I advise clients to focus on “Putting the Customer or Member in Control”. To do so in a service economy, leaders must focus on both employees facing the customer as well as the customers themselves.

A Harvard Business Review article, “Putting the Service-Profit Chain to Work,” written nearly 20 years ago, described an approach that rings as true today as when it was written. Research shows an important chain reaction. Whether you are working in a credit union which services members or an organization that services customers, satisfied employees create loyal customers who in turn become apostles for your business. These apostles are your best customers.

They create new customers and they drive profit and growth. Customer loyalty is a direct result of customer satisfaction. Satisfaction results from the knowledge that the company is delivering value to them. Value is directly tied to employee productivity, which is the result of employee loyalty and engagement. Satisfied, loyal and productive employees create value for customers.

Employee engagement is related to their satisfaction, which in turn arises from respect of leadership, high-quality support services and policies that empower employees to deliver results.

When service companies put employees and customers first, a radical shift occurs in the way they manage and measure success. Leadership spends less time setting profit goals or focusing on market share. Front-line workers and customers become the center of concern. Leaders focus on assuring that the links in the chain are attained and maintained. They lead through personally demonstrated values; they are energetic, creative, participatory and caring. They lead by listening, coaching and motivating by mission.

Investment in people and the technology that supports them is a leader’s duty. Management assures that every employee knows the mission of the organization and their role in achieving it. Continuous learning is fostered. The employees understand the environment in which they operate. Measurement and analyses are employed.

Our recent column on Big Data shows how management tools are available now that were not available when the HBR article was written. Organizations can learn more about the customer than ever before. Management can measure the key factors in the service-profit chain with accuracy and precision.

Successful executives of outstanding service organizations concentrate on profitability drivers. Customer and member loyalty are key. The most satisfied customers are the most profitable ones. Their lifetime value is extremely high, especially when referrals and repeat business are considered. Indeed, many companies have found that the top 20% of customers drive the majority of the profits. Furthermore, retaining a customer is much less costly than gaining a new one.

Member satisfaction creates loyalty. The most satisfied members are much more likely to give repeat business than those who are “just” satisfied. Value drives member satisfaction. Value represents all that the member receives including convenience and other intangible benefits in relation to the total cost of the product or service, including intangible costs.

The most loyal members can become apostles, letting others know about the great service and exceptional value received, thereby generating additional sales growth. In today’s world of social media this effect can be amplified. The converse can be dangerous; dissatisfied members can damage a firm’s reputation through the megaphone of the internet.

Employee productivity drives value. Productivity can be measured by employee time or labor cost to produce a product or service. But employees are much more than units of cost. The employees facing the customers are the front line of service. They can be listening posts of the organization, feeding back to management important information to be used for continuous improvement in customer service and satisfaction. In a recent article, we highlighted how Zara engaged its employees to collect information to design and produce the exact fashion wanted by its customers.

The most productive employees are also the most loyal employees. They are most likely to stay. Not only does low employee turnover result in lower recruiting and training costs, but data show that low employee turnover is closely linked to high customer satisfaction.

Empowered engagement drives employee satisfaction. Engaged workers want to make things right for members; empowerment adds depth to their work.

Leaders make sure that this member and employee focused approach is instilled in the culture. Statistics related to the member form the foundation of measurement of employee engagement. Employees know the metrics against which they are measured, and how they are performing in relation to them. Compensation is tied to these measurements. Thus, as the Service-Profit Chain points out, a management focus on employees “Puts the Member in Control.”

Stuart R. Levine is chairman/CEO of Stuart Levine & Associates. He can be reached at (516) 465-0800 or stuartlevine.com.

http://www.cutimes.com/2013/06/11/service-profit-chain-emplowers-employees?ref=hp

Over the years, I have seen the mission and values of the credit union industry expressed in the service brought to its members. I find that looking at the roots of an institution can remind us of its mission and values and connect us to those who have gone before us in service. The history, mission and values that lead to the establishment of the American industry inform us today.

The first credit unions were founded on the ideals of self-help, self-responsibility, democracy, equality and solidarity. They were imbued with honesty, openness, social responsibility and caring for others. The same values that credit unions bring to their members today.

Modern credit unions first took root in Germany in 1847 to assist farmers and small craft businesses that were in dire financial straits when failed harvests and famines occurred. These businesses had no access to bank services; they were reliant upon private moneylenders.

In response, two Germans separately and independently took action. In 1847, Hermann Schulze-Delitzsch founded the first “raw materials association” for carpenters and shoemakers and the first “thrift and loan association,” essentially the first credit union, in 1850. Also in 1847, Friedrich Wilhelm Raiffeisen created the first aid association in Weyerbusch for the rural population. In 1864 he founded Heddesorf Credit Union to help German farmers purchase livestock, equipment, seeds and other farming needs.

These German credit unions’ values included democratic governance, with each member having one vote, regardless of a member’s deposit size, and a member-elected board of directors.  Essentially, this is the same governance model that is employed today. From the German roots, credit unions quickly began to spread across Europe and jumped to India and to North America.

Alphonse Desjardins founded the first credit union in North America, the Caisse Populaire de Lévis in 1901 in Quebec, Canada, with a 10-cent deposit. Desjardins wanted to provide affordable credit to working class families, who were at the mercy of loan sharks that charged outrageous interest. In 1908, Desjardins helped found the first credit union in the United States, St. Mary’s Cooperative Credit Association in Manchester, N.H.

The American movement, however, really started in Massachusetts, when Pierre Jay, a banker and grandson of John Jay, the first Chief Justice of the Supreme Court, and Edward Albert Filene pushed the enabling legislation in Massachusetts.

The Massachusetts Credit Union Act became law in 1909.  It served as a basis for other state credit union laws and the Federal Credit Union Act of 1934.

Filene personally displayed the values underpinning the credit union industry. He is known for building the Filene’s department store chain, but moreover, he was an enlightened employer believing that his employees determined his success more than any other factor. He took care of his workers, mostly women, offering them free health care, hourly breaks and meals.

Filene encountered rural cooperative banks, many started by women in 1907 while traveling in Calcutta, India. He realized that these types of cooperatives could help ordinary American workers access loans without falling victim to usury, and allow them to save for the future.

In 1920, Filene hired Roy F. Bergengren, who had been a poverty lawyer, to manage the Massachusetts Credit Union Association, where his promotion of credit unions led to 19 new ones within a year.

Given this success, Filene founded the Credit Union National Extension Bureau in 1921 and hired Bergengren to run it.  Its ambitious mission was to create effective credit union laws in all states and at the federal level.  Filene contributed over $1 million to this effort.

Bergengren traveled the country appearing before state legislators and recruiting volunteer organizers. In his passionate speeches, he would state: “The real job of a credit union is to prove, in modest measure, the practicality of the brotherhood of man.”

When Bergengren began his efforts in 1921 there were only 199 U.S. credit unions. By 1925, 15 states had passed credit union laws, and 419 credit unions were serving 108,000 members. By 1930, 32 states had adopted legislation with a total 1,100 credit unions, and by 1935, 39 states had passed enabling legislation and 3,372 credit unions were serving 641,800 members.

The effort culminated with Franklin Roosevelt signing the Federal Credit Union Act on June 26, 1934, creating the national system to charter and to supervise federal credit unions.

Credit unions have been a shining example of quality service, fair prices, community outreach and ethical dealing. These are the values that benefit our communities now and have since the industry’s inception in Germany 165 years ago.

Stuart Levine is a director at Broadridge Financial Solutions and the founder of Stuart Levine & Associates, a management consultancy.

Over the past two years, scandals in the athletic departments at both Rutgers and Penn State universities rocked the sporting and higher educational worlds. Firings included Rutgers’s basketball coach, assistant coach, the head of the athletic department and general counsel as well as Penn State’s president, CFO, athletic director and a revered coach.

The issues facing the governing boards of these major multi-billion dollar educational institutions and those of corporate boards are essentially identical.

Many board members of educational institutions are themselves corporate CEOs. The 11-member board of governors of Rutgers and the 32-member board of trustees of Penn State contained numerous well-known and well-regarded CEOs and corporate senior officers. These uncompensated volunteers are responsible for the same duty of care that corporate board members face, and must follow the best practices outlined by the Association of Governing Boards and home state by-laws. The problems at these institutions illustrate three important governance points, including: The board’s role in creating and monitoring enterprise risk management (ERM) policies and procedures; its requirement for a thorough understanding of reputational risk; and its provisions to prepare for strategic communications in advance of a crisis. While not required by law, these provisions are widely regarded as best practices that all directors, including those on corporate boards, should adhere to.

For both universities, there were storm clouds on the horizon well in advance of the storm, but preparations appeared not to be in place.

In December 2012, the Rutgers basketball coach was suspended for bad behavior, a limited and legalistic response, although his behavior clearly violated the values of the university. A video documenting his behavior that caused the dismissal aired on ESPN on April 2; the coach was fired on April 3. The late response, only in reaction to public pressure, damaged the university’s reputation and that of its board.

At Penn State, senior university officers testified at a grand jury proceeding convened for the child abuse case. The board was apprised of the preceding months before the “story” broke, but neither the administration nor the board instituted an in-depth examination of the situation’s potential effect. The board asked no questions about it. When the storm struck, Penn State’s board was unprepared.

The reputation of any organization’s brand is critical. It affects the institution’s culture, its ability to attract and retain quality students and faculty, and its standing within the community. There are direct parallels with a corporation’s reputation and brand.

Boards must have a robust ERM plan in place well in advance of any crisis. The plan describes a structure and a method for identifying, measuring and documenting risk. Management and the board are responsible for it. The board must assure its high quality and its integration into regular operations. ERM may involve compliance, but it must extend well beyond compliance into matters that affect reputation, not just law.

A chief risk officer (CRO), who may also be the chief compliance officer, oversees ERM. The CRO monitors events in real-time to look for storm clouds. The position usually reports to the president or general counsel. The CRO must also have a direct line to the audit and/or governance committees of the board, meeting with them independently at least once every six months. The CRO must be vigilant. The responsible board committees, as part of their duty of care, must also be vigilant and ask questions.

If the board committee overseeing risk senses a problem, it should notify the chair and initiate the “machinery” of the ERM plan that has been put in place, with particular attention to the strategic communication plan. At Penn State, the lack of preparedness in strategic communication was damaging to its stellar brand. The university community, including 500,000 alumni, watched helplessly as the media created a damaging story, which many viewed as inaccurate. Indeed, the university relied on external firms to create a message in the middle of the storm, as no advance strategic communication plan was in place. It did not work.

These institutions, through their adversity, have created a teachable moment for all boards. It is our responsibility as directors to learn from them.

Zara is the flagship store of the Inditex group, the world’s largest clothing retailer. The company is an excellent example of how putting the customer in control, having collaboration infused into the culture, building seamless communication into the organization, using “Big Data” in day to day operations and implementing very effective processes has built one of the world’s most successful companies. The New York Times has published a feature on Zara.  We have extracted some key business points for this summary.

Zara is the oldest and biggest brand of Inditex, which is based in the economically depressed region of Galicia, Spain. Inditex essentially pioneered “fast fashion”, in which the latest fashions are imitated and their cheaper versions are quickly distributed into stores.  The results are trendy, well-made and inexpensive products that are sold in high-end-looking stores. The company has approximately 5,900 stores in 85 countries. It manufactures 840 million garments a year. Its founder, Amancio Ortega Gaona is the world’s third richest person.

Jesus Echevarría, Zara’s communications director, aptly describes putting the customer in control, stating, “We must have a dialogue with the customers and learn from them.”  This important lesson can be applied to credit unions to bring member focus to new heights as well.

Zara focuses on understanding the items that its customers actually want.  This differs from the traditional method in fashion of predicting seasonal trends, and then promoting the line through fashion shows, media and magazines.  Inditex does not advertise.  Instead the company invests heavily in the beauty, historical appeal and location of its shops. Zara’s strategy is to locate their stores as close to the highest-end luxury stores as possible. The customer associates the location with the quality product, in addition to shopping convenience and an enhanced experience.

The company monitors customer reactions carefully.  It notes what they buy and don’t buy. It records feedback that customers give to the staff.  This information is reported to headquarters daily.  It is transmitted to a vast team of in-house designers, who quickly develop new designs.  The factories then manufacture clothes based on these designs.  If  Zara stores in London, Tokyo and São Paulo all have customers responding enthusiastically to a specific item, the company can very quickly deliver more of these. Moreover, customer feedback about recommended changes to a product can be accommodated as well.

Customer demand drives store deliveries.  Often specific items are adjusted according to customer feedback. Zara generally ships only a limited number of dresses, shirts or jackets in each style to a store about twice a week. In doing so, the company keeps its stock fresh with very little leftover stock. Merchandise moves very quickly and customers know that they will be buying something nearly unique. Furthermore, Zara customers realize that since the fashions turnover and change quickly, they must buy it now or never; because the prices are so low, they buy it now.

Zara’s approach has been innovative and disruptive to the industry. Traditional ready-to-wear fashion companies had stocked stores in spring and fall, with smaller shipments throughout the year. Because of Zara, about half of the high-end fashion companies, like Prada and Louis Vuitton, now make four to six collections instead of two each year.

Zara succeeds in ways that traditional fashion firms cannot.  Traditional firms seek cheap labor, sending their designs to independent factories in countries like China and India. Inditex manufactures most of its items in factories located in more costly labor markets.  The trendiest items are made closest to home.  This allows the entire production process to take about two to three weeks. Greater flexibility, smaller inventory cost and faster turnaround speed offset higher labor costs.

Zara uses the voluminous data it collects to gain insights into the global market. The managers collect information from China or Chile to learn what is selling. They might observe that what is fashionable in Istanbul may also be so in New York. They meet with the designers to decide whether there is a true trend. Inditex takes the fashion pulse of the world and responds accordingly with customer focused products.

By taking customer focus to new heights, Inditex grew during the financial crisis. In the last five years, its annual sales have grown to 13.8 billion Euros from 9.4 billion Euros.  Its profit has risen to about 2 billion Euros a year. Zara’s customer-focused business strategy has delivered impressive results and created customer loyalty.  Credit unions can learn many lessons on how lazer sharp member focus creates enormous results.

This past Sunday, we watched the news talk shows featuring various governmental leaders from both sides of the aisle explain their positions on sequestration and its implications for the U.S economy.  Despite the rhetoric and general mediocrity of the talking heads from Washington, D.C, I am very positive about this country and believe there are great opportunities in this nation.

CEOs understand how to manage their business while continuing to look for new opportunities for market share via products and services. Whether it’s a group of executives in financial services, healthcare, telecom or technology, there’s a prevailing question about the future of this country. We in the private sector are held accountable on a quarterly basis by shareholders who rightfully demand a return on their investment. The consequences for non-performance are felt at the board of director’s level and senior management resulting in probing questions about strategy, innovation and culture.

The one curious question people ask repeatedly is about my take on investing in the public markets. My response for the past two years has been uniformly positive, shocking many of the questioners. CEOs, unlike public officials, are held accountable in regular periods by their board and shareholders. Smart CEOs are financially incented and know how to hit the bottom line. This differs distinctly from the two year horizon of public officials who focus their actions on political gain, which results in little relief for the huge number of underemployed and unemployed people in this country.

Economic growth is predicted to shrink by at least half a percentage point from sequestration and will cost the country about 700,000 jobs. Unemployment, which has steadily declined for the past three years, is expected to stay below 8%. With significant numbers of people out of work, companies feel no incentive to increase wages.  This increasing economic divide in America is most certainly related to an increasing educational divide. Joseph Stiglitz, a Nobel Prize-winning economist, is known for his public views on income level being closely linked to educational success.

As Warren Buffet says, don’t confuse the success of the stock market with the state of the economy and employment, as the two often do not align. Despite the Dow Jones hitting its historic highest level this month, the gap between a company’s success and the American workers employed by them, could continue to deteriorate, as federal budget cuts mandated by sequestration begin. Corporations, influenced by greater productivity from technology, faster growth in emerging economies and continued job cuts, will continue to be able to maintain margins and drive productivity.

In life, there are controllable and uncontrollable variables. The reality is that unless you are in a senior leadership position in Congress or the president of the United States, your voice doesn’t count despite what people tell you, and you won’t have any meaningful impact on public policy.  Staying focused on the business fundamentals of running your business, will provide the greatest chances for continued success.

David Walker, the seventh comptroller general of the United States and head of the U.S. Government Accountability Office for almost 10 years, compares the present-day U.S. to the Roman Empire in decline, with unsustainable policies and practices and long-term obligations underwater to the tune of $50 trillion. His theme is that we have not had an honest discussion about what we value in our entitlement programs, what they will truly cost and who will pay for them. He says what’s needed from Washington is “leadership rather than laggardship.”

As with any effective criteria-based decision-making business process, his solutions test for leaders includes asking the following questions: Does it make economic sense? Is it socially equitable? Is it culturally acceptable? Does it pass a basic math test? Is it politically feasible? And can it achieve meaningful bipartisan support?

My point of view is pretty consistent. Leaders need to lean forward into the opportunities ahead. They won’t get distracted by the Washington bureaucrats that deaden the brain and your creative thinking. They will continue to build business plans that have accountability and responsibility to shareholders and members.

They know that enthusiasm and attitude are everything in life. They will limit their consumption of the news from predictable media, which provides confusing rhetoric and instead choose to get a deeper understanding of emerging technology trends, their impact on consumers and develop products and services that can be accretive to their shareholders or members. They will develop criteria for talent and aggressively pursue those people who share their values and want to enjoy a better life.

http://www.cutimes.com/2013/03/08/leaders-lean-forward-into-opportunities-ahead?ref=hp

You have probably been seeing the term Big Data popping up in many places. It has entered the business vernacular. Learning more about Big Data stimulated the following thoughts for me.

INTRODUCTION

Johns Hopkins University School of Medicine used data from Google Flu Trends (a free, publicly available database) to predict increases in flu-related emergency room visits well before the Centers for Disease Control and Prevention issued its warning.

Twitter updates tracked the spread of cholera in Haiti after the 2010 earthquake as accurately as and weeks earlier than official reports. Pharmaceutical companies use data from social media sites, such as Facebook, to track reports of side effects of their drugs, correcting formulas much more rapidly than awaiting results of clinical trials.

Ford Motor Co. opened a Silicon Valley office in 2012 focused on Big Data, innovation and the user experience, stating, “It’s time to prepare for the next 100 years.” Walmart records well over 1 million customer transactions every hour, saving them to databases estimated to have over 200 times the information in all of the books in the US Library of Congress.

SO WHAT IS BIG DATA?

Big Data has moved from technology circles into the business mainstream. But what is it? This article addresses the terms, the business case and management and business issues associated with Big Data.

Big Data describes the volumes of data generated by an enterprise, including Web-browsing trails, point-of-sale data, ATM records and other customer information generated within an organization, plus huge stores of data from new external sources such as social networks like Facebook, Twitter, YouTube and LinkedIn, sensor and even surveillance data and massive public and private databases.

These data sets can be so large and complex that they become difficult to process using traditional database management tools and data processing applications. The data are often unstructured, unformatted and unwieldy. But there can be important business information ready to be unleashed; “the signal in the noise.”

Ever-improving computer hardware tools, such as virtually unlimited storage and continually faster processing speeds, combined with software tools such as artificial intelligence, machine learning and pattern recognition, can be applied to these vast troves of data.

THE BUSINESS CASE

As the examples in the introduction demonstrate, Big Data has the potential to bring about a fundamental transformation of the economy. Almost no area of business activity will remain untouched.

There is a payoff from data-first thinking. Studies show that the more companies characterized themselves as data-driven, the better they performed on objective measures of financial and operational results. Harvard Business Review recently reported that companies in the top third of their industry in the use of data-driven decision making were, on average, 5% more productive and 6% more profitable than their competitors.

McKinsey Global Institute, the research arm of McKinsey and Co., has analyzed Big Data’s effect on business, concluding that the use of data and analytics are going to be a basis of competition going forward for individual firms, for sectors and even for countries. The ones that are able to use data effectively are more likely to win in the marketplace.

A NEW CULTURE OF DECISION MAKING

What Managers Must Do

Managers can measure and analyze more precisely than ever before, thus allowing much more insight about their businesses and a better understanding of their customers. This knowledge can translate into more-accurate predictions, wiser decisions and stronger performance.

Managers can analyze vast amounts of data in a rigorous and disciplined way. This enables acting on carefully distilled information, perhaps in place of instinct and intuition. In essence, the manager allows instinct to be overruled by the data.

It is critical to note that Big Data does require management vision and human insight. There needs to be an understanding of how the mathematics differs from reality and an understanding of the business theory underlying the analytical results. Most importantly, the assumptions underpinning the analysis call for thorough understanding and critical evaluation.

Senior leadership identifies the strategic goals and uses the data to make better, faster decisions. The use of the data is directly linked to strategy, with a goal to clarify, define and implement it most effectively.

Challenges for Senior Management

The challenges to a business’s culture can be great. A senior executive team might see a shift in who is considered the “expert”. Often, the most senior person or most highly paid person in a business area was automatically considered the expert. With Big Data injected into decision-making, the role of expert could shift. The expert might be a junior person who knows what questions to ask and how to use data to get the best answers.

Senior decision makers have a duty to embrace evidence-based decision-making. The data-driven CEO welcomes, encourages and creates a culture that supports it. For example, when the CEO has a gut feeling about a business trend, the data might not support that intuition. Senior executives that are genuinely data-driven will override their intuition when the data do not agree with it.

The culture should allow a junior manager to use the data to explain results that differ with the boss’s instinct. This requires that the junior manager has a thorough understanding of the data and its relation to the business, courage, and a high level of interpersonal skills, in addition to a supportive culture on the part of the organization.

UNDERSTANDING THE PITFALLS

Managers must understand the pitfalls and limitations, as well as the potential, of Big Data. Good data scientists should in part be pessimistic with a great concern about what the information is truly indicating, being sensitive to what can go wrong with predictions and model designs.

Correlation is not causation. With such large data sets and well-honed measurement there is substantial risk of “false discoveries.” Just because elements of the data are highly correlated, does not mean that there is a causal relationship between them; indeed, the correlation might not be meaningful at all from a business viewpoint. Management must use skill and experience to avoid this trap.

Furthermore, any mathematical model inevitably is a simplification. Modeling is used very successfully in the physical sciences; for example, countless phenomena are accurately predictable according to the laws of physics, such as the flow of water or the path of a rocket. This is not the case in substantially more complex systems, such as economics and social systems, which are disciplines directly affecting business.

Managers must understand the observable business theory or insight that explains the statistical inferences. Conclusions are much stronger and more valuable when there is this business insight. The numbers do not speak for themselves; managers speak for them, giving them meaning.

It is human nature to use analysis to confirm one’s own biases and prejudices. It can be all too easy to use massive data troves to see what management wants to see without realizing it is doing so. Big data might provide raw material for biased fact-finding ostensibly based on statistics.

CONCLUSION

Big Data is a powerful tool to support smart decision-making. It can allow better understanding of what is most important to the success of an enterprise. Managers must employ it thoughtfully, being fully aware of the obstacles to maximizing its utility, including organizational cultural issues, personal biases and “false discoveries.’ With that caveat, management can realize the value of Big Data to better serve customers and the enterprise as a whole.

http://www.directorship.com/comp-committee-conversations/

The full effect of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) is still to be felt in the financial sector. Dodd-Frank creates an environment of increased scrutiny and heightened sensitivity by regulators and consumers.

Perhaps credit unions should not be treated in the same way as other financial firms; however, regulators are reacting to this environment. With this in mind, senior management and their boards must be on top of their game today in addressing compliance issues.

Volunteer board members and management need a common sense approach to regulation and compliance. To assist them, the Credit Union Leadership Forum recently hosted a Web seminar on “The Future of Regulation and Compliance:  What You Need to Know to Successfully Prepare Your Organization.”

• See the webinar online: “Future of Regulation and Compliance”

Fully, two thirds of the participants believed that Dodd-Frank would play a significant role in their 2013 planning. Indeed, many credit unions will be allocating additional funds to the regulatory effort.

About 30% of participating credit unions indicated that they would be spending $10,000 to $50,000 more on regulatory compliance in 2013 than in 2012, and about 10% said they would allocate an additional $50,000 or more.

Tim Segerson, deputy director of the Office of Examination and Insurance of the NCUA, participated in the Web seminar. He predicted that addressing the legislation would take time for credit unions to sort out. Much of Dodd-Frank deals with financial institutions aside from credit unions, but the legislation itself affects the markets in which credit unions operate.

For example, the mortgage industry is an area where there will be rulemaking. The Consumer Financial Protection Board will soon announce regulations for qualified mortgages and for the secondary market for mortgages. These regulations will affect the credit union industry.

The CFPB is mandated to write a significant number of consumer related protections affecting the financial services industry, including credit unions. Changes to truth in lending and mortgage regulation are forthcoming.

The NCUA does not write regulations; other agencies, such as CFPB, do so. NCUA usually has some input and at times a voice at the table. NCUA uses the regulations in its normal examination process to assure that credit unions are in compliance. There is a particular focus on managing risky activities that could have an impact on the NCUA insurance fund.

Tim pointed out that the diversity in size of credit unions makes rule writing difficult. To give some context, the largest credit union has more than $51 billion in assets and over 9,000 employees, while the smallest has less than $15,000, with no employees, only volunteers. The NCUA oversees both; so one size regulation cannot fit all.

Tim explained the importance of scalability. Rules must apply appropriately across the spectrum of credit union sizes. Rule writing must not be so complex as to set smaller firms up for failure, but it must appropriately address risks associated with large institutions.

The NCUA has a focus on modernization, asking “Are the rules of the past appropriate for the future?” There is an emphasis on streamlining regulations, with a fresh look at making the process less burdensome.

The trend is towards fewer, larger and more sophisticated credit unions. Larger institutions will have a greater impact on the risk associated with the insurance fund. Tim reiterated that many regulations relate to the protection of the insurance fund.

Anne C. Flannery, senior counsel with Morgan Lewis’s litigation practice was another Web seminar participant. She emphasized that it is critical that management and boards show that good governance practices are in place and are being followed. This is critical for two reasons:

First, this actually prevents mishaps. Following routine control measures and methodically following processes that are in place can correct problems before they become major issues for the credit union. Testing the code of ethics and comparing a firm’s practices to new developments to assure that the firm is testing for the right things, often leads to discovering minor problems and at times major ones before they escalate. The process works.

Secondly, organizations must prove to regulators that there is a process in place. Being able to show that management and the board were staying abreast of best practices demonstrates that the credit union was, in fact, living up to the standard of duty of loyalty and duty of care.

Duty of Loyalty requires a director to act in good faith in the best interest of the organization and not in the director’s own interest. Accordingly, the director avoids all conflicts of interest. The board should review its Code of Ethics at least annually. Board members must fully understand the Code of Ethics and the issues involving conflicts of interests. Signing the ethics disclosure form should be part of the board’s regular duties.

Management compensation is an important element of the duty of care. The board must be engaged and assure that the compensation committee is well functioning. Board oversight means that management is paid fairly and appropriately. It means that the board sees that compensation is aligned with the mission of the organization and the strategic plan.

Design of management compensation systems should be independently verified with boards and their compensation committees having access to independent counsel.

Of the Web seminar credit union participants, about 60% agreed that transparency was good.  Anne noted the importance of transparency between management and their compliance groups and with regulators. Credit unions will be in a stronger position when confronting a significant regulatory challenge, when it has developed the relationship with its regulators before a problem occurs; they know in advance what the credit union is trying to accomplish and the challenges that it faces.

Tim agreed that discussions with the regulators build the trust relationship. Continual communication can minimize regulatory problems if an issue does arise.

Quality communication among management, the board and regulators is important for risk management. This conversation must be based on sound values that support the firm’s mission. Addressing any regulatory problem must be done at the highest intellectual level. No one should fear “retribution or payback”.

Tim explained that there are systems in place to avoid any semblance of regulatory retribution or payback. Debbie Matz, the chair of the NCUA Board, has explicitly stated that this will not be tolerated.

Anne pointed out that now there is much more communication among the regulatory agencies, and much less compartmentalization than in the past. For example, if the SEC were to receive a complaint related to a credit union, it would communicate that complaint to the NCUA.

Creating a culture of common sense ethics in the credit union industry will benefit it in a number of ways. It will help in the competition for talent, with credit unions attracting smart and decent people. A focus on the mission of the credit union and their dedication to values will attract talent with character and good independent judgment. These are the qualities that will help the industry succeed during a time of heightened scrutiny.

Values require that management has the self-confidence to engage the board at a strategic level on issues of ethics and compliance. The character of the board members sets the tone for the CEO and for the firm. The values are the foundation upon which service to the members is built.

Stuart R. Levine is chairman/CEO of Stuart Levine & Associates. He can be reached at (516) 465-0800 or stuartlevine.com.

http://www.cutimes.com/2013/01/07/regulation-communication-trust-and-ethics-all-link?ref=hp&t=washington

Hurricane Sandy created mass disruption in the Northeast as people were displaced from their homes, suffered catastrophic flooding and lost electricity on a historic scale.  While New Jersey Governor Chris Christie received high marks for his crisis response, the same could not be said of the governance team at the Long Island Power Authority, the utility serving Nassau and Suffolk counties in New York. LIPA’s botched response to the region’s power outage offers a lesson on the qualities that governing boards need to navigate their organizations through large-scale emergencies. It also shows the heavy consequences that all stakeholders endure when their organization fails to exhibit these traits.

The public has faulted LIPA for being particularly slow to respond in Sandy’s aftermath, causing untold suffering, economic loss and anger. Most individual and business customers went without power for two weeks or more, and the long-term economic damage is yet to be seen.

By way of background, LIPA differs from other public utilities in New York in that it relies on outside contractors to perform major operating functions, and it is not overseen by New York’s Public Service Commission, a professional oversight board. Those factors make internal governance particularly important for LIPA, as it lacks direct control over crucial service providers like utility linemen and tree cutters, and it has no real external watchdog beyond its own board.

Through the lens of effective board governance practices, we can study moves that LIPA’s board of trustees made – and didn’t make – during the years before Sandy struck that might have contributed to the recent problems.

Hiring the CEO. Among a board’s most important roles is appointing a CEO who has a strong mandate to manage the organization. LIPA’s last CEO stepped down two years ago. Michael Hervey, who was appointed COO in September 2010, also subsequently served as “acting” CEO. The board never officially hired him as CEO, so the State Senate never approved him as such – signaling a leadership vacuum.  He will step down at year-end, after 12 years of service, having been asked to resign because of LIPA’s poor performance. There is no doubt that Hervey’s lack of clear, board-backed authority impaired his decision-making on investing in new technology that could have mitigated Sandy’s impact.

Succession planning. As is evident from the anecdote above, LIPA’s board had no succession plan in place in 2010, and thus was unprepared when the last CEO stepped down. And as of now, the board has not announced a successor for Hervey after his position becomes vacant in several weeks.

Oversight of enterprise risk management. Another responsibility of a governing board is to deal with controllable events and prepare for uncontrollable ones. Because LIPA is vulnerable to storm-caused outages, management has been looking for ways to secure the system, and it hired a consultant in 2006. But adequate preparation was still not in place by August 2011, when Hurricane Irene struck the area.

Investigators found that during the five years before Irene struck, LIPA failed to implement many of the consultant’s 2006 recommendations, including procedures for clearing roads outside hospitals and schools and locating downed wires.

And in a glaring oversight failure, just four days before Sandy arrived, the LIPA trustees met for about two hours – but discussed the storm for just 39 seconds, according to the board minutes. Board chair Howard Steinberg said the trustees were confident about LIPA’s preparedness, but they did not discuss or review the plan.

New York Governor Andrew Cuomo recently declared that LIPA, at least as it is currently configured, must be dismantled.  The utility’s 1.1 million customers, myself and my wife included, must hope that whatever replaces LIPA will be founded on principles of good corporate governance. That would certainly help the organization achieve its goal of providing reliable and economical electric service, to the benefit of all stakeholders.

This past month during our firm’s Senior Leadership Team meeting, we watched a video from Boss.tv featuring Liane Hornsey, Vice President, Operations at Google.   The smartest CEOs and their teams are asking how to develop the right leadership for the future.

Creating organizational responsibilities and defined accountabilities sets the right culture when vision, mission and core values are identified.  As companies grow, they need to evaluate their leadership and how to deploy and prioritize financial resources to achieve talent growth with discipline.   The velocity of growth exposes leadership deficiencies.  Some senior people want to learn and grow, while others are satisfied to function in a linear way.  This resistance is understandable but creates an unsustainable model for the business enterprise.  As leaders are limited by the number of hours in the day and number of decisions that can be made, combined with the unending amounts of information available, leaders need to accept accountability, own their responsibilities and lead.  This is a spiritual challenge that requires inspirational leadership.

Liane Hornsey sheds fascinating light on this subject by sharing Google’s hiring practices, how they build a culture of innovation, the biggest HR mistakes they have made and how they manage conflict.   The most important learning, and one that she describes as a “light bulb” moment, was when she finally recognized that her success in business was about the people around her being successful.  She said it took her 10 – 15 years to develop her managerial skills and leadership takes a long time to develop.  It is not a “one shot” deal, but tends to be an iterative, evolving process.

The development of leadership capacity within an organization is not random.  It happens by design.  Building an innovative culture and recruiting talent that understands innovation and the importance of continuing to learn is critical.

At Google, their ongoing interviewing process is a lengthy one. It used to include some 14 interviews.  Throughout this process, ownership of the individual’s success is built.  The hiring process is a formal decision-making process through consensus, which provides energy and enthusiasm for the new hire.   The process is taken very seriously to make sure that the right people come in the front door.  Managing talent with quarterly reviews to ensure they are performing keeps them accountable.

Making sure that people have the skills to do the job and helping them to develop that leadership capacity is a huge issue.  Really enjoying the relationships with the people you work with and loving the people around you is a major way that Google achieves the culture that encourages innovation.  They draw strength from the values of ethics and decency they share and feel great about the people around them.

Personal satisfaction at work is often determined by the degree of alignment between personal values, organizational values and responsibilities.  If someone values independence, their satisfaction will be largely influenced by their degree of autonomy at work.  If someone values honesty, their satisfaction will be influenced by the level of open, ethical behaviors at work.   When people enjoy their work, they are internally driven to excel.

The integration of personal and corporate values plays a significant role in how employees move on a daily basis towards a company’s vision.   Just as an individual has personal values that support their vision, corporations have organizational values that support its vision.  Once a corporation’s values are established and expressed by its leadership team, these values become behavioral guides for every employee.  For employees to bring their very best to the job, personal values need to align with organizational values and intersect.  People need to live their own values in the context of the organization.  Google has figured out how to create this kind of environment, where people’s values are aligned, the best talent is attracted and retained and people bring their best energy and talents to the job every day.

How do we stimulate and challenge the types of leadership behaviors that make us more successful and effective?   One idea that can develop your leadership capacity and build relationships with key people is to share content like this with your boss, your senior leadership team and your clients.   They might really appreciate the thought and it’s a nice way to open up a dialogue.

Innovation starts with passion, listening and asking the right questions and ultimately a commitment to learning.  CEOs need to take hiring, managing and reviewing talent in a more structured and thoughtful way.  Google provides us with great examples for how they are building the right leadership for their future.  Are you building the right talent for your organization?