Why Should Credit Unions Care?
Mergers of sound well run credit unions are a fact of life in the cooperative system. So why should the $2.1 billion mega-merger of Schools Financial and the $16.1 billion SchoolsFirst be an issue?
I believe the circumstances and specifics of this merger highlight in ways that smaller combinations do not, the threat these transactions represent to an independent system of cooperative financial institutions in the American economy.
Credit unions have a federal and many state income tax exemptions because they are supposed to be creating an alternative to the purely for-profit practices of other consumer options. Cooperatives are designed around certain premises including self-help, self-finance and self-governance. Member-owners are loyal, over and above the economic benefits, because the institution belongs to them and future member-owners.
Once these fundamental facts are debased by agents who pay lip service to principles but act from personal and institutional self-interest, then the boundary lines between for-profit and coops is blurred, if not lost.
Factual Basis Missing From Merger Process
While not entirely unique, the size of the SchoolsFirst merger dramatizes the failures of the current merger process to disclose and to protect members interests. A few of the critical omissions are:
- The failure to mention any aspect of the approximate $540 million wealth transfer;
- The absence of any description of the significant losses to the community in terms of business relationships, the setting of local lending and investment priorities and the consequent reduction in civic leadership;
- The complete lack of any specific product, service or fee comparisons and changes that would be coming-whether gains and losses;
- The conflicts with the senior management and the board negotiating their own ongoing roles and compensation versus the absence of any commitments for continuing or new services, programs and products from which the members would benefit;
- The lack of any disclosure of alternatives considered and, if evaluated, why this merger was the option chosen.
These significant information gaps and subsequent post-merger announcements suggest a pattern of deception.
Given the public record and limited details provided, it is hard not to conclude that this combination is motivated more by the personal ambitions of two CEO’s and their boards, not from promoting the best interests of School Financials’ members.
Members Given 49 Days to Decide a Charter Cancellation
Today a new charter takes years, volumes of paperwork, financial projections, organizers’ resumes, and millions of donated capital to open the doors of a de novo credit union. It seems contradictory, even absurd, that a CEO and board should ask members to give up a charter in less than 60 days from the public notice of October 23 to the December 12 final vote. The timing prohibits any meaningful discussion. Surely the process to surrender a charter granted and successfully managed since 1933 should warrant greater member dialogue and public scrutiny.
Lessons Learned
As other CEO’s and boards read about mergers similar to SchoolsFirst, these examples incentivizes behavior that contradicts both faithful stewardship and the priority of members’ wellbeing. Consultants now openly solicit engagements to show how CEO’s can enhance their benefits from mergers. Credit unions market their willingness to bargain with CEO’s where “like seeks like” to facilitate the sale of their leadership responsibilities.
Boards begin to feel they must play the same game to protect their options or to preempt competitive intrusions in their markets.
The consequence is that instead of creating a cadre of cooperative leaders driving innovation for member benefit, the system is spawning a capitalistic, robber-baron CEO style that elevates institutional growth over member value.
These self-serving mergers promote a stunted view of what cooperative leadership and collaboration looks like. They adopt a simplistic view of success and a Neanderthal’s approach to change.
Cooperative growth opportunities are not being enhanced. Rather myriad options for future innovation are shut down and the industry becomes more heavily concentrated in a small percentage of large institutions. Industry risk becomes more concentrated.
The system does not grow its reach through mergers; it only reduces the diversity of credit union institutional models. During the past decade the number of credit unions declined by 2,400 (virtually all by mergers) and shares grew at only 5.7%, an annual rate characteristic of a mature, if not stagnant, system.
The moral capital that the cooperative system created over the past century is being squandered by short term behaviors from executives unwilling to pursue long term member value creation.
The Arguments Back
- Everybody does it. Wrong, not everybody. And if that were true, we should have had a much more public and active bidding process for not only this merger, but all mergers. Instead CEO’s selectively seek the best option for themselves, privately discuss the potential, and then negotiate in secret with the board’s blessing or indifference.
- The regulator approved this. Therefore, it must be all right. Correct, NCUA and state regulators routinely sign off on actions even when shown that they violate any objective test of member benefit or due process. The fact that the regulator can be, and often is incorrect or unknowing in its actions, does not mean an action is proper.
As in its financial management of credit union’s cooperative resources, the NCUA board’s oversight of mergers is squandering an inheritance that it does not value nor understand.
Instead of honoring the unique member-owner design and being the architects of a cooperative system, the NCUA board sees itself as just another banking regulator.
The NCUA’s merger process undermines any meaningful democratic choice for member owners; in fact, it promotes corruption by endorsing the self-interest of the initiators of these transactions.
Member voting is nothing more than a sham. A merger proposal has never been turned down by members. This democratic fig leaf can no longer hide the naked ambition that animates these events.
The NCUA board lacks any respect for the member-owner cooperative system. It does not grasp how credit unions differ from other financial institutions. Even when given detailed examples of improper and self-serving mergers, the agency at the highest levels is unable to see the mistakes of its own making.
In sum, two wrongs do not make a right.
- I agree but these mergers are just the “way the world works.” This argument reminds me a line from the play, Just Call me God. In it the character observes, “The one thing I know about power is that the good never seek it.”
But the reality of the cooperative model is that one is not asked to stand alone. The whole model depends on the realization that each credit union member, board and CEO is part of a whole. That together, we uniquely contribute to a greater good.
We succeed not by acquiring but by collaborating, learning and then helping each other.
Similarly, this distortion of the cooperative system, will be ended when leaders say enough is enough. Just as happened in the conversion from coops to mutuals and then to for-profit charters in the 1990’s.
Next Steps:
This SchoolsFirst merger is a prime example of how the community’s future is jeopardized when an individual’s ambitions or a credit union’s claim of superior capability is given priority over cooperative value and design.
It poses the question whether the cooperative system can correct its own excesses. Will the future evolution just be a relentless pattern of bigger buying out the smaller?
This merger exposes multiple institutional failures within the cooperative system including: individual credit unions with leaders converting cooperative design to commercial ends; regulators who grasp neither purpose nor practice when faced with challenges; and, fellow travelers trying to earn a living seeking the next big wave to take them to shore.
These factors suggest that change may have to come from outside the system should credit unions be unable to learn from their own experience. The fourth estate is always looking for aberrant behaviors; competitors seek examples of cooperative hypocrisy; and congress protects the public interest by highlighting the other party’s administrative failures.
The Action Called For
However, this charade of mergers ends or is transformed so members actually received the benefit they created, this is an important moment for those aspiring to future cooperative leadership.
A participant once caught in a similar historical dilemma commented: “I didn’t do anything wrong; But I didn’t do anything right.” The difference is courage. Do believers in the specialness of cooperatives still exist?