unions as a teller over 30 years ago including role as a CFO of a $200 MM credit union. www. alloyacorp. org
Introduction • Served on several other Boards: – IL CUES – Fox Valley Montessori – Federal Reserve Chicago Advisory • Serve as the independent lead director for CTI (CTIB) for the last 10 years: – $60 million in sales – Serve on the Audit Committee • Not an attorney, please check with your counsel on any specific issues. www. alloyacorp. org
Agenda • • • Volunteer Duties and Responsibilities Directory Liability Personal Indemnity Agreements Trends Best Practices Questions www. alloyacorp. org
Duties and Responsibilities • What are the duties and responsibilities of a Director? • Depends on who you ask – NCUA - Regulation 701. 4 – Attorneys - Courts www. alloyacorp. org
Duties and Responsibilities NCUA Regulation 701. 4 • General Direction and Control • Duties – – Good Faith Fair & Impartial Understand financials Direct Management per FCU Act www. alloyacorp. org
Duties and Responsibilities NCUA Regulation 701. 4 • Hire Outside Experts as needed – You believe to be experts – Legal Counsel – Accountants, etc. • May rely on: – Management – Outside Experts – Board Committees www. alloyacorp. org
Duties and Responsibilities Attorneys • Duty of Due Care – Attend and Participate in Meeting • Do you track attendance? • Absence = Risk accepted • Use as nomination criteria – Good Minutes • Can change prior to approval • Not a transcript, but important discussion and debate should be covered. – Hire Outside Resources When Necessary www. alloyacorp. org
Duties and Responsibilities Attorneys • Duty of Loyalty – Disclosure of Actual and Potential Conflicts of Interest • Recusal • Transparency • Ask legal council if you are unsure – Appearance of impropriety is as bad actual impropriety. www. alloyacorp. org
Duties and Responsibilities Attorneys • Duty of Loyalty – Fair and Impartial • Responsibility to all members, not just a few. • For example, pricing or product access for select members. www. alloyacorp. org
Business Judgement Rule If you only remember one thing, remember this! • Fundamental protection under the law for all stakeholders. • States you do not have to make the “right” decision, but you do have to demonstrate you exercised due care. • For example, if a big issue was discussed in five minutes with no supporting materials, you cannot demonstrate due care. • Board packet contents and minutes matter! www. alloyacorp. org
Director Liability Good/Bad News • Good news – Few cases actually get litigated – Fewer still result in costs to directors • Bad News – Risks are increasing – Litigation amounts are increasing for publicly traded firms: • Settlement range ($75 -$275 mm) • Median Settlement ($6 mm) www. alloyacorp. org
Do you believe that the risk of liability has increased in recent years or will increase in the near future? No, 11% Yes, 89% www. alloyacorp. org
Have you ever been named in a shareholder suit? No, 20% Yes, 80% www. alloyacorp. org
D&O Litigation Trends • 5, 100 companies (3%, 150) • Financial Services (0. 9%) • Most suits involves SEC Regulation, Securities and M&A issues that do not apply to credit unions. • More credit union suits related to bank charter conversions (share holder activism). www. alloyacorp. org
Case Disposition Tried, 0. 2% Dismissed, 39. 5% Settled, 52. 6% All pubic companies last 10 years Withdrawn, 7. 7% www. alloyacorp. org
D&O Protections • You take actions on behalf of your credit union and can therefore incur liability. • Three protections: – Good governance practices, prevents issues – Indemnity, credit union pays – Insurance, insurer pays (sometimes both) www. alloyacorp. org
www. alloyacorp. org
Director Protections Indemnification • Indemnification – Credit Unions can indemnify volunteers and officers for their actions per the Bylaws and Policy. – Can include litigation and settlement costs. – Cannot indemnify against regulatory actions. www. alloyacorp. org
Director Protections Indemnification • Indemnification – Contingent on credit union’s ability to pay. – In most cases, disinterested directors decide whether, what and how much gets covered. – Not usually an issue, but… • Supervisory vs. Board issues • Bank charter conversion www. alloyacorp. org
Director Protections Insurance • Insurances – Fidelity Bond may apply • Required by regulation • Usually protects the organization, not the individual – Property & Casualty • Protects the organization • Contents • Liability (slips and falls) – Directors and Officers Insurance (D&O) • Protects the individuals www. alloyacorp. org
Director Protections Insurance • Insurances – Directors and Officers Insurance (D&O) – Insurer offers coverage for certain actions – Insurance is risk mitigation not risk elimination • If you have a significant claim, there will likely be separate litigation with the insurer. • You won’t know if you’re covered until you get the facts. • If the insurer agrees to pay and they agree it is in the policy, they stand in. – Usually pays after settlement and can reimburse credit union for indemnification. www. alloyacorp. org
D&O Insurance • Side A What it Covers – Trigger = D&Os Actions that are not indemnifiable – Pays = On behalf of D&Os – Retention = $0 • Side B – Trigger = D&Os Actions that are indemnifiable – Pays = On behalf of the credit union – Retention = Applies • Side C – Trigger = Action of the credit union – Pays = On behalf of credit union – Retention = Applies www. alloyacorp. org
D&O Insurance Risk/Return Decision • What should our limits be? • Depends – How many D&Os do you have? – Limits are shared – $10 MM/25 D&O = $400 thousand each – Limits by Policy Type • D&O • EPL • Fiduciary www. alloyacorp. org
Indemnity Issues • In cases where indemnity arises, there is often an inherent conflict of interest. – Some or all the BOD or volunteers are sued. – Who can impartially decide what is in the members’ best interest? – Consider using General Counsel or independent attorney. • Bylaws/Policy can be changed to eliminate coverage of former volunteers and directors or how and when indemnification occurs. www. alloyacorp. org
Indemnity Issues • Bylaws/Policy are not specific – Advancement of legal expenses • Often a source of contention • Litigant can force the individual into settling based on attorney fees – Witness coverage • Travel Expenses • Lost Wages www. alloyacorp. org
Indemnity Issues • Bylaws/Policy are not specific – Independent counsel • Will the credit union provide you independent counsel? • Who decides when and if you get that counsel? • Who pays for the counsel and when? – Litigation will use this against you to force you to settle since you may bear the legal costs. www. alloyacorp. org
Personal Indemnity Agreement • Many organizations develop Personal Indemnity Agreements to address this, which are allowed for under NCUA Regulations. • Contract binds credit union going forward (cannot be changed). • Typically 8 -10 page agreement that: – Provides more specificity on what will be covered. – Under what circumstances expenses, including witness, will be advanced. – Selection of independent counsel. www. alloyacorp. org
Do you have a personal indemnification agreement contract with your company? No, 38% Yes, 63% www. alloyacorp. org
Trends – Boards Public Companies • • Average BOD size Average Committee of the Whole Supv/BOD Same Average # BOD meetings/yr Duration of planning retreat/days www. alloyacorp. org 62 8. 7 3. 4% 6% 5 2. 5
Typical Public Company Meeting • Day 1 – Morning • Fly in, meet at hotel/corporate offices • Committee meetings • Lunch with senior staff – Afternoon • Senior staff discusses business lines • Financial review – Dinner – Working dinner with CEO and senior staff www. alloyacorp. org
Typical Public Company Meeting • Day 2 – Morning • Breakfast/Committee meetings • CEO and BOD or BOD Only – Strategy – Succession planning • Executive session – Lunch & departures www. alloyacorp. org
Best Practices • Regular Board Meetings – – Range of monthly to quarterly Usually 4 -6 in person meetings per year In-person meeting last about one and half days Personal interaction of Directors • Committee Meetings – Varies by Committee – Supervisory meets more frequently (6 -9 times per year) – Others usually quarterly • Packet & Agenda 7 -10 days in advance – Sufficient time to review materials – Allows Directors to ask clarifying questions, before the meeting – Consent Calendar www. alloyacorp. org
Best Practices • Use a System For BOD/Committee Packets – – Provides Transparency, Access, Security Reduces administration costs Diligent, Board Source $5, 000 - $50, 000 per year • Have Annual Calendar/Agenda – Layout general meeting topics for the year – Have strategy be a standing item – Add Bylaw, Regulatory Requirements (i. e. , Annual Meeting) www. alloyacorp. org
Best Practices • Independent Majority – Required at public companies – Credit unions already meet this • Director Diversity (No PMS) – Represent member demographics – Diversity of gender, race, etc. – Diversity of skills www. alloyacorp. org
Best Practices • Self-Assessments – At least BOD and Supervisory – Perform annually – Lots of tools and providers • Take anonymous survey • Survey and Consultant • Can spend a lot or spend a little – Great tool to drive Board effectiveness www. alloyacorp. org
Best Practices • BOD Succession Planning – – Need to have a plan to replace Board Members Skills matrix for BOD members Succession through Committees Board Officer Succession • New Director Development – Have an orientation program – Associate Board members – Required training www. alloyacorp. org
Best Practices • No Over Boarding – Too many Boards can reduce effectiveness – Make sure management is not over boarded – Public companies have a limit • Senior Staff Attendance – – Most BODs have them attend at least part Staff development Lets the BOD “see” the staff in action Engages senior staff www. alloyacorp. org
Best Practices • Board Executive Sessions – Fairly typical at in person meetings – Usually CEO and Board only – Chair should communicate with CEO following the meeting • Committee Executive Sessions – Usually only Supervisory – Meet separately with Independent Auditor www. alloyacorp. org
Best Practices • Age limits – Advantage – Can get stale and ineffective – Disadvantage – Lose expertise & knowledge – Consensus is No • Big investment in expertise and experience • Internal costs to develop new directors • Self-evaluations should identify those who need to move on • Have a good self-evaluation process www. alloyacorp. org
Best Practices • Term limits – Advantage – Prevents stale, group-thinking – Disadvantages - Loss of expertise & knowledge – Consensus is No • Forced turnover can be bad, loss of continuity • Cost of developing new directors is high • If you have a good self-evaluation process, you don’t need this www. alloyacorp. org
Best Practices • No Emails during meetings – If you’re doing emails, you are not engaged – Public company BODs have been bitten by this • Personal Indemnity Agreement – Becoming more common – Provided for in regulation www. alloyacorp. org
Best Practices • Engage on People & Talent – One hire, CEO – Succession planning – Talent planning • Engage on Strategy – – What business are we in and why? Who do we serve and why? What is our value proposition and why? Engage while its forming as you are responsible for the results www. alloyacorp. org
Best Practices • Engage Between Meetings – Dialog with fellow BOD members – Develop relationships • Engage your Expertise – Accounting – Legal – HR – Cybersecurity www. alloyacorp. org
Questions www. alloyacorp. org
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