The architecture of transformation: Governance and organizational structure

Your credit union’s people, structure, and governance model play a pivotal role in its success — both today and tomorrow. During the transformation process, it is essential to examine and update your organizational structure, board governance model, and risk management strategy to position your credit union to overcome challenges both today and tomorrow.

People and structure

Your people form the backbone of your credit union — and your organizational structure enables them to perform their responsibilities and serve your members effectively. However, the financial services industry is constantly shifting. Financial regulations, the changing expectations of your members and employees, and evolving technology all may have a significant impact on your credit union in the future. Taking the steps to proactively invest in employee training or update your organizational structure can help your credit union mitigate the impact of these changes and achieve a successful transformation.

Daniel Johnson, CEO of Innovation Federal Credit Union, shares his perspective:

“The transformation of the organization’s mindset is one of the most important things to achieve during the transformation process — and it’s also one of the key challenges. It’s hard to find success without transforming your organizational mindset, or having a culture that aligns with transformation.”

Organizational structures

Various integral components operate in tandem in the conventional framework of a credit union — including service delivery, technology, finances, and people-related functions such as risk management, community relations, and marketing. Each of these components reports to a chief executive officer, who in turn reports to a board of directors composed of the institution’s members. The specifics of reporting lines and titles should always reflect the credit union’s strategy.

The roles within credit unions are undergoing significant transformation as the industry evolves, necessitating upskilling, training, and the introduction of new capabilities. It is essential for your credit union to plan for these changes during the transformation process and be willing to invest in them to ensure success both today and in the future.

Below are examples that may affect different components within your credit union:

Finance

There is an emerging need to transform finance within your credit union to meet its broader strategic needs. This transformation will support new possibilities, ways of work, and collaboration with other areas of the business. It will also require you to recruit a new mix of skills to support a successful transformation, such as data and advanced analytics.

Successfully transforming finance within your credit union also includes a comprehensive understanding of areas such as environment, social, and governance (ESG) that will require shifts in your financial metrics to align with the changing landscape. Additionally, regulatory pressures are mounting. While the Office of the Superintendent of Financial Institutions (OSFI) regulations currently do not apply to all credit unions, several provincial regulators may adopt similar regulatory requirements surrounding ESG and climate matters in the future.

This requires finance teams to collect new data and your credit union to reassess its practices to ensure compliance. For example, Bill S-211 will take effect in January of 2024 and will require any entity with assets over $20 million, revenues of at least $40 million, and/or more than 250 employees to report on labour-related risks as part of their supply chains. To comply, your credit union must carefully examine the practices of its major vendors.

These regulatory changes, and other changes anticipated within accounting frameworks under International Financial Reporting Standards (IFRS), may require future comprehensive reporting on facets including your credit union’s lending policies, greenhouse gas emissions, and physical footprint. Additionally, it will require your finance team to not only collect new data but also to confirm its accuracy — particularly in regard to your credit union’s energy consumption.

All of the above factors will require careful consideration during the transformation process. There are numerous technology use cases in finance that may affect your credit union’s compliance with these regulations. The simplification of operational finance processes, identification of value-add strategic opportunities, democratization of finance through self-service capabilities, and adoption of cloud-based technologies and vendor partners all must be considered carefully to ensure your credit union navigates the future regulatory environment successfully.

People

Evolving member expectations and external factors such as demographics, technology, and regulatory changes will significantly impact people and hiring policies in credit unions in the coming years. It is essential for your credit union to re-evaluate its current policies and practices during the transformation process to ensure that you continue to meet the need of both your members and your employees in the future.

Policies and practices around hiring, pay, and promotions are receiving increased scrutiny by current and potential employees, who wish to ensure that the places where they work are equitable, representative of their communities (i.e., diverse), and inclusive (i.e., implement equity, diversity, and inclusion (EDI) practices in their workplace).

Employees and members also want to see that the cultures of their credit unions are productive and welcoming — and reflect the principles of cooperatives. Additionally, the aging workforce in credit unions will lead to retirements in the near future, creating a need for succession planning and talent acquisition to ensure your credit union remains competitive.

Younger generations entering the workforce may have different expectations and preferences regarding work arrangements and career development. This will require your credit union to adapt and remain flexible to attract and retain top talent in the future while continuing the meet the evolving needs of your members.

Technology and product design

It is essential for credit union leaders and boards to ensure that their people have the skills and capacity to tackle new or emerging challenges. Education, training, access to external expertise, and hiring programs may be required across many functions. It will be equally important to define the new, transformational initiatives that your credit union will need to undertake to ensure it is well-positioned for the future. These priorities should be discussed with and approved by your board members as well.

Credit unions with the right organizational structure in place to embrace transformation can turn their focus toward ensuring processes are refined to remove friction as the organization transforms. A willingness to embrace change is critical for this transformation, and leadership will need to encourage agility, creativity, and openness to new ideas as teams define new ways of working within your credit union. It is important to keep in mind that your credit union may need to access comprehensive knowledge beyond which typically exists in-house to help plot its course toward the future.

Governance model

Your credit union relies on its governance model to provide guidance and knowledge on the journey toward transformational change. It is important to ensure you have the right board governance and risk mitigation strategy in place during this process to support its overall success.

Evaluating your board composition and nomination process, as well as the potential impact of transformation on the risks that your credit union faces, can help you ensure you have the right strategies in place to overcome obstacles and secure your position in the future.

Board governance

It is necessary for your credit union to comprehensively evaluate its board nomination process and board composition. This will help ensure your board is equipped with the right skills to govern your credit union’s transformation process.

However, many credit unions hold the mindset that as a cooperative, it is against the cooperative principle of democratic member control to appoint board members. This historical interpretation of cooperative fundamentals may prevent your credit union from upskilling its board. While maintaining democratic member control is critical, it may be beneficial to ask yourself why your credit union must elect all candidates from its historical membership when ultimately anyone who joins the credit union’s board can simply become a member of your credit union, ensuring democratic member control is maintained.

It is essential to recruit and retain board members who can help your credit union embrace transformation and chart its path forward in an evolving financial services landscape. To prepare to meet the challenges and opportunities in the future, boards should consider undertaking a strategic reflection to create a skills matrix and identify gaps.

This exercise should include the CEO at various points — and potentially one or more members of the executive team to ensure that the reflection fully captures the strategic and operational dimensions of your credit union. It is important for your board composition to reflect the communities that your credit union serves, and ones that may be emerging.

A sound governance model can enhance your board’s capacity to exercise proper oversight and support management’s efforts to transform your credit union. Beyond having clearly defined governance procedures, future boards may want to revise committees’ terms of reference or form new committees to deal with emerging issues related to ESG. Additionally, the cooperative principles of credit unions make EDI a natural area of focus for boards. The board may want to ensure that solid policies — such as respectful workplace directives and inclusive hiring practices — are in place and being practiced.

Future boards may also want to revamp standing agendas to ensure that your credit union’s strategic plan is reviewed at every meeting. In addition, they may wish to broaden the set of KPIs your credit union tracks to include the measurement of culture health, EDI progress, and adherence to regulatory requirements. Taking a holistic view of governance practices and making required changes will be crucial to the success of any transformational undertaking within your credit union.

Risk management

During the transformation process, it is important to keep in mind that significant changes to your credit union’s organizational strategy, structure, or processes can impact risks differently. These changes may potentially elevate inherent risks, modify risk mitigation strategies, or affect residual risks.

Additionally, changes in brand strategy, member experience, or technology options may indirectly or directly impact your credit union’s reputational risk, operational risk, or regulatory risk. It is essential for your credit union to take the right steps to manage those risks during its transformation to secure a successful future.

Identify the impact of change on the overall risk environment as your credit union embarks on a wholesale or component change that could impact organizational governance, team structures, or policies and procedures. A critical element of the overarching risk and control structure could be modified with change — and each element that changes may have an incremental effect on your credit union’s overall risk landscape.

Ensure you are diligent and maintain awareness of any potential changes to inherent and residual risk during the transformation process. However, this should not be a deterrent to change, but conversely act as an impetus for change as effective transformation can contribute to a stronger risk management and control environment within your credit union.

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