I met business theorist Clayton Christensen once. He had just finished a panel on the potential for disruptive innovation in higher education-including his courses at the Harvard Business School.
Thinking that his new online offering on disruptive concepts might be useful for credit union strategy, I asked if we might talk with him about this innovative effort. He gave me his card, turned it over to show his administrative assistant’s name, and asked we contact her.
We did. That is how Callahans became a partner in distributing and applying his ideas of disruptive analysis with credit unions.
His Final Work
Professor Christensen’s last work was How Will You Measure Your Life? In this brief excerpt he begins with a case– the example of Blockbuster’s demise after Netflix’s replaced the DVD rental model with online streaming. By 2011, Netflix had almost 24 million customers while Blockbuster had declared bankruptcy the prior year before.
His explanation of how this happened:
Blockbuster followed a principle that is taught in every fundamental course in finance and economics: When evaluating alternative investments, ignore sunk and fixed costs (costs that have already been incurred), and instead base decisions on the marginal costs and marginal revenues (the new costs and revenues) that each alternative entails.
But it’s a dangerous way of thinking. This doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future.
In this article he extends the errors of marginal-cost logic to a person’s choosing right and wrong. He tells the story of deciding not to play in the British Universities National Championship basketball game for Oxford where he was studying on a Rhodes Scholarship. He learned that the final game would be played on a Sunday, the Sabbath for his church. He was the starting center. His teammates challenged him: “You’ve got to play. Can’t you break the rule, just this one time?”
He did not play. He compares the temptation he felt to “adjust” his principles just this once, as similar to the logical error in marginal cost thinking.
If you give in to “just this once,” based on a marginal-cost analysis, you’ll regret where you end up. That’s the lesson I learned: It’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. The boundary — your personal moral line — is powerful, because you don’t cross it; if you have justified doing it once, there’s nothing to stop you doing it again.
The Personal Decision Underlying Every Merger of a Sound Credit Union
Sometime in the first decade of this century a credit union manager described the private merger deal making going on in his state. In the example cited, he said the “retiring CEO” had requested a payment of six times the annal salary to recommend his credit union as the merger partner. The CEO turned down the “opportunity.”
Tomorrow I will address Christensen’s business critique of marginal cost analysis in bank purchases and mergers. Today I will apply his logic to the underlying principles that guide our thinking when making any consequential decision.
He describes his importance of his decision at Oxford not to play on the Sabbath:
Resisting the temptation of “in this one extenuating circumstance, just this once, it’s okay” has proved to be one of the most important decisions of my life. Why? Because life is just one unending stream of extenuating circumstances.
The Moral Challenge in Mergers
Since NCUA’s 2017 rule requiring disclosures of additional compensation for senior executives when merging with another credit union, the payouts, once private are now public.
The amounts range from bonuses and Golden Parachutes as high as $1.5 million plus continued employment in specific cases. One CEO set himself up with payments of $35 million to a non-profit he incorporated just 60 days prior to the merger announcement.
CEO’s defend this additional bounty with various rationales. These vary from “this is the usual and customary practice” to legal obligations for payments under employment contracts when a charter is ended.
Some situations appear to be nothing more than the CEO selling the credit union and taking a portion of the reserves as a bonus for so doing.
Rarely are any specific plans or concrete examples of member benefits presented in the members’ merger notice. Rather it is the deal makers who reap immediate, specific windfalls.
The CEO’s and senior management who have negotiated these benefits have done so publicly. Their personal choices are clear.
However every “seller” requires a willing buyer.
The issue Christensen raises is about the other CEO’s, those on the accepting end of these conditional deals. How do their employees and boards view these significant “bonuses”? Will their CEO be tempted to follow the same path? What member interest is being served? Are these situations promoting their credit union’s values? How do these mergers support the purpose of their member-owned credit union?
What will be the character of a movement built upon internal consolidation of long serving, strong performing firms versus growth from winning via market competition?
I have heard the reasoning that these are one-off opportunities. If we had not agreed the CEO would have just gone to another credit union and we would have missed our chance for this free and easy growth. Moreover since we are larger now, the members will be getting a better deal, etc.
Christensen’s explained his choice of not playing on the Sabbath:
It’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. The boundary — your personal moral line — is powerful, because you don’t cross it; if you have justified doing it once, there’s nothing to stop you doing it again.
The Choice
One of the cooperative values is autonomy, the ability to manage an independent institution free to make its own business decisions. For some, this will be to “roll up” smaller institutions, take their free member capital and pursue an open-ended effort at acquisitions.
For others, the decision will be to turn down overtures, focus on innovative growth, and support the diversity and variety of institutions flying the credit union flag.
Christensen’s bottom line: Decide what you stand for. And then stand for it all the time.
From a reader: Your article reminds me of an article in this morning’s sports section about the high profile of college football coaches. It reads:
“Major college football programs and the coaches who lead them once viewed the sport’s relationships as familial, in which the successful coach would become a patriarch of not just the team but the school, a face as familiar as the colors and fight song. Lots of forces can tear at the fabric of family, from bad fortune to infidelity, but perhaps none does so as quickly as money.
. . . the geometric rise in the riches of success and costs of failure over the past decade has led colleges and football coaches to ditch loyalty for expedience, less interested in investing in legacy than in cashing in quick. Instead of searching for a long-standing partnership, each side is looking for a weekend Tinder match. “