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Be Polite Skeptics

June 2011 – Vol: 34 No. 6
by Theresa Witham

Directors’ need to ask the right questions

June 27, 2011

Steve Williams
Steve Williams speaks about risk at CUES Annual Convention, June 26 in Cancun.

“The role we play as healthy skeptics at the director level is very important,” said Steve Williams, principal with CUES Supplier member Cornerstone Advisors, Scottsdale, Ariz., at the CUES Annual Convention pre-conference workshop, June 26 in Cancun.

One of the best things directors can bring to the table is “a strong suspicion of human nature,” he said. Experts can mess things up. Sometimes it takes scrutiny and skepticism at the board level to stay on the right path.

In order to ask the right questions, directors need to have a certain knowledge about the workings of the credit union. This is behind the NCUA regulation 701.4,, which states “Each federal credit union director has the duty to … have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the FCU’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors ....” 

Williams outlined general financial statement concepts and worked through some examples with attendees. (CUES offers a free course “Understanding Credit Union Financial Statements. Sign up here.) And then he talked about why a director needs to be able to read and understand the balance sheet and income statement. Namely, to understand the various risks facing the credit union.

The NCUA is moving toward risk-focused exams, concentrating on seven risks:

  •  Credit risk: risk of default on expected payments or loans or investments.
  • Interest rate risk: risk that changes in market rates will negatively impact the income statement and balance sheet.
  • Liquidity risk: risk of an inability to fund obligations as they come due.
  • Transaction risk: risk of fraud or operational problems in transaction processing that result in an inability to deliver products, remain competitive and manage information.
  • Compliance risk: risk of violations and non-compliance with applicable laws and regulations resulting in fines, penalties, payments or damages.
  • Strategic risk: risk of adverse business decisions through management’s actions or inactions. (These can be failed products or just plain bad decisions, Williams said.)
  • Reputation risk: risk of negative public opinion or perception leading to a loss of confidence and/or severance of relationships (for example, a data breach).

A good exercise for boards to do with management is to create a table with each risk category and define who the owner of the risk is and what key risk controls are in place.

Williams provided this example:


Risk Category 

Traditional Owner 

Key Risk Controls 


Chief Credit Officer or

Chief Lending Officer

  • Credit policy
  • Underwriting tool/analysis
  • Loan approval process
  • Loan review process

Interest Rate


ALCO Committee

  • ALCO modeling and reporting
  • Hedging strategies



ALCO Committee

  • Liquidity policy
  • Liquidity forecasts
  • Standby borrowing capacity



Business Units

  • Policy and procedures
  • Audit functions


Compliance Officer

  • Compliance policies
  • Business unit procedures and quality assurance
  • Compliance audits and testing


Board and CEO

  • Analysis and planning
  • Execution of projects/initiatives


Board and CEO

  • Customer service metrics
  • Peer and industry comparison

As a director, there are two best practices when discussing risk, Williams said.

First, “anytime there is a risk, view your exposure in terms of what percentage of your members’ capital could be at risk. For example, a loan portfolio that is 10 percent of total assets can be 100 percent of total capital,” he said.

Second, try to frame risk discussion in terms of:

  • likelihood of loss and
  • impact of loss.

“I see your role as being the polite skeptic,” he said again.  “If you feel uncomfortable, ask the question.”

Directors should ask managers: “What concerns you about the numbers?”

Also Williams suggested boards use dashboards to understand the trends. A great dashboard should have five components:

  • current measure;
  • measure last quarter;
  • measure same quarter last year;
  • goal/budget/policy for this measure; and
  • peer/benchmark measure.

“It is fair and it is right to keep encouraging your management to give you dashboards,” Williams said. However you also need to work very hard to understand how your business model impacts the numbers and monitor that closely. “Don’t terrorize your management team with dashboards,” he said.

Theresa Witham is a CUES editor.

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