NCUA Chairman Todd M. Harper Statement on the Revised Proposed Rule on Succession Planning

As Prepared for Delivery on July 18, 2024

Ariel and John, thank you for your presentation on the revised proposed succession planning rulemaking. This new proposal would require federally insured credit union boards of directors to establish succession planning processes for key positions.

This latest proposal also builds on our prior efforts to issue a rule in this area. And, as one of the commenters on our prior proposal noted, the costs associated with this rulemaking are "a burden worth bearing." I could not agree more and strongly support this rulemaking.

One of the NCUA's supervisory priorities in 2023 was the review of a credit union's approach to succession planning for senior leaders, including any written succession plan the credit union established. In a broader analysis of this exam priority for a large subset of examined credit unions, we found that roughly one in four credit unions either lacked or had an inadequate succession plan. That finding demonstrates our need to act now. 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 with a document of resolution.

"The NCUA expects that a credit union would develop a succession plan that is consistent with its size and complexity. Therefore, smaller institutions may have a simple succession plan that addresses a few key leadership positions, while larger, more complex institutions would have more extensive plans for a variety of critical roles. In either instance, the succession plan must consider how the selection, skill, experience, and diversity of the covered employees collectively and individually promote the safe and sound operation of the credit union."

The continued health, success, and diversity of the credit union system requires foresight by all. That includes the NCUA and the credit union leaders who serve as the stewards of their member owners' financial security. After all, as Benjamin Franklin once reportedly said, "If you fail to plan, you plan to fail." Therefore, it isn't surprising that the term "succession planning" includes the word "success" as the first seven letters of the phrase.

Regardless of the economic environment, the consolidation of credit unions has been a constant for several decades. One reason so many mergers are occurring is an absence of effective succession planning, especially in smaller credit unions. We see that factor cited frequently in the reasons for a merger.

With this new proposal, the NCUA has revised its 2022 succession planning proposal to account for the public comments we received. Several commenters had asked for greater details and specifics in the proposal. This proposal provides those specifics. What's more, the revised proposal the Board is considering today would strengthen succession planning efforts of both federal credit unions and federally insured, state-chartered credit unions.

Generally, the proposed rule would require all federally insured credit unions to have a succession plan that covers the board of directors, the supervisory committee, management officials and assistant management officials, and any other personnel the board of directors deems critical given the credit union's size, complexity, or risk of operations. The succession plan would also address the members of the credit committee and loan officers, where such officials are involved in the daily review of loans. And, a credit unions' board of directors would be required to review the succession plan no less than annually.

"The continued health, success, and diversity of the credit union system requires foresight by all. That includes the NCUA and the credit union leaders who serve as the stewards of their member owners' financial security. After all, as Benjamin Franklin once reportedly said, 'If you fail to plan, you plan to fail.' Therefore, it isn't surprising that the term 'succession planning' includes the word 'success' as the first seven letters of the phrase."

In a prior role before joining the NCUA Board, I served as a board member and officer for a small non-profit with a budget of approximately $600,000. Without any contractors or money spent, that board was able to research, develop, and approve an effective succession plan within just a few months. And, that succession plan proved effective a short time later when the executive director departed. All credit unions would benefit from having effective succession plans in place.

As part of this latest proposal, the NCUA has developed draft templates for use by smaller credit unions. The NCUA Board would like to receive comments from credit union stakeholders on the templates as well. While the proposed rule would not make it mandatory for a credit union to use the NCUA template, the NCUA Board recognizes that some credit unions may experience a cost if they don't already have a succession planning process. The templates are intended to reduce the time and effort to develop a succession plan. Any feedback from stakeholders to improve the templates would be helpful.

The NCUA expects that a credit union would develop a succession plan that is consistent with its size and complexity. Therefore, smaller institutions may have a simple succession plan that addresses a few key leadership positions, while larger, more complex institutions would have more extensive plans for a variety of critical roles. In either instance, the succession plan must consider how the selection, skill, experience, and diversity of the covered employees collectively and individually promote the safe and sound operation of the credit union.

"In my view, it's better to maintain many small credit unions serving a wide variety of purposes and niche markets than continuing to consolidate credit unions into ever larger institutions."

And, I can't say this enough: Succession planning is vital to the long-term success of any institution, including credit unions. A credit union board's failure to plan for the transition of its management and key decision-makers could come with high costs, including the potential for an unanticipated merger of the credit union when key personnel depart. In my view, it's better to maintain many small credit unions serving a wide variety of purposes and niche markets than continuing to consolidate credit unions into ever larger institutions.

What's more, credit unions' failure to adequately succession plan can pose risks to the system as a whole and the Share Insurance Fund, which the NCUA is tasked to protect. For these reasons, this revised succession planning proposal is an important step to ensuring credit unions plan for, and are successful in, the future.

This proposal will be open for a 60-day comment period, and I encourage all interested stakeholders to provide substantive comments. That concludes my remarks. I now recognize Vice Chairman Hauptman.

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