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Good Governance: The Importance Of A Truly Independent Supervisory Committee

Michael Daigneault

Feb 26, 2020

If you’re shifting to an ‘audit’ committee instead, be careful not to sacrifice independent oversight at the altar of efficiency.

We’ve seen an important trend relevant to a good number of state credit unions nationwide. It’s one of those quiet trends that we believe could—in the long run—have significant governance consequences, perhaps for the entire credit union community. It is the transition of a good number of supervisory committees to the form of an audit committee. And with more state regulations allowing such a transition, more and more credit unions are taking the opportunity to make it.

While federally chartered credit unions are still required to maintain a supervisory committee, many state regulators have allowed the credit unions they regulate to operate with an audit committee made up entirely of board members, and the number of states (and credit unions) moving in this direction is growing. Further, some federally chartered credit unions, for various strategic reasons, are converting to state charters, thereby opening up the door to even more credit unions making the shift to an audit committee.

The difference between supervisory committees and audit committees can at times be significant, and those differences often come down to two key factors:

  1. the scope of authority granted to such committees

  2. who is appointed or elected to them—that is, their composition

Committee Authority

Supervisory committees at federally chartered credit unions can exercise certain types of authority over credit union’s leadership, and the National Credit Union Administration’s Supervisory Committee Guide for Federal Credit Unions outlines two key actions a supervisory committee can take, namely:

  1. Suspending by unanimous vote any board member, executive officer or credit committee member

  2. Calling “a special meeting (by a majority vote) to consider any violation of the: a) FCU Act; b) Rules and Regulations; c) Charter; d) Bylaws; e) Any practice considered unsafe or unauthorized.” This can result in a board member officer or credit committee member being removed.

The reality is, of course, that very few supervisory committees take either of these actions—even when perhaps they should. (Sadly, we have witnessed instances when we believe a credit union’s supervisory committee should probably have suspended or meaningfully investigated a board or committee member but didn’t.)

The important thing to remember here is that they could take such actions in the interest of the credit union and its members if supervisory committees were properly charted, effectively trained as to their responsibilities and courageously led.

The power to suspend or initiate a process to remove “any board member, executive officer or credit committee member” is a rarely used but still meaningful check on credit union leaders from engaging in acts that are unauthorized, unsafe or contrary to established laws and regulations. It is a far from a perfect means of deterring such misconduct, but when carried out thoughtfully and courageously by a determined supervisory committee, it can help save a credit union and its members from disaster.

To be fair, some states give audit committees the same authority to oversee board activities as a federal supervisory committee, but some don’t. What happens when an audit committee does not retain the authority to oversee the board? Then one leg of the credit union’s three-legged governance stool has essentially been removed.  Only two “legs” now remain: (1) the board (of which the audit committee is now a part); and, (2) management. In such instances, the three-part system of governance-related checks and balances has simply disappeared.

This unique authority in the credit union realm to oversee the board may not, however, be the essential differentiator between the two types of committees. The real difference may lie in their composition.

Committee Composition

Traditional supervisory committees (both federally and state-chartered) that follow the federal credit union model are almost exclusively composed of members of the credit union who are not board members. The exception to this is that federal credit unions may have one board member appointed as a member of a supervisory committee. We find that this does happen sometimes but is not particularly common.

In contrast, audit committee rosters are almost always composed of board members. This is often seen as efficient, more harmonious and certainly much simpler. What it gains in efficiency, however, it may lose in objectivity and independence.

One must ask, for example, how likely it is that a committee composed of fellow board members will find fault with their own board’s governance efforts or even that of their individual board colleagues. Yes, in extreme cases it may still take action, but remember that’s if—and only if—they are in a state that still grants them the authority to do so.

If one of the primary goals of both supervisory and audit committees is to serve as part of a system of checks and balances on board and management, it is little wonder that outright eliminating or even psychologically constraining such a role would result in significantly greater efficiency, harmony and simplicity. Therein, of course, lies the very danger traditional supervisory committees were designed to protect against! Effective supervisory committees play a vital role in the overall governance of the credit union and an adequate degree of independence must be a cornerstone of their design. Be careful not to sacrifice one of the foundation stones of the credit union governance system at the altar of efficiency.

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