Addressing Corporate Governance

A SUGGESTED WAY FORWARD FOR THE CREDIT UNION SECTOR in TRINIDAD & TOBAGO

– SYSTEMIC IMPROVEMENT IN CORPORATE GOVERNANCE

My last article asked the question: Are credit unions in Trinidad and Tobago obsolete? The consensus answer is NO, they are not obsolete, and can very much add value to the lives of their members, fostering economic empowerment. What appears obsolete though, is the entire corporate governance structure and basic assumptions underlying the standard bye laws and regulatory framework of the credit union sector.

In July 2021, I started a four-part series of YouTube videos on the credit union sector https://youtu.be/utHLhV8_ocU . Two years after, the points raised are very relevant and are referenced in this article. ?

Good corporate governance is a bit like good internal control. It doesn’t happen by accident or luck. The system must be set up correctly if you want to have a chance of getting the results you expect.

Like any effective internal control system, one must assume that some players in the game will be crooked or not-so-goodly gentlemen and women, so an appropriate corporate governance system for the credit union sector will:

·???????Screen who gets in as employee/elected official/member

·???????Set standards of performance, which are documented and shared

·???????Make elected officials and management accountable

·???????Monitor performance vs. standards

·???????Detect infractions ?early

·???????Take corrective, exemplary action early

·???????Update the corporate governance system as needed, based on actual experiences and research

The current challenge is:

·???????If someone has a vested interest in maintaining the status quo, will they be interested in meaningful credit union sector reform or good corporate governance in the sector? Which may result in “taking food out their mouth”? and

·???????How do you achieve real reform or good corporate governance with the input of persons or organisations knowledgeable of the sector, but who at the same time, may have known or unknown vested interests to protect?

After all, the idea of credit union sector reform is hardly new:

With ?all of these grand attempts at credit union sector reform, why has nothing of significance happened? (Multiple choice: one, some, or all choices may apply):

1.?????The powers that be like it so

2.?????Turfs are being protected at all costs

3.?????It is easier to talk than to do anything

4.?????Bigger fish to fry right now

Whatever the reason or reasons, the solution may lie in adopting an outside-in approach:

1.?????Rely on a team of technocrats (accounting professionals, forensic finance experts, corporate governance experts, lawyers) to draft a new credit union governing framework that will meet best practice guidelines for good corporate governance and operating/performance standards. Input from those in the sector will be welcomed but such input should only be accepted if it does not compromise the best practice good governance standards.

2.?????Incentivise the transference of existing credit unions to the new corporate governance framework through:

a.?????Continuation of existing tax-free status

b.?????Government support in funding deposits and shares insurance

c.?????Enrolment in a nationwide loans insurance protection system

d.?????Access to favourable funding for approved modernisation

e.?????Reasonable timeline (3 years?) to complete the transfer to the new corporate governance structure

f.??????Access to sector research for growth and development

3.?????Disincentivise continuation of the existing corporate governance structure through:

a.?????Phased removal of the tax-free status for credit unions in old structure (2 years?)

b.?????Phased closing down of the existing administrative structure for credit unions within the government, with mandatory transition to the new structure within a reasonable period (5 years?)

c.?????Forced liquidation of any credit unions still in existence after the determined transition period.

4.?????Pause registration of any new credit unions until the new corporate governance structure is in place. The new structure will automatically apply to any new credit unions.

Why bother at all?

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THE ECONOMIC STRENGTH OF THE CO-OPERATIVE?SECTOR

“In Trinidad and Tobago, there are?313?active co-operative societies with an approximate membership of over?600,000?member account holders. Co-operatives have an estimated asset base of?over TT$16.5 billion.”

Source: Ministry of Youth Development & National Service website - July 1, 2021. (Note: this data has not been updated on the website)

Much of these assets and membership reside in the credit union sector. These assets collectively belong to the 600,000+ members, almost 50% of the population, so we need to bother.

Credit Unions in Trinidad and Tobago operate under the Co-operative Societies Act Chapter 81:03 of 1971 (amended in 1972, 1976, 1981, 1993)

Also in 1971, these events occurred:

·?????????????????????Intel released the world’s first microprocessor

·?????????????????????Disney World opened in Florida

·?????????????????????Voting age lowered to 18 in U.S.A. and U.K.

·?????????????????????Charles Manson and his followers receive death penalty

·?????????????????????Average house price in USA – USD25,250

·?????????????????????Retail price of a gallon of gas in USA: USD 40 cents

·?????????????????????Average monthly rent in USA: USD150

To say the least, the Cooperative Societies Act of 1971 (amended) is out-of-date, way past amendment and needs complete replacement. It was first enacted in an era without the Internet, Fintech, smartphones, and widespread use of artificial intelligence. Together with the replacement of the Cooperative Societies Act of 1971, the following are recommended:

·???????Standard guidelines for Bye Laws

·???????Standard guidelines for internal policies and procedures

SELF GOVERNANCE SELDOM WORKS

If one looks locally and internationally, most sectors that have a significant public interest or use substantial public funds are regulated by central or municipal governments. The simple reason is to protect the public interest, ensure relevant standards are met or adhered to, and to properly account for the use of public funds.

This is seen in:

·???????Airline industry

·???????Public Transportation

·???????Water distribution

·???????Electricity distribution

·???????Banking

·???????Insurance

·???????Investment Brokerage/Stock Exchange , etc.

I contend that credit unions should be added to the list. The existing regulatory body seemingly exercises minimum control over the sector. In their “absence”, regulation is delegated to the elected Boards which are practically left on their own to exercise best judgment on behalf of members, of what is appropriate or what is inappropriate. Sometimes this works fine, sometimes it doesn’t. And when it doesn’t work, what then?

WHAT ARE THE CURRENT GOVERNANCE DANGERS IN THE CREDIT UNION SECTOR?

• Tyranny of the Board and other elected officials
• Collusion between Executive Management/Staff and the Board/Committees in pursuit of self interest
• Weak, ineffective, tardy regulatory oversight
• Absence of sector-wide ethical standards and practices/reliance on individual ethics within individual credit unions
• Uninformed membership

·???????Lack of Member education and understanding?of the necessity for, and benefits of good?corporate governance

·???????Too democratic? Popularity may win out over competence, good fit and good intent

·???????Perceived lack of representation and power by members under 50 years’ old

·???????Same old faces (and ideas) on rotation between Board and Committees, often with a bias in favour of older members, (over 50)

·???????Need for standardized procurement policies in keeping with best practice

·???????Strengthening of internal audit capabilities, with clear consistent audit standards to be followed

WHAT CORPORATE GOVERNANCE MEASURES MIGHT THE TECHNOCRATS CONSIDER?

·???????A New effective Regulatory Authority for credit unions with:

• Independent Nominating oversight and vetting for all credit unions. With the power to reject nominees. No member of a credit union should be allowed to contest an election without prior vetting by the Regulatory Authority
• Existing elected officials should be required to pass a Fit and Proper evaluation by the Regulatory Authority to continue in their elected positions. Should they not pass, this may trigger special elections
• Power to enforce merger and acquisition of credit unions, based on financial assessment etc.
• Approval of annual budget, three-year strategic plan
• Power to intervene, suspend the C.F.O. or CEO/GM, request a forensic audit etc. on the petitioning of sufficient members
• Power to suspend the Board/Supervisory Committee and oversee special election, based on its internal assessment and reporting requirements, with a stated protocol to follow in such an instance
• Optional Representation on the Board and Supervisory Committee (non-voting)
• Approval of creation on non-statutory Committees
• Sign-off of collective bargaining agreements
• Setting of credit thresholds and requirements for loans to executive management and elected officials
• Approval of loans to members of the Board, Committees, Executive Management above pre-defined thresholds or exposure.
• Sign off on Executive Management recruitment and dismissal
• Approval of major capital expenditure/investments

·???????Term limits imposed for all elected officials.?This term limit is intended to be consecutive and independent of elected position. For example, an elected officer, who is President, will not be allowed ?to run for a Committee position on the expiry of their term limit, and if elected, run for President again on leaving the Committee position. A 5-year gap is recommended between term limits.

·???????Embedded right of recall: standardized, simplified process for members to recall elected officials

·???????Representation standards to ensure representation of women and eligible youth on the Board and Committees

·???????Create an Office of Inspector of Credit Unions, with whistle blowing management function

·???????Annual filing of personal statement of affairs and income statement by elected officials and executive management, and their immediate family, with criminal penalties for false reporting

·???????Compulsory development of strategic plans, to be approved by the Regulatory Authority. Strategic plans to be shared with the members within 30 days of final approval. Half-yearly reports on performance vs. strategic plan to be submitted to Regulatory Authority and shared with members within 30 days of submission

·???????Standard bye laws, policies and procedures that are compatible with the new corporate governance structure

·???????ESG (environmental, social and corporate governance) reporting requirements

THE UPSIDE TO ALL THESE CONTROLS AND REGULATIONS IS EXPECTED TO BE :

·???????A deepening of the confidence of members in their credit unions, and a boosting of the credit union brand, leading hopefully to growth in membership in the sector, and more investments by members

·???????Improvement in actual financial performance of the credit unions as the right competence and ethics would be the norm at the leadership level, and these values will no doubt redound to the general staff

·???????Refocus on member engagement, empowerment and delivering value to the memberships consistently

·???????More frequent injection of fresh ideas, encouragement of participation of younger generations in the leadership of the credit unions

·???????Easier recruitment of higher quality management, staff, who would be comforted by the new level of corporate governance. Attraction of suitable candidates for elected positions. Higher staff morale as there is more structure and logic being applied in the work environment

WHO COVERS THE COST OF IT ALL?

Setting up of a new Regulatory Authority for Credit Unions will require a significant outlay, both in terms of set-up costs and annual maintenance. In my view, while the government of the day might take the lead in the establishment of the Authority, over time, the operating costs should be shared by those institutions who are regulated. The appropriate ratio of cost sharing is one for the technocrats to figure out, but a useful guide may be to group the credit unions according to asset size and membership. Then the costs can be allocated as per grouping in which a credit union belongs.

It would be expected that those credit unions that are larger in asset size and membership would be more closely monitored than the smaller credit unions who may be randomly sampled for audit purposes, unlike the larger credit unions where a 100% sample size may be expected.

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CONCLUSION:

It is high time to take the credit union movement back to its roots, with a modern twist.

A credit union should be a non-profit-making cooperative whose members pool their resources, financial and human to:

o??Create a larger source of funding for productive and non-productive purposes, at competitive rates

o??Enable savings and reasonable income on those savings

o??Provide a stable source of dividend income based on share contributions

o??Provide learning and knowledge which will advance the economic empowerment of its members or increase their social/living skills and competences

The prevailing corporate governance concerns must be addressed and solved for progress to be made, for the wider benefit of the credit union membership. As was famously stated in Star Trek’s The Wrath of Khan: “the needs of the many outweigh the needs of the few, or the one.”.