Duties of Directors and Indemnification of Directors and Employees with Drew Edwards

ATLANTIC CITY, N.J. – Drew Edwards spoke with attendees Tuesday morning at this year’s NJCUL Annual Meeting and Convention about NCUA’s Regulatory Standards, including Duty of Loyalty, Duty of Care, Business Judgement Rule, Indemnification, and more. Edwards provided directors with the knowledge of what they are liable for, what insurance is out there for their protection, and how to best serve their membership.

According to NCUA, there are eight reasons why credit unions fail. These reasons include poor management decisions; aggressive growth plans; lack of “real” board involvement; high concentration in a single area; commercial loan exposure; insider transactions; lack of expense control; and embezzlement.

Edwards discussed the responsibilities that directors have to their credit union. Some common rules that he touched upon included Duty of Loyalty and Duty of Care, what directors should be aware of in their position. Duty of Loyalty surrounds the ethics of the director in serving the member. Whether a CU employee or director, the Duty of Loyalty means representing the members' interests when making a decision. With that said, there shouldn’t be any self-dealings to benefit the employee versus looking out for the members' best interest in what their needs are.

Duty of Care is knowing and understanding what functions are occurring in the credit union and how to execute those proper functions, relying on others who are competent, and documenting the board’s decisions. Edwards also discussed the Business Judgement Rule, which means that a director is not liable for a mistake in judgement if he/she makes a decision and does it fully informed and acts in a way that they honestly believe is in the credit union’s best interest. The reason for this, as Edwards explained, is the recognition of human fallibility and eliminates second guessing by a judge or jury.

Ethics is another element that plays a large role in the duties of directors. According to NCUA standards, as Edwards discussed, the regulations of these duties can be found in 12 CFR 701.4. The board is responsible for the general direction and control of the credit union. Also in accordance to NCUA standards, directors must have the ability to read and understand balance sheets and income statements, ask questions of management and auditors, and operate in accordance to all laws and regulations with sound business practice.

The discussion of what “indemnification” surrounds the conversation that a credit union may pay expenses of officials and employees that are in connection with legal proceedings to which they are parties because of their performance of their official duties. According to 12 CFR 750, the credit union can only indemnify if the party is not guilty and must go through the board.

Key takeaways from this breakout session include:

  1. Directors have a duty of loyalty and a duty of care
  2. Directors must be financially literate within 6 months of election
  3. Indemnify your directors and employees

Edward’s presentation, as well as other speaker presentations, is available for download the NJ CU Convention Web site.

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