The National Credit Union Administration approved a proposed rule that would require federally-insured credit unions to establish succession planning for key positions in their organizations.

At the board’s July 18 meeting, Chairman Todd Harper said the regulator has found that 25% of credit unions either lacked any plan or had an inadequate plan.

“Without a rule, we can only encourage credit unions to adopt effective succession plans through exam findings,” he said. “A rule would allow us to require such planning.”

Harper also quoted Benjamin Franklin, who reportedly once said “if you fail to plan, you plan to fail.”

The proposal would cover planning for positions including the board of directors, the supervisory committee, management officials and their assistants, the credit committee and loan officers.

If approved, the proposal would modify an NCUA rule approved in 2022 and would require more stringent planning for large credit unions compared to small institutions.

But Vice Chairman Kyle Hauptman said he was concerned about the size and scope of the rule, which would add state-chartered credit unions that are insured by the NCUA to the 2022 rule.

Hauptman said he recognizes that succession planning is important but said the proposed rule is not the best approach.

“In fact, I’m concerned that regulation in this area could make things more difficult,” he said. “Today’s rule is almost twice the size of the previous one. I fear it may be daunting for many.”

NCUA staff said that failure to plan for vacancies at the top of an organization can “come at high cost,” including creating a leadership vacuum, disrupting operations and ultimately can lead to the credit union seeking a merger.

Mergers and baby boomer retirements are at the top of the list of factors that the NCUA said increases the relevance of succession planning today.

An NCUA analysis found that a lack of succession planning was either a primary or secondary cause for almost a third of consolidations.

There were 4,604 federally insured credit unions as of Dec. 31, 2023, compared to 4,760 a year earlier.

At the same time, approximately 10% of credit union chief executives were expected to retire between 2019 and 2021, the NCUA said.

Board member Tanya Otsuka said one of the goals of the rule is to help ensure the continuity of small credit unions, who are often left with no choice but to merge when leadership retires.

“The lack of leadership…results in serious financial and operational problems which hurts members and puts the viability of the entire institution at risk. And that can also put the share insurance fund at risk,” she said.

But Hauptman said if the proposal was such a good idea, the FDIC would probably have a similar rule in place. But it does not.

“Good ideas are good ideas,” he said. “If it was a good idea I think other agencies [would have adopted it].”

Harper called the cost of establishing the rule a burden worth bearing.

The proposed rule was approved by a 2-1 vote with Hauptman dissenting and is now open for a 60-day comment period.

“Without a rule, we can only encourage credit unions to adopt effective succession plans through exam findings. A rule would allow us to require such planning.”

 – Todd Harper
Chairman
NCUA