Challenges in Credit Union Boardrooms and CEO Succession Planning
Today our hosts Joshua Barclay and Becky Reed guest is Doug Duong, Board Chairman of Pasadena Federal Credit Union. The main discussions include the impact of the changing economy on credit unions, the significance, selection, and efficiency of board directors, the importance of succession planning among CEOs, and the responsibility of credit unions in promoting financial literacy among its members.
List of Resources
Where Investors Are Finding Returns in a World of Yield
More than 60% of Americans are living paycheck to paycheck.
Follow Us:
Full Transcript
Joshua Barclay: If you could change one thing about credit union board rooms, what would it be? Plus, we’re peeling back the curtain on CEO retirements. How should credit unions be doing their succession planning? All this and more on today’s episode.
Joshua Barclay: Welcome to Grow Your Credit Union, where credit union leaders gather, learn, and grow. Becky Reed, my cohost. Welcome.
Becky Reed: Thank you. Hello.
Joshua Barclay: Becky, it was great meeting you for the first time in Frisco, Texas at VentureTech 2023.
Becky Reed: It was a pleasure actually meeting you. And you’re taller than I thought.
Joshua Barclay: About five people told me that at the event. “Wow, you’re a lot taller than I thought you were.” So, I don’t know what kind of little man vibes I’ve been giving off, but it was great to see you there.
Becky Reed: [Laughs]
Joshua Barclay: We are delighted to welcome our guest, board chairman at Pasadena Federal Credit Union, Doug Duong. Doug, welcome to Grow Your Credit Union.
Doug Duong: Thank you. Looking forward to this.
[Music]
Joshua Barclay: Let’s talk about the elephant in the room, or rather the mountain of cash that’s accumulating in retail money market funds. The average yield has surged to a level we haven’t seen since 1999.
What options exist for credit unions that want to satisfy member’s thirst for high-yield without damaging net interest margins? Becky, let’s start with you.
Becky Reed: It’s definitely a balancing act, and it’s called asset liability management, or ALM. And I call it ALM 101. Now, credit unions got a little bit out of practice with ALM when interest rates were below zero. Money was practically free.
Credit unions focused on lending. And lending, as it relates to low interest rates, is all about volume. It’s about getting the most loans on the books as you can because they pay off pretty darn quick.
Well, in a rising rate environment, if you have a lower interest rate on your loan, you havae a two percent, and interest rates are now five percent, you don’t have a very appealing option to go and buy a new car at five percent when the one you have is at two.
Same goes for a mortgage, all of those things.
So, prepayment speeds start to really slow down. So, now it’s not about volume, it’s about the quality of the loans you’re putting on the books. Now, reverse that, and now money is no longer free.
I’m not paying .1 on my savings account. I’m paying 100 basis points on my savings account, not 10. And so that creates a whole different attitude from an asset liability management perspective.
You talk about 1999. Well, I remember 1999. I remember Y2k. I was in the credit union space back then. I remember when we had mortgages at seven, eight, nine, ten percent. I remember a car loan being at six and seven percent.
I remember a savings account being at two percent. There are a lot of credit union leaders today who were not around then, who came into their leadership position at the credit union in the executive…in the C-suite in the low interest rate environment.
It’s definitely a challenge. I’d love to hear what Doug’s take is on it from a board perspective.
Doug Duong: Making loans is still a priority for us. We can’t look away from making loans. But also the fact there is high-yield opportunities out there for members. If they’re members, and they are loyal to their credit union, a quarter basis point is not going to get them to move their money.
It’s the problem where most credit unions today, they’re still paying three percent when there are five, six percent vehicles out there, opportunities for members.
I think if you offer four percent, four and a half percent, you’re still going to retain the member’s money because they still are very loyal to their credit union.
I think this is an opportunity for many institutions today. They got to look at the way they do business, and going in there and do some cost cutting. Improve your margins.
It’s not just about the loans. It’s not just about the yield. You got to run a very lean and efficient operation today to compete.
Joshua Barclay: Doug, you mentioned cutting costs. Can you give us any examples of areas where some of those costs could be cut?
Doug Duong: I’m going to say something that is going to be very controversial, and I know folks are not going to like it. Efficiency is a goal where there is a lot of opportunities for many institutions to look at.
There are positions that was nice to have when we have great flow of income, but we should look at it carefully at this time and thinking how we could improve and bring more efficiency to the system.
We talk about the digital channels being much more cost affective versus branch operations. They all are important, but we need to make sure that they are efficient. There are many institutions who are 20, 30 billion in asset size.
They have ten percent of their branches that barely have any members visiting them.
The smaller credit unions are always in difficult positions because they don’t have the luxury of cutting costs because their margins are thin.
They’re operating in a very difficult environment as it is because cost cutting is very difficult for smaller institutions compared to the big ones.
Joshua Barclay: Becky, anything to add to that? Because you were the CEO of a smaller credit union.
Are there any efficiencies or cost cutting that is very obvious?
Becky Reed: I think efficiency is the key phrase. And across credit union land, when I go around and talk to different credit unions, efficiency is one of the main things that I hear.
We have to be more efficient. We have to be able to do more with less or at least do the same with less, right? I believe that it starts with technology.
What that means, in some cases, is that you have to spend the money on the technology in order to gain the efficiencies that you’re looking for. You have got to have a digital roadmap.
You know, there is not a magic pill that you can take from a software perspective that is just going to automatically make your organization more efficient.
So, you have to have a plan. You have to have a strategic roadmap in order to make sure that you follow the steps that you need to gain those efficiencies. But in this day and age, that starts with technology.
[Music]
Joshua Barclay: I want to bring up something that Sam Brownell mentioned on a podcast episode that I did five or six months ago, and here is what Sam said.
He believes that many credit union mergers are driven by CEOs, using them as a retirement exit strategy. He says we should be preparing young leaders for a smoother transition into leadership.
So, Becky, what is your process for pinpointing potential leaders, and how do you determine when they’re truly prepared to take the helm?
Becky Reed: Thank you for asking that, and what Sam said is a bit controversial, when we have the old regime that just is kind of hanging on.
Unfortunately, that’s a barrier to some of the immerging leaders that are coming up through the ranks. It’s very frustrating being in middle management and having a C-suite that is working well into their 70s, God love them.
But that’s a barrier to allowing growth opportunities for people in your credit union. So, if I’m sitting in the middle management ranks, and I’m a senior VP, or I’m an executive VP, and a C-suite executive doesn’t leave for some reason then I have to leave.
I’ve got to go somewhere else. And so we’re losing talent because of that. I’ve always looked at it as I can’t grow unless I help others grow. I’m always looking to train my replacement.
That is a scary thing for some folks because it’s like, “If they come in and take over what I’m doing, what am I going to do?” Exactly. What are you going to do?
You need to be thinking about how you can continue to grow and expand in your career.
Joshua Barclay: Doug, please give us your take on this.
Doug Duong: I’ve said this all along, right? If you want to grow, you got to let go. You can’t continue to hold onto the same chair you had 10, 15 years ago. To be honest, everything starts with the boardroom.
When the board of directors are not paying attention to their job, their responsibility is they need to have and ask their CEOs for a succession plan.
They need to have it ready all the time and identify whether it’s an interim person or a permanent person. But it needs to be done on a regular basis.
It needs to be part of your strategic plan. Your strategic plan session is not designed so that you can go and enjoy the trip and go on a golf outing. It’s actually work.
You need to have a plan. Then you need to hold your CEO accountable for the plan, and the board of directors have got to hold each other accountable for that plan.
I’ve had three years in a row of strategic planning where after we formulate and create the plan, next month it goes in a drawer and disappears.
They need to have a strategic plan at least twice a year. Things are changing too quickly to hold once a year. You need to have it often.
Joshua Barclay: Doug, how are board members typically selected?
Becky Reed: Once again, I’m going to say something that most folks are not going to like, because your buddies that you go to the bar with and have a couple of drinks, that person is not the best board member you can bring on board.
The CEO and the board chair brings board members in that they know will rubberstamp everything in front of them. They’re not going to question anything.
They’re not going to ask anything. I remember my first meeting as a supervisory committee member, and I thought, “I’m just going to have a little fun here, sit here and listen.”
Stupid me opened my mouth, and I said, “How are we making money with this model, with this strategy?”
And they all look at me and says, “We have a plan.” “Okay, tell me the plan.” There weren’t any plans. I’m lucky enough to have been in the credit union space for 25 years.
I have been educated by many people about what a good board of directors, good management, good leadership should be all about, so I was able to share that with my board.
And eventually those folks who are not interested in working hard and helping the institution, they will naturally deselect themselves from the process.
Raising the standard of board of directors, for me, is the number one solution when it comes to survival of credit unions.
Joshua Barclay: I have a follow up. I’m going to go to Becky first, and then we’ll pass it back to Doug. Becky, if you could make one change to credit union boards, what would that be?
Becky Reed: Mandatory term limits. Most bylaws don’t have term limits built into them. I mean, it’s not standard if you’re dealing with a credit union that has been around for 30, 40, 50 years.
They don’t have term limits built into their bylaws. Now, it should be a reasonable term, because you want educated folks. You want people who have experience. You don’t want brand new board member every two years. That would be a nightmare.
A three-year term or a maximum of four terms for example, that is a really good time limit. Also rotating the executive committee.
You shouldn’t have a board chair that’s been there for 25 years. That’s probably not in the best interest of the credit union.
Joshua Barclay: Doug, let me pass that one off to you. If you could make one change to credit union boards, what would it be?
Doug Duong: Any board chair who’s actually active and working after about three terms, they should step down because they should be very tired if they’re working as a good board chair.
But the last part which I find very interesting that most board of directors don’t have is a code conduct. It’s ridiculous for us to make sure that our employees and management, executives have a code of conduct, and the board of directors don’t have one.
As you’ve noticed recently, the Supreme Court has finally administered their own code of conduct. Really? 300 years, 200 years in, and we finally have a code of conduct?
Board of directors should have a code of conduct, including not messing around with management stuff. Right? Not getting involved, talking to employees and causing all sorts of trouble.
So, a code of conduct would give the board the guidelines. It absolutely would give management a tool to go to the board of directors and say, “We have a problem. Somebody is violating the code of conduct.”
[Music]
Joshua Barclay: Recent research from LendingClub has shed light on a bit of a widespread challenge. About 61% of Americans are living paycheck to paycheck.
However, the thing that blew my mind, Becky and Doug, was that even people in the high income bracket, those with earnings surpassing $100,000, admit to facing the same financial tightrope.
Do credit unions have a responsibility to educate their members on financial literacy?
Becky Reed: Well, I’m going to answer that by saying you can lead a horse to water, but you can’t make them drink. Credit unions do have a responsibility to their community and to their member to provide tools and access so that people understand.
However, you can’t force anybody to make good financial decisions. There is so much involved in the financial decision making in a household or in an individual that has 100% nothing to do with the credit union and everything to do with the manner in which they grew up, the community in which they live, and the financial habits of the people that surround them.
Joshua Barclay: Doug, do credit unions have a responsibility to guide people through financial literacy?:
Doug Duong: Yes and no. First of all, as an immigrant from Vietnam, when I first came here in 1975, there were no financial literacy classes. My first mortgage was eight percent adjustable.
When it went up to 12%, my wife and I ate Spam and Ramen for six months just to make sure we can save money to pay for our mortgage. We took the responsibility. We sacrificed to make sure that we honor our commitment when we sign that paper.
The responsibility doesn’t start with the financial institutions alone. It starts at home, and it starts with our educational system.
You know, when kids go to college, they’re being bombarded by these banks, and many of them throw credit cards at these kids. And the kids don’t know what to do with it, other than, “Hey, you know what? Someone is giving me free credit, and I’m going to sign up. I’m going to charge it up.”
And then they can’t figure out how to pay for it. When you’re talking to a member, and that member has a credit card 22% interest rate, your responsibility is to say, “Hey, ours is 12%. You can save a lot of money.” That’s not selling. That’s not pitching. That’s doing someone a great favor.
Becky Reed: Sometimes what that means is denying a loan application and sitting down with that person and saying, “Look, I understand you want to get a new car, but let’s take a look at that car that you want to buy, and let’s really take a look at what that means. Because the numbers that I’m looking at says you really can’t afford it.”
Joshua Barclay: You know, when I was in high school, they didn’t educate me at all about financial literacy whatsoever. I had to go through it myself. Becky, final thoughts?
Becky Reed: I think we were very lucky to have Doug with us today. It is so important, I think, to hear from the board’s perspective as it relates to the credit union industry, because it is in fact boards of directors that are running the credit unions, right?
Financial cooperatives are democratically run by the members, and they vote for fellow members to represent them on the board.
And so thank you so much, Doug, for giving us your insights as a board chairman.
Doug Duong: Thank you for having me, and those are excellent questions. I’ve been dying to tell my story for a long time. I have a great platform to actually share some of these thoughts. Right?
Because my family have heard enough of this story, right? I annoy everybody that’s close to me, hearing this stuff all the time. And I wish all board of directors, once in a while take a breather.
Give your CEOs, and your executive team, and your employees a little bit of a pat on the back and say, “Hey, you guys are doing a good job. Keep going. You’re serving the community, and you’re doing a good thing.”
Joshua Barclay: Board chairman at Pasadena Federal Credit Union, Doug Duong. Thank you for appearing on the Grow Your Credit Union Podcast.
Doug Duong: Thank you.
Joshua Barclay: If you love what you heard, please share it with a friend, subscribe, all that good jazz. And we will see you next time. Take care, everybody.
