This past week’s financial runs show how fragile consumer confidence can be.
A critical distinction in credit union design is democratic ownership-one member one vote.
One of the challenges however is that it is easy to treat owners only as customers. The fact is that many “owners” today are ordinary consumers attracted by a competitive rate or other marketing message. In some cases, the customer is just an indirect loan borrower who had minimal voice in the selection of where the loan was made.
There is a difference between customers and owners in a financial institution.
Customers do not vote for directors at the annual meeting;
Customers do not vote on merger proposals for their institution;
Customers do not have a residual interest in the reserves of their firm.
Ownership is traditionally honored in other communications such as members’ founding stories or recognizing those who have played special roles in the credit union or cooperative system.
The One Thing Essential
Transparency is one critical leadership characteristic that acknowledges the owner’s role.
Without full, continuous and open communications, the default is to treat owners as customers. That unfortunately is the attitude of many in positions of leadership today.
Most importantly lack of transparency on specific credit union commitments means the owners have little or no basis for their responsibility of electing directors.
A Regulatory Shortcoming
An example is from last week’s subordinated debt rule approved by NCUA. Every party to the transaction is provided full information: Senior management/boards, the brokers, the consultant, NCUA, and most importantly the individuals and entities (including other credit unions) that buy the debt.
Debt issuance of $100 and $200 million have been completed in the past 12 months. The only persons not provided the details of these events are the owners. It is their loyalty that is the basis for issuing these borrowings that can now extend as far as 30 years.
Without transparency, there is no possibility of accountability. The owners are removed from any role in governance. NCUA presumes its in loco parentis role if something doesn’t go according to plan-a distinct prospect with terms of 10, 20 and now 30 years.
Senior Management and Board Compensation
Only state-chartered credit unions are required to file IRS form 990 which discloses senior management and board compensation, political donations and other activities such as grants for all non profits.
These disclosures are essential for owners to know the incentives and circumstances board and management have agreed to in leading the credit union.
Compensation consultants today are plentiful with four part plans and multiple ways to structure payments now or later. There are increasing references to a “change of control” clause which would trigger executive payouts no matter other merger bonus and benefits negotiated by the CEO.
Without compensation transparency there can be no accountability. State charters have disclosed this for decades. The same logic applies to federal charters. This information is an important step in owner oversight, even consumer protection.
The Place and Time to Start Showing Trust in Owners
In the months ahead, most credit unions will hold their annual meetings-in person and virtual. In preparation the annual audit will be available, a Chairman’s report prepared and other required business conducted including election of directors.
Some meetings will include updates on projects such as a new building or branch expansion, a report by a foundation or community activity. Others will include an educational presentation, an outside speaker and even a meal.
The annual meeting is a primary opportunity for leadership to engage with owners in open and full conversations.
It is especially important in light of recent examples about the resilience of regional and smaller banks. Confidence in an institution is based on trust. Trust is not created in a day or by a special press release about a firm’s financial standing. It is a relationship founded on open communication as both customers and owners over years.
Nothing could be more important this year than showing coop owners that the CEO and board deserve their trust by being fully transparent with facts and open to the members’ questions and points of view.
That is how free markets are supposed to function in a competitive economy. That is how democracy is supposed to work.