Author: Chip Filson

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When Vision is Lost: Difficile Est Bonum Esse

America’s character has been forged by both idealism (doing good) and entrepreneurial capitalism (doing well).

Jim Blaine captures these two aspects in his portrait of the Amana Colonies in central Iowa. This Utopian experiment did not last past the second generation. Today the community’s vision is divided into The Amana Society Corporation which controls and manages the businesses. The Amana Church Society now deals with spiritual matters. His blog posed the question whether today’s credit union generation still believes in the movement’s unique purpose.

Stories of Business Idealism

For 40 years USC Business School Professor James O’Toole has studied the ever present challenge of “doing good while doing well” in a capitalist economy. His latest book, number 19, is The Enlightened Capitalists.

It is a collection of stories of business leaders who built success in the market and also shared their firm’s financial gains with their employees and communities. He leads off with Robert Owen (1771-1850> proceeding to current examples such as Ben Cohen (Ben and Jerry’s) and Patagonia. Each is a story of a leader with a vision broader than financial success. These goals include shared ownership, employee education and well-being, environmental consciousness, and community investments.

I looked to see if cooperatives were part of this historical account. Late in the book he summarizes newer forms of organizations designed for more than financial success: benefit corporations, cooperative businesses, employee shared ownership plans (ESOPs), and mutuals. Credit unions get two short paragraphs. The first begins with this sentence, “Then there are credit unions, the most visible and successful form of cooperatives,” and the second ends with, “Again no organizational form is perfect: some credit union executives have taken advantage of their federal charters, accentuating the practical over the idealistic aspects of their businesses by paying themselves egregiously high salaries and even converting their organizations into regular banks to treat themselves to financial windfalls.” (pg. 419) Even credit unions illustrate his theme of vision overtaken by self-interest.

Difficile Est Bonum Esse

O’Toole’s conclusion after reviewing two centuries of multiple organizational efforts to combine financial success and social benefits is: doing good is very hard.

He concludes: “It would require a prodigious degree of optimism that I am incapable of mustering to conclude that the behavior of corporate leaders will change appreciably in the near future. . . my head will not allow my heart to disregard or discount the historical behavior of investors. . . I also find it ethically unacceptable to discourage corporate executives from attempting to buck the odds by adopting enlightened practices.” (pg. 472) He is especially concerned that the ever expanding patterns of outsourcing jobs and the gig economy model will further erode a fair allocation of financial gains for this growing class of “contingent” employees.

Lessons for Credit Unions

Both authors document the challenge of sustaining a reform effort’s original purpose. Innovative design and dedicated leadership can be a foundation. But vision can also be quickly shrunken by the realities of market competition or leadership failure. The factor that can help keep the vision alive is how the beneficiaries of the vision are incorporated in the oversight (governance) process. Is there a sense of us, not me? A bond of common values? Relationships, not just transactional events? Transparency empowering informed choice about the future?

Vision requires interdependence, not just the pursuit of self-interested independence. Both doing well and doing good entail documented plans. It is this joining together, this unity, that keeps credit unions from being sucked into the vortex of market capitalism, the system for which co-ops are to be the antidote.

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From the Field: Democratic Governance Makes a Difference

Hi Chip. I recently joined a credit union and received something in the mail I thought I’d share with you.

The following was in a welcome letter:

We want you to know that you are much more than a customer – you now belong to a family of 200,000 members who cooperatively own [credit union’s name]. Ownership gives you an equal voice to elect our Board of Directors…

How many other credit unions encourage this participation? 

 

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The Key to Credit Unions’ Future: “Trust Each Other”

Three factors must combine to sustain a unique credit union system:

  1. Belief in the innovative power of cooperative design;
  2. Leaders with vision to sustain cooperative purpose;
  3. Effective governance centered on the roles of member-owners.

This last characteristic often gets short shrift. Governance is usually thought of in terms of board effectiveness. That is one element. But in my view it is not the most important.

Effective governance must put the member-owner at the center of the process if it is to inspire the other two factors of cooperative uniqueness,

In for-profit firms, the primary performance driver maximizing shareholder wealth. While many institutions may profess a wider mission, market realities sooner or later come back to this singular focus.

In credit unions, the vital role of the member-owner is often relegated to that of a “satisfied customer.” CEOs and boards are wary of member involvement beyond token ratification of the board’s election at the required annual meeting.

Without stimulating member awareness and involvement, the unique cooperative model can quickly run off the rails. Boards become closed shops. Directors serve for decades. Infrequent vacancies are filled with familiar colleagues.

This isolation from the members turns the credit union into an institution where financial performance is the primary success factor. “Mission” becomes a special project or a PR effort.

Examiners reinforce this focus. I have yet to see an exam that assesses cooperative contributions. This does not mean purpose is dead; it just suggests it is uniformed by continuous member engagement.

Member-Owner Participation as an Essential Cooperative Process

An immediate way to start engagement is to treat members as interested owners. One way is publishing the quarterly financial outcomes on the web, and distributing them digitally, with a full discussion of what they mean.

After every calendar quarter, there is not a day that goes by without public companies, especially financial firms, announcing quarterly earnings, the reasons therefore, and their outlook . In credit unions, which must file financial call reports quarterly, there is comparatively total silence. Until some reporter seeks out the 5300 report for an article.

I have found one example of this SOP-private-company process in credit unions. When I asked the CEO why he sent a quarterly letter with full financials and commentary he replied:

  • We’ve reported to our member-owners every 90 days for the last 20 years. That is something we believe all coops should do.
  • We describe how we are responding to current events; e.g. the COVID-19 pandemic, both financially and operationally.
  • The report is for personnel and team building, not a compliance requirement designed from a regulator’s point of view.
  • Numbers are the minimum baseline in relating to owners – the culture and heart of who we are is the relationship with our “shareholders.”

He wrote: “Member involvement is a real living tactic for us…..to reach for shared strategic hopes is a win-win model for every stakeholder. We see each other, talk to each other, and trust each other.”

A Basic Step in Real Democratic Governance

This one tactic is an easy first step for every credit union to take. It would begin to broaden the concept of cooperative governance with the constituency that matters the most: the member-owner. Most importantly, it would show “we trust each other.”

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What Do Municipal Credit Union and the U.S Postal Service Have in Common? 

The following is an excerpt from Today’s Edition, a newsletter of current events:

While we should be concerned about the health of the Post Office, I do not believe that widespread alarm or panic is justified. Let me explain…

So, let’s start with a clear-eyed look at the challenges facing the Post Office. The Post Office is in trouble. It has been in trouble continuously since 2006. Why? In 2006, Congressional Republicans imposed a special rule on the Post Office. It requires the Post Office to account for its retirement obligations in a way that no other federal agency is required to do. As explained by the Institute for Policy Studies,

In 2006, Congress passed a law that imposed extraordinary costs on the U.S. Postal Service [that] required the USPS to create a $72 billion fund to pay for the cost of its post-retirement health care costs, 75 years into the future. This burden applies to no other federal agency or private corporation.

Nor does it apply to private corporations.

Since 2006, the Post Office has been on life support, beholden to Congress and the Executive for its continued sustainability because of a made-up accounting rule . . .

Government authority creating numbers to flim-flam decisions is not restricted to Congress and the Post Office. NCUA has made a habit of the same practice for over a decade.

The Situation at Municipal Credit Union, New York City

I have written about NCUA’s May 2019 conservatorship of Municipal Credit Union in three blogs. One described the reported $123 million loss for the June 2019 quarter. Another analyzed the equally unprecedented and outsized net income of $30 million achieved in the final three months of that year.

NCUA has provided no information about the conservatorship affecting almost 600,000 members in this $3.6 billion credit union. The only data comes from the quarterly call reports.

These highly unusual financial  results in conservatorship continue.

Extraordinary Return on Equity a Year Later

The June 30, 2020, call report shows a net income of almost $15 million as compared to the $123 million six-month loss in the prior year. This is certainly positive. More remarkable is the 54% gain in reserves from $104 million to $160 million in the year since June 2019. This is a return on equity of over 50%, an extraordinary outcome, perhaps unprecedented for a coop.

But these unusual financial results are not the results of operations. Rather, like the Post Office, NCUA imposed accounting “adjustments” for liabilities far into the future, in an attempt to justify its conservatorship. And NCUA avoids answering questions after examining the credit union for decades without requiring any such one-time “adjustments.”

Exaggerating problems to justify supervisory edicts does three things. It creates a public case for why regulators are needed, or as one NCUA chair explained: “to get honest numbers.” Secondly, this sudden discovery deflects questions about where the regulators were as the problems developed. Finally, it shifts the spotlight for responsibility by blaming (and sometimes suing) those in place, versus those examining.

Just prior to the conservatorship in March 2019, Municipal reported a well-capitalized net worth of almost 8%. NCUA had to justify taking over a solvent credit union in May and putting in its own management. So far, this action has resulted in 200 job losses, the closure of 7 branches and a reduction of over $150 million in loans outstanding. The allowance account has been funded to 223% of reported delinquencies, 50% higher than the industry average.

When Authority Goes Dark

Taking a credit union away from its members via conservatorship is the most serious action NCUA can take. Any credit union that reported going from a quarterly loss of $139 million to a quarterly net income of $30 million six months later would be highly suspect.

When government imposes pseudo-accounting write downs to seize control of an institution, both the organization and the government lose credibility.

NCUA has a record of dictating reserves which proved to be significantly in error and contrary to the judgment of experienced managers. This occurred in the five 2010 corporate liquidations, which the agency still defends, using exaggerated estimates of loss as recently as the June 2020 board meeting.

These staff statements continue  the practice of unfounded official projections.  For example during the NGN funding, NCUA published estimates of the  of the total estimated costs to credit unions that have proved to be more than $20 billion in error.

Municipal was not without problems. But the key question is, what did the examiners do or not do to assist the board in their oversight of this $3 billion firm? Also,, what is the plan now to restore the credit union to its member owners?  And, why has there been no explanation for the wild swings in financial results?

Lucidity in a Crisis

All crises involve uncertainty. Forecasts are no longer linear extrapolations from a settled environment. Responses must be flexible. Options are vital. Clear thinking is a must.

The issue of subjective estimates of future losses imposed by examiners is especially critical now. In past crises, examiners have dictated individual credit union’s allowance provisions,  reducing the credit union’s net worth and compromising its ability to serve members. And then, post recovery, the decisions have been found to be overly zealous.

Regulators are supposed to be where problems are. The track record in Municipal suggests their role has added to the difficulties of the credit union getting back on track. Unaccountable actions, no transparency and no one taking responsibility, is a debilitating, even dangerous, practice.

NCUA’s silence reinforces the impression that they cannot make a public case for their decisions with Municipal. There is no plan. And they hope no one notices the growing impression of regulators not up to the job.

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The Volunteer Spirit

In July, the Library of Congress finished a crowd sourced project to complete the transcription of over 10,000 documents in its collection of Lincoln papers.

Most are letters with complaints, pleas, job requests and military reports. Some are in French, German or Italian. Many are personal such as the desire of a Navy Officer to marry, to which Lincoln responded to the Secretary of the Navy: “please allow him the requisite leave of absence, if the public service can safely endure it.”

One of the most stunning messages for me was a letter from a 65-year old would-be Army volunteer from western New York. He wrote in March 1864:

Father Abraham

I am 65 years old am able to do a fair days work (not the hardest kind of work) day after day am willing to go to the army, or rather into some fort or Garison, where there will be no long marches, was never a good traveler but worker will help you work out our national salvation will go free of any charge to Government except travel and rations Avery Coon is a stout man of about my age will go too to a Fort or Garison he may need the usual pay will be a good hand

We have Faith in God and dry Powder

Truly Yours Daniel Edwards

The question for credit unions: What is the belief and “dry powder” motivating your volunteers?

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How to Achieve Increased Participation in NCUA’s Annual Voluntary CU Diversity Self-Assessment

Few credit unions have completed this voluntary form. NCUA makes repeated requests for more participation. At the July NCUA board meeting one member suggested that credit unions should have an incentive, such as lowering their operating fee. The August 3 NCUA letter to credit unions (20-CU-23) is the latest reminder.

The form is long with five sections. It combines data, qualitative comments and even asks for stories. Check it out here: https://cudiversity.ncua.gov/

Given the wide range of interpretations possible from the information, one can understand the hesitation to complete it, especially if the forms are public.

How to Increase Participation

With heightened concern on implementing truly equal opportunity, this self-assessment could be a useful tool for any organization trying to identify ways to respond. Two suggestions to gather more credit union data;

  1. Use the filings to give annual awards highlighting credit union leaders in this effort. The subtitle of the form is: “Best Practices for Demonstrating a Commitment to Diversity and Inclusion.” Awards would validate the relevance of the form. They would spotlight best efforts. Most importantly, credit unions would have to participate to win! The awards would showcase leadership and promote winning credit unions’ employer reputation. Much like the many Best Place to Work recognitions given out in localities around the country.

An example of this approach is the Departments of the Army , Navy and Air Force Distinguished Credit Union of the Year Awards. Four credit unions were honored using each military Department’s selective criteria.

  1. NCUA should complete and publish its own copy of the voluntary diversity report as an example for credit unions.
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From the Field: A CEO’s Budget Review Message

“Later next week we will finalize the [financial] report book and publish. I wanted to send this summary out to you and the team to see the tact and our confidence about the future based on traditional thinking. Our numbers are GREAT! But not for the right reasons. 

We are doing the right things. But what are we risking in just doing the right things for now, and not the right things for the coming post-COVID future? COVID is not unprecedented, it’s just another year after year revolving pressing issue. We knock down the pressing issue of the year, every year – chaos is constant, and adjustments are forever needed.

Remember: to see COVID as simply another challenge to success is not dismissing COVID, it simply is recognizing that as cooperative business people, we have the means and the skills to endure and prosper. When you read this financial update, I hope that is what you infer between the lines. Take care, stay safe.”

The Key CEO Question: What are the right things we should be doing now for the post-COVID future?

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From the Field: Will New Leadership Change NCUA?

 

(A response to What NCUA Nominee Kyle Hauptman can learn from McWatters’ NCUA Tenure)

“I’m sure you are familiar with the story of Passover. At the beginning of the Seder, the children ask the famous 4 questions. It begins with the phrase “Ma Nistanah”. Why is this night different from other nights? Among Jews, family members, we use the phrase as a question: why will this be any different? So if your wife’s mother does the same silly thing again, and you say to your wife “Ma Nishtanah”- you both get it. Sometimes the reference is more serious and that’s unfortunately what I would say about a new NCUA Board Member. Chosen by the same patronage process, using the examples of behavior of the existing board members, and being trained by the same existing staff. “Ma Nishtanah”- why should we expect anything different?”