As Prepared for Delivery on January 27, 2022
Ariel, thank you very much for your thorough presentation on this notice of proposed rulemaking on succession planning at federal credit unions. I appreciate the hard work — by you and your colleagues in the Office of General Counsel — that went into crafting today’s proposal.
Before I begin to explain the reasons why this proposal is essential, especially to help maintain the viability of small credit unions and a diverse system with many small credit unions, I would like to thank Vice Chairman Hauptman for working with me to improve this proposed rulemaking. His suggestions go to the heart of the costs and benefits of this rulemaking to credit unions, as well as regulatory flexibility.
Through this proposed rule, the NCUA Board would require the boards of federal credit unions to establish and adhere to processes for succession planning. The succession plans would help to ensure that the credit union has strategies in place to fill key positions, such as officers of the board and key management officials to provide continuity of operations. Although the proposed rule would apply only to federal credit unions, the purpose of this rulemaking is to encourage and strengthen succession planning for all credit unions. Significantly, the proposed rule would provide federal credit unions with broad discretion in implementing the proposed regulatory requirements to minimize any burden.
Succession planning is the process through which an organization identifies, develops, and retains key personnel to ensure its viability and continued effective performance. Succession planning also allows an organization to prepare for the unexpected, therefore minimizing service disruptions during management transitions.
Moreover, succession planning is recognized as vital to the long-term success of any institution, including credit unions. A board’s failure to plan for the transition of its management could potentially come with high costs, including the potential for the unanticipated merger of the credit union upon the departure of key personnel. Put another way, succession planning helps to safeguard credit union members’ choice of financial institution.
When previously serving on the board of a small non-profit, I once saw firsthand the benefits of succession planning. At the time, that organization had annual revenue of approximately $650,000, and it underpaid its leader. The board’s foresight in developing a succession plan, including what would happen if the leader departed suddenly, and increasing the salary structure allowed the organization to withstand the uncertainties created during a subsequent management transition. At approximately the same time, another non-profit in the same area of work, in the same vicinity, and with more than twice the revenue folded when its chief executive abruptly left. That organization did not have a succession plan.
Several factors have contributed to increasing the relevance of succession planning for credit union boards. First, there is the long-standing, steady decline in the number of credit unions. This trend has remained relatively constant across all economic cycles for more than three decades. We are losing credit unions much faster than we can replace them with new charters, and we must find a way to keep small credit unions viable over the long term. So, it is time to try something new.
The consolidation trend is especially apparent in smaller credit unions. During the third quarter of 2021, the number of federally insured credit unions increased in every asset category tracked by the NCUA, except for those with less than $50 million in assets.1 Another NCUA analysis found that poor management succession planning was either a primary or secondary reason for almost one in three credit union consolidations.2 And, it is very important to note that the Federal Credit Union Act contains provisions that disfavor consolidation, implying a presumption that the public is better served with a greater number of credit unions.
Another reason for a heightened focus on succession planning is the ongoing retirements of the so-called “Baby Boomer” generation. The COVID-19 pandemic has accelerated the pace of retirements among this generational cohort.3 And according to some sources, even before the pandemic started, approximately 10 percent of credit union chief executive officers were expected to retire between 2019 and 2021.4 Succession planning is critical to the continued operation of those credit unions for the board members and executives who are part of this retirement wave.
Since joining the NCUA Board, I have been a strong proponent for succession planning. Over the past three years, I also have been encouraged by some in the credit union movement to pursue this rulemaking. One CEO told me, “[Succession planning] has a ton of merit, and we look forward to weighing in on that subject. Kudos for addressing it. From what I have seen, that’s one of the biggest reasons mergers take place at small asset credit unions.”
Another industry leader encouraged me to “wake [the industry] up to planning….as long as there is flexibility. The longer I do this, the more I understand how we need reasonable regulation that is risk-based. We want to spend our time serving the members first and giving them value. So, what you are concerned about is, no question, a high risk at small credit unions.”
The same official stressed to me that after “having consulted with a lot of small credit unions over the years, they are often looking for new candidates, but what you find is many of them have CEOs that have been there for decades. These CEOs hung around and never made a very current day salary. So, when the boards go out to look for a current day CEOs, they feel priced out of the market.”
Finally, when growing up, I spent several years at Benjamin Franklin Elementary in my hometown. In doing so, I became quite familiar with Franklin’s many witty financial insights, like “a penny saved is a penny earned.” And, I took to heart his lesson on compound interest: “Money makes money. And the money that money makes, makes money.” We often hear these wise words echoed in credit union marketing materials.
But, our famous founding father had another quote on management that directly applies to this rulemaking: “If you fail to plan, you plan to fail.” At its core, this rulemaking is about federal credit unions of all sizes — especially smaller credit unions that do not already have succession plans — planning for their futures, so they can continue to serve their members for generations to come as independent entities. Small credit unions are at the heart of the movement, and we need to find a better way to preserve them, instead of consolidating them.
For all these reasons, this succession planning proposal is essential. And, notably, instead of applying a rigid standard and methodology for such strategic planning, this flexible rule allows credit unions to develop succession plans that best meets their needs.
Before concluding, I have a few questions for you, Ariel. First, would you please explain in greater detail how this proposal provides credit unions with leeway and flexibility to develop their succession plans?
Thank you for that response. And, what would be required of a credit union that already has a succession plan in place? Would this proposal require that credit union to change anything in its plans if, for example, the credit union’s board has already adopted a strong succession plan that the credit union’s board and management are following?
Thank you. So, this proposal would create a floor and not a ceiling over the type of succession plan a credit union board may adopt? And, it provides maximal flexibility? Is that correct?
Finally, I want to focus on the initial costs of implementing this rule. What free and low-cost resources might be available to a credit union’s board to draft and approve a succession plan?
Thank you, Ariel, for those insights. To conclude, credit unions should be thinking ahead of what is to come, before it comes up on them. At the same time, through this rulemaking the agency recognizes the need for flexibility and to not take a one-size-fits-all approach.
Finally, this proposal will be open for a 60-day comment period, and I encourage all interested stakeholders to weigh-in on this important matter. That concludes my remarks. I now recognize Vice Chairman Hauptman.