Month: August 2023

On August 2, Credit Union Times reporter Jim DuPlessis published a followup story to Colorado Partners Credit Union’s (CPCU) sale of its cannabis CUSO business Safe Harbor.

The main news was that CPCU reported a $10 million dollar loss in the second quarter on top of a $40 million first quarter deficit, thus wiping out any gains from what was  announced as a $185 million sale of the business in 2022.

When asked about the $10 million, second quarter increase in salaries and benefits, the article quotes the CEO Doug Fagan:

“The loss in Q2 was due to the final pieces of contractual deal expenses that were not recognizable, per GAAP, until the second quarter. I am not at liberty to disclose any further information on those expenses,” Fagan wrote. “We did not have any write downs in Q2 that were directly related to the sale of Safe Harbor.”

The question is who received the $10 million?  For what contractual obligation?  After $50 million in losses, there is more than money at stake.  This is about the integrity and accountability to the member-owners by CPCU’s board and management of a deal gone bad.

Are Coops More Ethical?

This situation reminded me of a Financial Times November 6, 2013 article following the failure and restructuring of The Cooperative Bank in Great Britain.  The following excerpt suggests business ethics are not as simple as doing the right thing.

“Honest is the best policy, but he who is governed by that maxim is not an honest man.”  Richard Whately, Archbishop of Dublin, was a 19th Century theologian, but the observation is very relevant to the modern debate about the nature of business ethics.

The Cooperative Bank has just announced a restructuring that wipes out the value of existing equity.  Over many years the message of the bank’s advertising has been its aspiration to higher standards of ethical conduct than its competitors. The devil’s advocates might seize on the bank’s financial problems as evidence that honesty does not pay, but that s not what happened here.

The Coop Bank failed for the usual reason banks and businesses fail-bad lending in commercial property and the misguided acquisition  of another business by management whose ambitions exceeded their abilities. . .

Ethics are about what to do when good behavior and profitable business are not necessarily the same thing.

Bishop Whately noted the difference between the honest man and the man for who honesty is the best policy.  When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honest is no longer the best policy.

Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves our trust.   The integrity we value is a personal or organizational characteristic, not a business strategy.”

When humankind invented places for reflection, knowledge, good deeds and community leadership, the laws of nature were not repealed.

Organizational design wether this be a church, non-profit driven entity, a credit union, or political office, leaders are all members of the human race.  With their bundles of good intentions and temptations.

Money is an especially potent allure in critical moments, from petty cheating on travel claims to large self-dealing transactions.

So organizations develop checks and balances to,  in the words of my college roommate, “keep honest people, honest.”

Designs Are Not Enough

Returning from a weekend reunion in Chicago, this was the new design for the Metro exist at Bethesda.

The gates have been altered to heighten the exit to prevent “jumpers” from leaving Metro without paying.  Metro had announced that it was losing so much in unpaid fares, that this redesign was necessary to discourage an ever growing temptation.

The “Barriers” in Credit Union Design

There are three elements of organizational structure in credit unions to discourage the ever present temptations when managing money.

1. The credit union supervisory committee and its system of internal and external audits;
2. The oversight and review of policy, process and results by external regulatory exams;
3. The political check and balance provided through the democratic oversight of members in the annual required election of directors.

When these checks and balances are listed, it is easy to see why credit unions can go “off the rails” in terms of personal and organizational shortcomings.

Human temptation is not overridden by organizational design.  For ingenuity can work around the most explicit of processes or checks and balances.

That is why the most critical aspect of leadership is integrity.   One of the best indicators of this quality is the words leaders use when describing an organization’s activity.   In cooperatives those who talk about MY members, MY credit union, MY board or even MY agency reveal potential misunderstanding of their responsibility.

In cooperatives, the operative word should be OUR.   OUR collaborative system, OUR dual regulation, OUR insurance fund, OUR communities’ needs . . .

Designing barriers can help reduce temptation.  Leaders’ integrity is necessary to keep them meaningful.

I have just read the general announcement.  But am looking forward to learning the details, plans and benefits as these become available.

Here are my first thoughts.  The members of both organizations will vote on the mergers.  This is a good precedent for all coop mergers.   That way the details and commitments are explained to both constituencies.   When only the merging entity votes, the acquiring firm is exempted from commenting, or even committing, to what the intended benefits will be.

The Loss of Competing Views

Competition in ideas can result in more and better options for credit unions.   NAFCU as the # 2 trade association had to always “try harder.”   This was especially important in critical moments of legislative and regulatory change when there were different “proffers” or options presented by each trade group responding to congressional or administration views.    One need only recall the give and take in passing the CUMAA in 1998.

NAFCU’s origin story in the early 1970’s was to advocate for a federal insurance option, a  position on which CUNA was extremely skeptical.   CUNA feared federal insurance would mean the dual chartering system and cooperative solutions would be subjugated to federal control and uniformity.   Both trade groups were right.

As any CEO who has merged their credit union will testify, mergers are acquisitions, not “marriages of equals,” or other PR pseudonyms.  CUNA’s culture, priorities and politics will be, absent explicit goals, the continuing model.

The Importance of Details and Plans

This first step of mobilizing political consensus at the board and CEO level for a merger is the easy lift.  Most mergers defer the messy details until after the deed is done and the surviving leadership takes over both organizations.

Intentions, promises of shared goals, enhanced capabilities, reduced costs-in sum better value for the members-are never identified or stated.  Just rhetorical promises, sometimes sugar coated by adding several directors from the old organization to the new.

Details matter when change of this magnitude and circumstance occur.  What I will be seeking in this process is how the merger will address the top two or three strategic issues facing credit unions and the future of the cooperative option in America’s financial markets.

Every party serving the cooperative system will have a different vantage point from which to provide their priority.   In my view, this strategic assessment should be the number 1 task for this most consequential change in how America’s credit unions will be represented going forward.

Some strategic issues might include:

• What should be the role and voice of the member-owner, now largely absent, in the evolving credit union model? NCUA prefers consumer protection not member rights.  Credit unions have removed members from any meaningful role in the governance process.
• How will the continued trends in consolidation and absence of new charters be addressed?
• Can the unilateral and “me-first” approach of NCUA be transformed to a more collaborative, cooperative effort for oversight and project priority?
• How can the credit union system be more engaged in addressing the key challenges members face in their communities from affordable housing, student debt overload and fair financial options?

Priorities may vary across the numerous cooperative organizations.  However, without identifying these issues, the merger outcome could be samo-samo.

Ed Callahan used to observe, people will do what they know.  Meaning they revert to the actions with which they are comfortable.   In this case a single national trade association could result is just more resources devoted to political lobbying, PAC’s and PR tacking with each change in the political and economic winds.

Without a plan for what the system should strive to be, a CUNA-NAFCU merger could just perpetuate the status quo but absent an important forum for dissenting views.