Thoughts on Mergers: The Tallest Candlestick Ain’t Much Good Without a Wick

I am increasingly concerned about mergers of well run, healthy credit unions. And the bandwagon that many credit union CEOs seem eager to join. Here are my reasons why.

One of the most important innovations of the cooperative financial model was to give ordinary citizens the right to “own and manage the means of financial production.”

Without this option, members would just be consumers of financial services at the mercy of whatever options the market, private enterprise or non-regulated firms offered.

Making Capitalism More Democratic

The co-op response emerged out of the progressive era at the turn of the 20th century. Large monopolies controlled railroads, banking and other vital industries such as steel and oil. Farmers were one of the first groups to organize against large corporate monopoly power via co-ops.

The credit union belief that regular citizens, not the wealthy, could own, control and invest their collective savings was both a political and an economic innovation.

The elected boards were the mechanism by which the governance and democratic purposes were carried out.

The Importance of Economic Democracy

As consequential as the movement’s financial growth to over $1.6 trillion has been, the value of cooperative design goes beyond a purely economic role. Or offering just another market option. Benefits individual credit unions provide for their communities and member groups include:

  • Collaborative economic capacity inspired by purpose, passion and values
  • Direct CEO accountability to user-owners
  • Elected oversight of directors, from the membership
  • Focus on community needs and priorities
  • Reinvestment of savings responsive to local conditions
  • Firsthand knowledge of members and community circumstances-both routine and in uncertain environments
  • Leadership in the community to support other local solutions

Credit unions are an essential part of members’ lives especially when communities, no matter the size, are hollowed out by changing economic, political or even demographic events. Credit unions’ roots provide local, CEO level, leadership capacity and staying power in ways other economic firms cannot or will not do.

Mergers of Healthy Credit Unions Compromise Cooperative Design

NCUA released the latest batch of merger totals. Year to date, there have been over 110 approved. In the last five years the total exceeds 1,200.

The most frequent reason provided in the NCUA summary spreadsheets is “expanded services.” A very small number report difficulty finding officials, and a one or two, poor financial condition in the third quarter 2019 summary.

None of these situations is irreversible or necessarily fatal. Yet the industry has accepted this consolidation as inevitable. Regulators routinely encourage mergers for situations that would be temporary but lack oversight perseverance. Consultants tout their help in arranging new combinations–for a fee.

The Agency Challenge and Board’s Fiduciary Role

Most mergers, especially among healthy credit unions, are initiated by the CEO. Almost all credit unions merging today were begun at least two generations (50 years) ago or longer. All have survived severe economic cycles, regulatory disruptions, constant technology innovations and leadership changes in their decades of service.

But today the boards, led by CEOs, have thrown in the towel. Forgetting the responsibility for the legacy they inherited and their accountability to future members, the board’s present “happy talk” narratives saying the credit union can no longer meet its responsibilities to the member-owners.

Instead of carrying on their fiduciary duties to members, they transfer this financial and relationships legacy to another credit union. Often the senior leadership has carved out a better immediate future for themselves. This is often accompanied by a token “incentive” special dividend, if members will give up their accumulated commonwealth reserves and political control over their co-op’s future.

Although boards and their CEO are supposed to be agents of the members, they can also be motivated by self-interest. The best support for this interpretation is that most merger discussions are portrayed as extending over a year or two. Boards state they have routinely evaluated all strategic possibilities. Even though these discussions occur during the annual election-meeting cycle, I have yet to find a board seeking election while stating their intent to merge the credit union.

Rather, a sudden decision is announced with no prior public information. Members are asked to give up their independent charter on short notice. Their accounts are transferred to another credit union seemingly offering a better deal than what their own board and senior management are able to provide.

In this message-controlled process by the CEOs and boards, there has never been a member vote against a merger. Developed in secret, the charter surrender is then marketed as a logical decision to members, completely unaware such a pivotal event was even needed. No other option is allowed to emerge. The incumbent always wins.

The Irrelevance of Size

The benefits of cooperative design do not depend on size. Very large credit unions can be just as focused on member well-being as small ones. Often a credit union’s size ambitions reflect its market reach. As FOMs expand, so does the logic for larger and larger size, resulting in a self-justifying need to seek mergers.

The difference is not the size of the credit union, but its approach to business strategy. Some credit unions want to be primarily commercial firms with institutional ambitions that mimic the for-profit banking sector. Other leaders focus on innovation in member service. Both approaches can fit within the cooperative model.

The difference is what success criteria are used. One is driven by institutional performance, the other by member well-being. Regardless of size, I believe that strategies that focus on commercial success are like candles without a wick. No matter how tall, they will never shed any light.

Shredding the Legacy

Why should credit union leaders care whether mergers are driven by “commercial” motives or member well-being? Because democratic co-ops are hard to sustain if the member focus is subordinated to agent self-interest. Cooperative democratic governance depends on values where leaders follow the highest standards of fiduciary conduct overseeing collective wealth. It is based on the foundation that members’ interests will always be paramount. Abdication by boards and CEOs of decades of cooperative investment justified by marketing bromides about future benefits, compromises the reasons credit unions were created in the first place.

The unchallengeable progress of the credit union system demonstrates both the need and power of cooperative design for the American economy. If its distinctive purpose is increasingly hijacked by questionable combinations driven by self-interest, then the entire system’s foundations are at risk. For if credit union CEOs do not believe in their own institution’s autonomy, but instead are open to the best offer, will members themselves respect the cooperative choice?

Mergers are complex and hard to engage in non-interested discussion. However everything we say or do affirms or critiques the status quo. To say nothing is to say something; in this case, that the status quo in merger trends is okay. I believe these trends are not okay.

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