The elections this week were full of last minute drama. There will be many consequences yet to be sorted out from the results.
In one case the vote was especially close. Only 318 votes separated the two sides. The percentages were 51.1% versus 48.9%. Certainly one of the closest elections ever.
Voting participation however was not particularly high in this critical ballot. Of the eligible voters, only 21% cast votes.
“Highly Engaged Members”
The results were announced in this document on November 9th after polling had closed.
However this was not a republican vs. democrat political election. It was a vote to extinguish the charter of a 75-year, innovative state chartered financial cooperative.
The official tally was 7,622 for the merger and 7,304 against. The result is that $1.1 billion VSECU and its 71,000 member-owners will no longer have their own credit union.
It will be merged into the $1.9 billion New England FCU, officially on January 1, 2023.
Voting matters. By law the charter belongs to the member-owners, not management or the board. The leader’s duty is fiduciary, to always act in the members’ best interest. Voting is the core of democratic design.
So when almost 50% of members vote against a strategy that management has tried to sell them for almost a year, such a no confidence result would cause most responsible leaders to rethink their plan.
When announced in February, the opposition was visible, public and well thought out by conscientious members who launched their own website, Calling all Members. The State Employees Association Board of trustees voted to oppose the merger.
Even controlling all the communication and marketing resources, member contacts and legacy relationships, the vote barely exceeded the required majority. The members sense there is something that doesn’t add up in this charter cancellation.
The Merger Math
The merger explanation contained two specific benefits: the NSF fee would be reduced by $10 and access to NEFCU branches would be opened. Both “benefits” could have been done immediately without merger.
The reasons for merging was given in rhetorical phrases about future plans and a new partnership, but no specifics.
The math for coop mergers is simple, 1 + 1 = 1. There is no increase in members, loans, capital or any objective market share measure. Instead one charter goes away along with its independent leadership and business strategy. VSECU relationships, good will and member loyalty is dissolved after 75 years and three generations of building its unique identity.
There was not even a thank you dividend for the $100 million in collective equity now transferred to the control of a new board and management with their own financial priorities and strategy. They have no operational or political connection with the 70,000 members who created this common wealth.
The merger announcement included the VSECU CEO’s observation: Our membership is highly engaged in the democratic process as member-owners evidenced by the highest credit union voter turnout ever in our history,” noted Miller. “As we look toward the future, we are excited about the opportunity this partnership promises and ready to take VSECU into our united future for all of our members.”
A Weaker System
There are other consequential problems with this transaction. The first rule of financial soundness is to not put all one’s eggs in a single basket. This merger increases concentration and reduces diversification for both credit union members and the Vermont system.
Separately these two credit unions competed for market leadership and innovation. Now they are 47% of the Vermont credit union market by assets and 40% of members. That concentration should raise both financial as well as public policy issues. As the American Banker’s lead story on February 23, 2022 described the situation, Vermont’s Largest Credit Union Merging with Rival.
Vermont’s credit union system is smaller, losing it largest state charter with total credit unions numbering just 17. Traditionally, the state charter has been more innovative and flexible than the federal option, but the largest example of that difference is now gone. The political sway in state debates is lessened both institutionally and by members.
Here’s What’s Next
From VSECU’s press release:
The two credit unions will continue to operate separately as VSECU and NEFCU until January 1, 2023. On that date, VSECU will become a division of New England Federal Credit Union. No changes will occur for members of either credit union while integration of systems, services, and products occurs. While there is no firm deadline for the conclusion of the integration, it is expected that the combined credit union will operate as one entity later in 2023.
Currently, it’s banking as usual at VSECU, soon to be a division of New England Federal Credit Union, until we identify and create a new name for our combined organization.”
With 50% of “highly engaged” members opposing this cancellation of their independent charter, how many others feel the same way? The new name, organization and operational integration is over a year away. How many will wait around to see what this new identify and “vision’ looks like?
Banking Values?
A number of years ago VSECU became one of a very few American credit unions to join the Global Alliance for Banking Values.
The vision of this global network is: Finance at the service of people and the planet.
Our collective goal is to change the banking system so that it is more transparent, supports economic, social and environmental sustainability, and is composed of a diverse range of banking institutions serving the real economy.
In support of this effort VSECU announced its own expanded vision five years ago:
“To inspire a movement that brings people together to empower the possibilities for greater financial, environmental, and social prosperity.”
The goal? To align our organization with a larger movement of values-based and impact-driven organizations in Vermont and around the world.”
Two major initiatives were begun as part of this restated purpose. One was called Powered by VSECU to stimulate social and economic opportunities through innovative partnerships around the state.
The second was Alternative Capital, to help small businesses and coops raise financing including direct investments in coops. VSECU was one of the few credit unions making these coop investments.
This new vision from 2016 lasted just five years. The merger has no expressed vision. The credit unions will continue what they were doing until they figure out the combined operations and develop a new name and brand. Both credit unions are giving up their historical legacies.
Many VSECU’s members sensed that this combination promised nothing and took away what the valued. The fact VSECU management gave up on their vision less than five years for an undefined merger, foreshadows a challenge retaining the trust of the members who built this organization.
What is Being Lost
More is at stake than just member-owner patronage.
At a time of increasing economic uncertainty and record inflation, the one institution members have counted on is no longer theirs.
Members have lost their capital, their independent leadership, their long established relationships and their unique identity.
Moreover in this stressed economic moment, members of both institutions will spend millions of dollars on vendor contract cancellations, product and operational conversions, and payments due when benefit plans are terminated.
Both sets of employees will eventually be rationalized. No organization needs two marketing, HR, mortgage lending, and operational leaders. There is no efficiency from scale without redundancy reduction. Aspirational professional career paths are eliminated.
The credit union system in Vermont loses its state leader and its ability to influence local regulatory and political institutions when change is desired. Larger credit unions tend to separate their self interest from the system that spawned their creation in the beginning.
The national credit unions system has lost one of its examples of green leadership. VSECU Eyes a Green Future in Vermont, is just one story of a series at creditunions.com portraying the credit union’s business innovations. The stories exist no more. The institution is gone. Size becomes the goal, not values.
The Betrayal
With widespread opposition and an absence of any concrete benefits or plans, the merger has cost thousands of members and multiple interdependent organizations real losses. The transaction comes at a time of heightened vulnerability for members and institutions.
Positive momentum is lost. Priorities become institutional assimilation projects, not serving local communities.
As one member read the posted results he wrote that within a year or so employees will be gone to “pursue other opportunities” and collect the benefits from their terminated plans. He ended saying: The board and senior leaders were hired to serve the members. What makes me deeply sad is not the money, it’s the betrayal.”
To build a successful credit union on a foundation on member loyalty and trust takes years. Both can be lost overnight. In a single election.
Chip, curious what solution you would suggest in this case. First, I agree that the loss of a charter is unfortunate and the continued consolidation of the industry concerns me. In the past, you’ve pointed out how these merger votes get pushed through with only a tiny portion of the membership voting. I might be remembering it incorrectly, but you might have even suggested these votes should require at minimum 20% of the membership to count. In this case, they got that, and it still received a majority in favor, if ever so slightly. Yes, the result is disappointing to you and me, but as it is with American politics, it’s always disappointing to somebody.
So if you had control over these situations, what would you want? Minimum 20% of eligible voters participate and more than a simple majority voting in favor? Maybe a two-thirds majority?