A common thread weaving its way through credit union governance discussions of late is the suggestion that a board must look like its membership. The premise is that a board must reflect the diversity of its membership (a mix of races, age ranges, ethnic backgrounds, professional experience, etc.) in order to properly represent unique member-owner interests. This is a false assumption that has caused many boards a great deal of anxiety not to mention pursuit of a misguided end.
The idea behind FOM-based board diversity is that board members can only make effective governance decisions if board members themselves share the same background as the unique segments that exist within the membership. To make policy decisions that drive better engagement with young people, for example, requires a young person on the board of directors – or so the assumption goes.
On the surface, such representation sounds beneficial, but the reality is that pursuit of representation of specific demographics drives less to beneficial board diversity and more to isolation and special interest decision-making. Hardly the impact suggested by advocates of representative diversity.
So what is the solution? What strategy should boards adopt to make themselves “representative” of the great diversity within their fields of membership? To find the answer requires a better understanding of what representation, in a governance context, actually means.
In 1999, a set of six governance principles drafted by the Organisation for Economic Cooperation and Development were endorsed by participating OECD countries. These principles have since become an international governance benchmark for policy makers, investors, corporations and other stakeholders worldwide, and it is in these principles that we find that representation is a broad board behavior rather than a diversity-based ideal.
Space does not permit a more detailed description of the background of each of the six principles, but in summary the principles combine to suggest that rather than a board of disconnected individuals representing distinct demographic groups, a board is to be a body representing the interests and rights of owners and other important key stakeholders. All owners and key stakeholders.
The burden on boards as a whole, as well as on individual members, is to make decisions that speak to the interests of all owners and key stakeholders – a responsibility that requires knowledge of the interests of all owners and key stakeholders. To that end, board members are not to sit back and let their connection to a particular demographic define their policy perspectives and decisions. Rather, they are to lean forward and engage with owners and stakeholders – regardless of any owner’s demographic background – and let the knowledge gained through this engagement guide policy decisions.
In a credit union context, then, a board must know and understand the interests and rights of the institution’s owners and key stakeholders, which commonly include member-owners, employees, regulators, vendors, creditors, volunteers…to name a few.
If a board is to represent the institution’s ownership and key stakeholders, why does so much industry commentary regarding representation devolve to a discussion of board demographic segmentation? I believe that one of the reasons so many argue for the inclusion of specific demographic groups on boards is from a misperception of board responsibilities. Those making the suggestion for demographic representation possess a desire to incorporate marketing-based discussions at the board level. Having some perspective of how credit union messages are received, and processed, by unique demographic groups is certainly useful, but in a marketing context. Marketing, however, is a management discipline. It is not a governance discipline and therefore not a direct board responsibility.
In summary of this last point, the challenge to any board member is to understand the motivations of owners and stakeholders as owners and stakeholders (not marketing subjects) to a level sufficient enough to make truly representative policy decisions. The challenge is not to segment policy decision-making along a variety of demographic-based market niches.
Yet another reason for the suggestion of making boards more demographically diverse may be related to another unique credit union governance problem. At many credit unions, some long-serving board members have indeed lost touch with the needs of the ownership as a whole, and have begun making niche-based policy decisions that tend to favor net savers (their representative demographic).
The solution to this particular problem, according to some, is that boards “get younger” by recruiting a new class of younger board members. Those making the suggestion, however, are prescribing a solution based on a poor diagnosis. In this situation, there isn’t an age problem per se, but a governance problem. The correct diagnosis is a board violating key governance principles by underperforming in the role of owner/stakeholder representative. A younger board member may be a solution, but only if the younger board member is truly a representative of owners and not solely an advocate for a particular generation.
For boards grappling with the challenges of getting older, thinking through succession issues, or feeling pressures to bring in a new demographic, I say that none of these things need lead to new board members if the board is and continues to be capable of fulfilling the basic principles of governance. If, however, the board has lost touch with its governance responsibilities, and finds itself drafting or defending policies focused solely on a particular segment within the membership, then new blood is in order.
In contemplating representation at your credit union, consider this: Credit union “owners” are established when real people (and/or their businesses) come together in a cooperative fashion to borrow and lend to one another. The most basic ownership expectation, then, is simply access to these two services. What is nice about this simple expectation is that it is multi-racial, multi-ethnic, spans generations, and knows no gender bias. Though credit union memberships are most certainly diverse, representing members is not based on that diversity, but on the diverse group’s simple shared “ownership” interests in a cooperative financial institution.
Incidentally, we help credit unions with these kinds of governance challenges. Learn more!
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