High-Tech Boards

December 2015: Vol 38 No 12
by Richard H. Gamble

Seeding boards with tech experts may or may not put a CU on track.

board table with board members As uncertainty around the technological future grows—along with the cost of being wrong—so does the temptation to add a tech guru or two to the board and hope that director’s specialized vision will help put the credit union on the right course. Salvation through board expertise can be a promising effort or a dangerous one.

When involving directors in credit union technology, it’s essential to draw a bright line between governance and operations and keep directors on the governance side of the line, insists Steve Williams, CIE, principal of Cornerstone Advisors, a CUES Supplier member and strategic provider based in Scottsdale, Ariz. “It would absolutely be a worst practice to recruit a technology expert onto the board and ask him or her to craft strategy and supervise operations.” It’s fine to have technology expertise on the board, Williams adds, but no one director should be the designated technology guru. It’s bad practice to have “one-issue directors.”

But in light of the exploding growth of financial technology and its critical importance, that line shouldn’t be too bright, others suggest. Conscientious generalists will continue to make valuable contributions, but they are no longer enough, argues governance expert Michael G. Daigneault, CCD, principal and founder of Quantum Governance, L3C, a CUES strategic provider based in Vienna, Va. Of course, many of today’s credit union board members carry smartphones and iPads, check email and log onto board portals, so they haven’t been left out of the technology revolution completely. Still, anything that upgrades the technological sophistication of CU boards is probably a good thing, he asserts.

Bringing a technological expert to the board can create tensions, but that’s not a bad thing, he insists. “The reason for recruiting them is to create tensions. That can help the staff and board get unstuck,” Daigneault says. “The mindset of most boards is safety and soundness. They’re guardians of the members’ assets and therefore quite risk-averse. Now there are more disruptors in the market, and the pace of change has picked up. Being conservative has become risky.” All this is why, he suggests, it may be time to change the mix by adding someone with tech know-how.

Mission First

$1.1 billion Meriwest Credit Union, San Jose, Calif., has a technology expert on its board—Edwin Mach, former product manager for network security at Cisco Systems, also in San Jose. Mach is vice chairman of the board and chairs the CU’s security and technology committee. But he modestly avoids the guru mantle. He insists that the board does not “set the technology direction” for the CU; that is management’s job.

“Directors should first and foremost make sure to understand, assess, and mitigate any risks and opportunities, whether they come from tech or non-tech items,” he says. It’s up to the executives to “prioritize and implement any items they choose.”

Mach admits to a particular interest in whether the CU should “go cloud. There are cost savings but also risks,” he observes, but going cloud is not ultimately a decision for the board to make. “It’s our role to help management think through what is best for our members, give feedback on prioritization and maybe bring up things they may not have thought about.”

Indeed, there’s danger in boards paying too much attention to technology, warns Kirk Drake, president of Ongoing Operations, Hagerstown, Md. “The primary focus needs to be on the CU’s mission, not its technology,” he insists. And that means CUs still need to recruit mission-minded directors more than technology-minded directors, he explains.

Trying to recruit a token Millennial onto the board is not a new idea and not necessarily a good one, Drake suggests. “Millennials aren’t seeking the newest technology; they’re seeking social engagement, and technology is one way they get it.” Drake says it’s more important to brand the credit union in a way that draws in Millennials “and then find the technology to deliver it. It’s not about offering the best mobile or online banking app.”

Kirk Kordeleski, CCE, believes upping the technological sophistication of the board is a worthy goal. With all the change and competition inherent in the current marketplace, management may need informed guidance or even prodding, suggests Kordeleski, CEO and founder of Kordeleski Consulting, Syosset, N.Y.

“There’s a feeling that CUs grew up in a protected environment, with tax advantages and no stockholders. They became comfortable in that world, where they could afford to follow others and wait for innovations to prove themselves before making tech investments. Now that world is gone, replaced by a hypercompetitive environment. Everything is moving faster, and delaying decisions can increase risk, not reduce it. If board members introduce some friction, that might be necessary,” he explains.

The future of financial competition is starting to emerge in the peer-to-peer lending field, and CU directors and managers can start preparing by observing what is happening in that space, Kordeleski notes.

“The new lenders are using a digital discipline throughout the process,” he points out. “It’s totally digitized and very effective from beginning to end, starting with marketing through digital channels like Facebook, moving through the application and underwriting process to placement with investors, including closing and servicing. It’s mostly used today by young borrowers for small loans, but as that demographic becomes the prime borrowers, they will bring their expectations with them. Many CUs still see electronic lending as an add-on piece and not part of a foundational discipline.”

Building that digital discipline is not the board’s job, Kordeleski insists, but it is the board’s job to be concerned about where future loans will come from and how they will be attracted and processed, he explains. That means being able to ask probing questions about the strength of business strategy, research and technology investments, he says.

Boards need to keep asking questions they get solid responses. “If, after a couple of years of questioning, management is still providing answers that are vague or shallow, then....” He doesn’t finish the sentence, but the implication is clear.

Even if change is pushing CUs out of their protected harbors, they have a good chance to flourish on the open seas, Kordeleski thinks. “They still have financial advantages—taxes and overhead—over banks. And their predisposition to collaborate can serve them well when they share costs of digital platforms. But it will take strategy, not software.” Tech-savvy directors can be part of the equation.

Prized Directors

Many CUs are indeed trying to increase the technological sophistication of their boards, but there is a shortage of qualified people, Daigneault reports. “CUs should be putting a premium on CEOs of small tech companies or vice presidents of larger entrepreneurial companies. They should be recruiting them from outside their membership and then asking the new directors to join. They want people who are attuned to the trends and can help them anticipate the future.” Within technology, it’s the member interface that gets and deserves the most attention, he adds. If a director also understands data security and operating efficiency, so much the better.

Because the vast majority of CUs depend on vendors for their technology, the practical challenge usually is not so much how to tackle the huge, confusing world of technological change, but how to assess the competency of a finite number of vendors, Daigneault points out. “How do boards and senior managers know if the vendors with whom they’ve enjoyed productive relationships over the years are still on the leading edge—or which leading edge they’ve chosen to invest in? A good track record in the past doesn’t necessarily mean a good future.”

Williams insists that the real danger is too much director involvement in CU tech strategy. If directors are creating the strategic technology plan, a CU may be in trouble, he warns. “Some board members have ideas for how the technology plan should look, but letting them do the planning would be a cardinal sin,” he cautions. “How can you hold a CIO responsible for implementing a plan he or she wasn’t involved in creating? Management has to create the plans; board members have to review and test them.”

In fact, Williams says a CU should have a board committee for technology only if it aims to be a national virtual CU or have a similar tech-dominated strategy. “In most cases, the audit committee or another board committee can handle what a board needs to do with technology oversight,” he says. “If a CU is going through a merger or technology overhaul, board members could participate in a temporary task force.”

Best Practices

Williams has seasoned advice for achieving the optimal level of board involvement. It’s a best practice to have the CIO present to the board at least annually, he explains. These reports should be long on visuals and short on details written out in text. “The point should be to let the board see that the credit union has aligned its technology strategy with the business strategy in areas such as growth, member services and targeted marketing,” he says. Technology should play a supporting role, not a starring one.

Boards should be asking and management should be preparing to answer these three key questions, Williams summarizes:

  1. How well does our technology stack up against our competition, and where do we have critical gaps?
  2. How well qualified is our IT staff to support our strategic plan? What skills will they need in the future, and what skills do we need to add in our IT area?
  3. What are we doing to ensure the security of our members’ data, and how are we verifying that our security is effective?

What boards should know is whether the credit union’s technology is good enough to achieve its strategic objectives, Williams says. Management needs to give directors substantive answers, not just “everything is fine” reassurance. “The goal should be to give the board comfort that technology is in fact being well managed without encouraging them to step into operations.”

Good boards are effective at staying at the strategic level and leaving operations to staff. The idea that salvation can come from recruiting a brilliant technologist onto the board and then basically implementing his or her vision is flawed, Kordeleski thinks. He knows of a CU that landed just such a star. “He knew where technology was going and provided valuable input, but he didn’t know consumer banking, so his vision was limited,” he notes.

Richard H. Gamble is a freelance writer based in Colorado.