Author: Chip Filson

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NCUA Board Sets Critical Precedent and An Important Oversight Role for Itself

The process took 23 months.   The appeal required multiple in-person meetings. And oral hearings.  The credit union engaged an attorney. The most senior regional and professional staff at NCUA opposed the petitioner’s request.

In the end, the board exercised common sense.  It adjudicated the appeal in favor of the credit union.  A difference  that, on the record, should have been resolved at agency’s local level.

This event is the first time in a long, long while in which the NCUA board has acted as a true board.   It overturned the actions and judgment of agency senior staff in their most important activity-examinations.   This decision could be a critical turning point in board oversight and staff accountability.

This summary is prepared from the Order published by the agency.

Background Summary

On November 26, the NCUA released a Decision and Order on Appeal of a Region’s and Supervisory Review Committee’s  CAMEL 3 examination rating of a credit union.

The Order provides  dates for the many steps required in this elongated bureaucratic appeal process.  The Order repeatedly presents the explanations for the Regional office’s downgrading  of the examiner’s recommended CAMEL 2 rating to CAMEL 3, and the SRC’s concurrence.

The examination date was December 2019.  The Board released its Order in late November 2021, or almost two years after the exam date.

Reading the agency’s repeated justifications for not correcting a flawed process reminds one of the old joke about NCUA examinations:

Question: What’s the difference between your NCUA examiner and a terrorist?

Answer: You can negotiate with a terrorist!

The Board’s Finding and Conclusion on the Credit Union’s Appeal

 

The Finding by the Board

After a de novo review of the administrative record, and taking both parties’ oral presentations under advisement, the Board finds, by a two to one vote, that the Region erred in assigning Petitioner a composite CAMEL 3 rating, effective December 31, 2019.

The Board notes the record in this case reflects several documented errors on the part of the Region, including miscommunications and breaches of NCUA examination procedures. Notably, the credit union was given an exam report containing composite CAMEL 2 language to support a composite CAMEL 3 rating. In addition, the exam report included DORs that did not cite a specific regulation, in violation of agency policy and regulation.25 Accordingly, the Board considers those DORs26 invalid and they are accorded no weight in this appeal.

Looking purely at the numbers, Petitioner’s ratios appear to be better than, or in line with, the average lowest rated composite CAMEL 2 credit unions:

The Board disagrees with the Region’s Asset Quality rating. The solid performance of Petitioner’s loan portfolio infers that the Region’s rating was based on the quality of the borrowers, rather than the quality of the loans. For example, although the borrowers’ average FICO scores were in the low 600s, delinquencies are very low. The Board notes it is much easier to achieve low delinquencies with borrowers with higher (e.g., 750 – 800) FICO scores.

Further, while the Board is not prepared to overturn the Region’s Capital rating, the Board is concerned that the Region failed to articulate to Petitioner why this credit union’s risk profile demands such high capital levels, especially when capital adequacy is defined by the Federal Credit Union Act (FCU Act).27 Petitioner’s net worth position of XXXX percent is considered well capitalized under prompt corrective action.28 The Board notes XXXX Petitioner’s net worth was still stronger than statutorily required by the FCU Act.

Additionally, the Board disagrees with the Region’s Management rating. XXXX Management understands how best to work with the credit union’s members XXXX.

Conclusion

The Board finds nothing in the record to support this credit union is “less capable of withstanding business fluctuations and [is] more vulnerable to outside influences.”29 Based on the Board’s full and independent review on appeal, the Board finds the Petitioner’s composite CAMEL 3 rating is not justified. Instead, a composite CAMEL 2 rating is appropriate.

Why This Example Is Extremely Important

The agency process for this extended appeal  lacked any semblance of mutual objectivity. Following are the timelines of the exam and appeal process presented in the Order:

Examination data used:  December 31, 2019

Exam began: February 29, 2020

Report released by Region: June 25, 2020 (six months after the exam date)

Credit Union Board met with Regional staff: July 14 2020

Credit union filed request for reconsideration: August 13, 2020

Region reaffirmed the CAMEL 3: September 11, 2020

Credit union letter to appeal Region’s Decision to the SRC: October 8, 2020

Appeal letter opened by SRC 42 days later: November 19, 2020

SRC held oral hearing with credit union: February 2, 2021

SRC affirmed the Region’s CAMEL 3: March 2, 2021

Credit union filed supplemental appeal letter to NCUA: April 14, 2021

Credit union requested an administrative review by NCUA board: granted April 20,2021

NCUA Board oral hearing with credit union: June 10, 2021

Order issued  assigning a CAMEL 2: September 8th, 2021 (last modified date of November 22, 2021)

For any credit union to persevere during this nearly 23 month gauntlet of appeals and hearings in the face of bureaucratic intransigence is a demonstration of true grit and determination—even courage.

The fact that the Board was willing to listen to the appeal and then reverse the agency’s repeated justifications of its actions, is a noteworthy and critical exercise of Board oversight.  For the Board  directly challenged and changed the Region’s and SCR reasons for assigning specific CAMEL ratings.

Why was the credit union so persistent?  Especially as the standard for appeal to the board is difficult: “the burden of showing an error in a material supervisory determination rests solely with the insured credit union.11”

This criteria means the credit union must show that the agency made a mistake.   Such a finding is contrary to every regulatory impulse that the regional office’s judgments and findings can be incorrect.  It shatters the aura of expertise that is the core of a regulator’s authority.

What the Supervisory and District Examiners Told the Credit Union

The following is from the oral recordings and written transcripts of what the Supervisor and District Examiners told the credit union in assigning a CAMEL 2 rating upon completing the exam:

The Composite CAMEL rating is based on our assessment that you are fundamentally sound. For a credit union to receive this rating, generally no component rating should be more severe than a 3. Only moderate weaknesses are present and are well within the board of directors’ and management’s capabilities and willingness to correct.

While this rating results in an upgrade, as you do not pose material concerns, we have retained a management rating of “3.” This rating indicates some degree of supervisory concern. You will not qualify for an extended exam program and will remain on a 12-month examination supervision schedule.

Bureaucratic Jargon Overrides: “Authorized and Unauthorized Examination Versions”

NCUA Regional staff explained this overruling of the district and supervisory examiner’s CAMEL 2 rating by saying it was an “unauthorized version, erroneously issued.”

The Region’s “authorized exam version” explanation is that upon its review, “the Region found that staff had mistakenly excluded from the examination report closing language that had been approved for release. Noting that the reconsideration determination should be considered an addendum to the examination report, the Region’s September 11 letter indicated that the final paragraph in the Examination Overview that discussed Petitioner’s composite CAMEL 3 rating should have read:        The Composite CAMEL rating is 3”

 “Arbitrary and Capricious”

This overturning of the field examiners’ judgment was the core of the credit union’s appeal.

Petitioner further contends that the Region’s field examiners followed NCUA’s published examination procedure by including their first-hand observations and on-site assessments of the credit union into a draft examination report that concluded a composite CAMEL 2 rating was appropriate, but that same draft examination report was subsequently altered after field staff was “overruled,” to reflect the final composite CAMEL 3 rating that was issued to the credit union. Petitioner argues that “the same set of facts resulting in two different and inconsistent conclusions is by definition arbitrary and capricious and fundamentally lacks a rational and reasoned connection to the evidence.” 

A Credit Union to Be Saluted

We do not know who the credit union is. It takes a special kind of leadership  to challenge regulatory authority when a credit union has been wronged. The process takes time, resources and distracts from the primary job of serving members.  The emotional toll can be telling as well.

Every credit union knows the examiners will be back in another 12 months and the agency is always tempted to prove they were right.   The fact that the board was willing to take this appeal and support the credit union’s position is an important check and balance that has been long absent in NCUA examination and supervisory actions.

A Worrisome Dissent

The dissent by chairman Harper presents interesting logic.  He writes:  “Although the process by which the credit union received its report and rating was inconsistent and flawed,31 an inconsistent and flawed process can still produce a reasonable and supportable result.”

An NCUA chairman seeing an “inconsistent and flawed process” should have set off alarm bells about the agency’s entire examination effort, not to mention the internal review process.

Moreover, if the means to an end are found deficient, how does one justify the end result or, in this case CAMEL assignment? That is the arbitrary moment that many credit unions have experienced in examinations.

For data and logic are the way sound judgments are supported.   This is a critical skill for examiner effectiveness in their credit union dialogues.   It should be modeled at the highest levels in the Agency, not asserted using one’s position of presumed authority.

Following are two additional references from the Order presenting the distinction between regulations and guidance,  which were used by Board:

25 NCUA’s regulations, Part 791, Subpart B, reiterates the distinctions between regulations and guidance and prohibits examiners from criticizing (through the issuance of DORs and supervisory recommendations) a supervised credit union for a “violation” of, or “non-compliance” with, supervisory guidance. The NCUA’s National Supervision Policy Manual requires examiners to cite to the specific section of the Federal Credit Union Act, NCUA regulations, Federal Credit Union Bylaws, or other authority and (if the credit union violates more than one) to cite the highest authority.

26 Of the DORs included in Petitioner’s exam report, 2 of 5 DORs included specific regulatory citations, while 3 of 5 included only general or incomplete citations.

 

 

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A Compensation Revolution Started by a CEO

Credit unions, corporations and multiple organizations are finding it difficult to fill vacancies. One response is to raise pay for both existing and prospective employees-especially at the lower end of the wage scale.

Some credit unions have announced increases to a $15 minimum starting wage; others have used hiring bonuses or payments for employee referrals.

The majority of these adjustments are at the entry level or bottom of the pay scale.   But is there another way to think about compensation that would start at the top?

What if credit unions were to emulate the example of CEO Dan Price and rethink their approach to pay starting with the CEO?

Reducing the CEO’s Pay from over $1 million to $70,000

Gravity is a  credit card processing and financial services company founded in 2004 by brothers Lucas and Dan Price. The company is headquartered in the Ballard neighborhood of Seattle, Washington and employs 100-200 people, including a branch in Boise, ID. It is a private company and plans to stay that way.

In 2015 CEO Price, now the sole owner, reduced his salary to $70,000 and made that amount the starting annual pay for any employee in the company.   The story went nationwide.   Inc magazine reported the action immediately; there have been follow ups to see the results  into 2021.

The company’s efforts were converted to a Harvard Business School case study.   This January 2018 article summarizes the case and concludes with a link to a 27 minute video in which Price and the Harvard professor discuss the underlying reasons at a Young Presidents Organization meeting.

In an April 13, 2021 twitter post, Price summarized the company’s results since the 2015 change as follows:

Since our $70k min wage was announced 6 years ago today:

 *Our revenue tripled

 *Head count grew 70%

 *Customer base doubled

 *Babies had by staff grew 10x

 *70% of employees paid down debt

 *Homes bought by employees grew 10x

 *401(k) contributions grew 155%

 *Turnover dropped in half

Price says a number of employees earn more than this minimum.  As the sole owner, this aspect of Price’s wealth grows as the company value increases.   He explains his approach and why it upsets many in the private sector:

“I did this as a private business owner. It affected no one but myself (I cut my salary from $1.1M to $70k) – the definition of private enterprise. But what I did was very threatening to them because it disrupts the narrative of “CEOs must be paid 1,000x more than their employee.”

Is there a Credit Union Lesson in This Spirit?

The increase in CEO salaries has continued across credit unions even during the pandemic.  Numerous consulting and trade firms provide data and peer comparisons to ensure CEO’s compensation remain competitive and growing.

What would happen if the whole salary paradigm were turned upside down as Price did at his company?  Gravity is a customer service firm where relationships matter. Price is very important.  Success depends on sales and every employee being an entrepreneur and accountable.

Price acknowledges this approach to compensation is contrary to most economic theory and business models.

He believes that once an employee’s concerns over money worries becomes only the fifth or sixth priority in their lives, more powerful intrinsic motivators will become dominant.  These include mastery of a craft, serving a bigger purpose, and autonomy.

When these characteristics spark employee behavior, then the business outcomes he cites can happen.

What Would Happen If?

Critics point out that the majority of Price’s wealth is in his ownership of the company.  So he can call the play Warren Buffett uses.   Buffett has been paid the same annual salary for the last 40 years-$100,000.

Credit union CEO’s do not have Price’s “stock” appreciation—although a small number have cashed out their positions by negotiating significant special merger payments as their credit union’s final act.

Skeptics point out this model would not work in low pay, low margin, slow growth industries such as food service and mass retail. In these industries robotic solutions and customer self-service are replacing traditional low wage employees converting variable salary expenses to a fixed capital investment.

Price’s response is automation makes the need for creativity, marketing and initiative in the remaining jobs even more critical.

Today a number of credit unions share their success with employees through various gain sharing programs.  These do not change the basic structure of the salary scale.

What would be a cooperative equivalent of this approach to employee motivation, accountability, compensation and organizational success?  Or as Price alluded, would this change be too disruptive of the existing narrative about how credit union CEO’s are compensated?

What would  be credit union member-owners reaction?   How might such a plan influence the way employees talk about the cooperative advantage with members?

Are there examples of credit unions  aligning compensation at all levels following a cooperative approach to this challenge?

I would be glad to share any examples incorporating this innovative spirit.

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Two Reasons Mergers Fail to Advance the Cooperative System

Mergers of sound and long-serving credit unions have two fatal flaws:

  1. They do nothing to expand the credit union system or its market share. Basic merger math is 1 + 1 = 1. No new members are added, nor loans.  Employees leave and long term member relationships are disrupted.
  2. Closing an independent operation with its own leadership and governance, reduces the industry’s human capital and innovation potential.                                                                                                                                        An analogy: If I have an apple and you have an apple and we exchange them, we both still have one apple. However, if I have an idea and you also have an idea and we exchange them, we both have two ideas.

Credit union leaders who serve in their positions for years and then seek a merger, inherited a vital legacy from their predecessors,  but have stolen it from their children.

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Thanksgiving Settings in 2021

Nature’s fashion change brightens our autumn.

History remembered for those who welcomed the first newcomers to our shores. This blog was written on the land of the Piscataway peoples.

People living in temporary shelters.  The unhoused on the grass circle in front of Union Station in DC.

A gift of thanks for a life well lived and hope in the future. (Nun danket alle Gott)

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What the Pilgrims Gave Coops

The Pilgrims did much more than inaugurate a national holiday.   They set up the first civil authority in the New World.   The full agreement is a single paragraph.   It was called The Mayflower Combination (November 11, 1620):

IN THE NAME OF GOD, AMEN. We, whose names are underwritten, the Loyal Subjects of our dread Sovereign Lord King James, by the Grace of God, of Great Britain, France, and Ireland, King, Defender of the Faith, & c. Having undertaken for the Glory of God, and Advancement of the Christian Faith, and the Honour of our King and Country, a Voyage to plant the first Colony in the northern Parts of Virginia; Do by these Presents, solemnly and mutually, in the Presence of God and one another, covenant and combine ourselves together into a civil Body Politick, for our better Ordering and Preservation, and Furtherance of the Ends aforesaid: And by Virtue hereof do enact, constitute, and frame, such just and equal Laws, Ordinances, Acts, Constitutions, and Officers, from time to time, as shall be thought most meet and convenient for the general Good of the Colony; unto which we promise all due Submission and Obedience. IN WITNESS whereof we have hereunto subscribed our names at Cape-Cod the eleventh of November, in the Reign of our Sovereign Lord King James, of England, France, and Ireland, the eighteenth, and of Scotland the fifty-fourth, Anno Domini; 1620

Historian Bradley J. Birzer describes this effort as follows:  “what incredibly and pugnacious audacity these Pilgrims had. Ruling themselves with a simple agreement, a single paragraph, and a deep and abiding faith.

“I wracked my brain trying to remember an example of another, earlier assertion of self-government. Had the Greeks done it or the Jews? No, they had already relied upon a law giver. The Romans asserted something in 509BC, but I’m not sure it had quite the same texture as what the Pilgrims did in 1620.

“I really couldn’t come up with a significant example. For all intents and purposes, the Plymouth Combination is the first real assertion of the right to self-governance in the modern western world and one of the most important in any time or place.”

The Right of Self Governance

The unique elements of cooperative design are all in this founding document.

Words familiar to any cooperator include:  mutually, covenant and combine, for better ordering, and acts, for the general Good of the Colony.

The document was an agreement to work together to further everyone’s well-being.

We remember the Pilgrims for many historical reasons.   But the legacy that may be most consequential  to America’s history is this commitment to self-government.

Credit unions are the embodiment of this ideal in their design for community financial services.

As we give thanks tomorrow, add the credit union model to the Pilgrim’s legacy for America.

 

 

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GAO’s NCUSIF Study Omits the Most Important Data Point

The GAO  released a report in October analyzing the causes of credit union failures from 2010-2020.   The news stories and report lead with two facts:  145 credit unions caused $1.55 billion in losses to the NCUSIF in these eleven years.

The full report  took 16 months to complete and contains appendices full  of math correlations and sophisticated looking analysis.

However it omits the most important fact about these losses.  That is the NCUSIF’s 1.30 Normal Operating Level (NOL) is 93 times larger than the rate of insured losses for this period.  That is a critical actuarial finding.

The GAO failed to put its analysis in any context or perspective.  Any loss is too much.  All credit unions operate in a competitive market.  As noted by Ed Callahan when Chair of NCUA discussing deregulation, “Some credit unions will do better than others.”

The most important issue is the financial impact of losses on the NCUSIF and credit unions.   Using the GAO’s $1.55 bn total, this results in a loss rate on insured savings in this eleven-year period of 1.4 basis points.

The loss  trend is also declining as noted in the study.  Of this total, the report (page 13) says $831.7 million was from the failure of three taxi medallion credit unions in 2018.   That means the 142 remaining credit unions lost $718 million for a loss rate of only .65 of 1 basis point.

In the context of a $20 billion insured fund with total capital equal to 1.3% of insured savings, the fund is 200 times larger than the insured losses if the disruptive event of the taxi medallions is not included.  If counted, the fund as noted, is 93 times larger than the eleven-year  insured loss rate.

Reasons for Failures

Figure 7 on page 19 is a table labelled: Top Material Loss Review Causes or Contributors to Failure by Number of Times Mentioned.

This is the list of the six causes from most to less frequently cited:

  1. Credit Union Board or Committee Oversight
  2. Failure by NCUA examiners
  3. Weak or missing NCUA Guidance
  4. Fraud
  5. Management integrity
  6. Lack of timely and aggressive NCUA action

All of these six areas are why there is an examination of every insured credit union.  These “causes of failure” should be covered in every exam.

The report does not cite economic circumstances or external disruptive events, as in the taxi medallion credit unions, as reasons for losses.  The report began after the Great Recession with losses in 2010 when the economic recovery was well underway.

What the report makes clear is that NCUA’s exam program has much room for improvement.

At yesterday’s November board meeting, the CFO commented that the positive NCUSIF AME recoveries from prior loss estimates has continued into November.   So the net loss reserving expense for 2021 is, in effect, negative.   This means the two most recent NCUSIF loss ratios cited above should be even lower when this year’s results are added to this study’s total.

 

 

 

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Showing the Way by Thought, Word and Deed

These brief examples represent  the ideals, principles, and qualities desired and admired by persons,  communities and nations.  The three persons apply these principles in their daily efforts.

In their individual areas, they rise, or rose, above self-interest and seek to bring out the best in others.

A 20’s something woman coach’s philosophy

Building the character of the rower is just as important as developing the skills of the athlete.   Diligent training on respect, resilience, and the outcomes of hard work is rewarded with improved teamwork and an overall love for the sport.

Every word spoken is intentional to create a positive learning environment and consistently progressing rowers. 

An author seeking appropriate use of words

Maybe we need to delete the word ownership from our vocabulary and certainly from our legal contracts and sales agreements and land deeds. Instead, let’s use the word stewardship — and introduce a raft of legislation that defines stewardship as “leaving something better than you found it.”

Steward it or lose it.

An Example of Selfless Generosity  (excerpts)

What made Aaron Feuerstein famous was not success but his attitude in the face of catastrophe. When a fire destroyed the textile mill he owned, he faced the decisions of whether to rebuild and whether to continue to pay his 1,400 workers, who were left destitute in the dead of winter. His decision became a model of how employers should treat their workers.

Standing By His Employees

Mr. Feuerstein won where it matters most. As a business leader, he captured the hearts of his employees and the imagination of Americans everywhere.

What made Aaron Feuerstein famous was not success but his attitude in the face of catastrophe. He became a model of how employers should treat their workers.

In December of 1995, a fire raged through the Malden Mills complex, destroying almost everything. He faced the decision of whether to rebuild. He also saw that the plant’s 1,400 workers were left destitute in the dead of winter. He could have collected the insurance proceeds and walked away from the disaster.

However, he decided to stand by his workers. He took a risk and retained all 1,400 employees on the full payroll for three months. He extended their health benefits and began rebuilding the plant so that they could return to work.

In a 1997 speech, he explained that if the worker felt he was “treated the way he should be treated,” he would go the extra mile and make quality products for the company. He was right.

Here is the link to his interview on 60 minutes (6 minutes):  https://youtu.be/ry7_FcSiQL8

Doing the Right Thing

How will your stewardship be remembered by your credit union’s members?  Who is showing the way for others on your leadership team?

 

 

 

 

 

 

 

 

 

 

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Are Credit Unions Democratic? Does it Matter?

On paper and as a long standing, unique cooperative value, the best answer is,  “Maybe.”  After all for federal and many state charters the member-owners have one person, one vote in elections, and no proxies allowed.

The required annual meeting is the recurring opportunity for members to decide who will represent them.  To approve their current leaders or to vote them out.

This is a crucial process in co-op governance.  However, the practice rarely lives up to the theory. One person sent me his summary of board elections with the title:  It’s a scam.

Here is my observation on the subject of Board elections:

1-The credit union board of directors appoint a nominating committee.  The committee are usually directors NOT up for re-election.

2- The nominating committee nominates the incumbent directors.

3-The nominating committee does not nominate any non-incumbents.

4-The ballot is “no contest” – the number of directors up for election is the same number of directors on the ballot.

5-There are no director term limits.

6-Directors arrange to “resign/retire” mid-year so the position can be filled by appointment – by the incumbent board of directors.

7-Once appointed the director will seek “re-election” by way of the nominating committee – composed of the board of directors

If a member seeks to run for the board they need to stand in front of the credit union and solicit signatures on a nominating petition & the number of signatures required is substantial.  

If it is not a scam, contested elections are certainly a rare occurrence.

While cynical, there is more than an element of truth in this former CEO’s observation.

Does the Absence of Director Elections Make any Difference?

Many very large federal credit unions have never had an, open contested board election in this century.   In seven states where proxies are used by state charters, the board itself controls all of the votes even were there to be a nomination by petition.  The result is that boards end up perpetually controlling who serves.

Incumbent directors and CEO’s would defend the process by pointing to the industry’s financial results and member growth.  They would argue that is the real measure of the responsiveness of board leadership.

Others would point out that  credit unions regularly publicize  board nominations when announcing the annual meeting, but never receive any interest from members.

For many the idea that any member might collect sufficient signatures to stand for the board is unsettling.  After all it takes expertise and experience like that of current office holders, to be able to be a director.

If most credit unions succeed without democracy does it matter?

Can this co-op concept of “democracy” succeed if the member-owners never vote?

What kind of leadership culture and responsiveness will exist at the board level knowing that their tenures are never subject to member approval?

How will co-ops present themselves versus for-profit institutions where shareholder rights and activity are frequently used to bring issues to the fore at annual meetings?

Finally, how does one explain the voting manipulation that occurs with mergers of long serving, solvent credit unions where substantial benefits are paid to the merging CEO?

The  merger transaction promises members only rhetorical future benefits. But the person responsible for the merger, who gives up leadership responsibilities, receives significantly more compensation (a golden parachute) than by staying and retiring from the job.

One writer described the outcome when democratic practice is usurped by those in power:

“when you get rid of the democratic oversight of a sector of the economy, it becomes a black market free-for-all, a winner-take-all-loser-dies-in-poverty survival-of-the-fittest dog-eat-dog game.

The masses lose, the commons suffer, individual rights get trampled, and power amasses to CEO’s maximizing their personal outcomes. “

The Most Important Loss

While the erosion of democratic processes, may take time to manifest itself, the failure to cultivate co-op’s unique member-owner design may be the system’s biggest vulnerability.

Recently the Vanguard Group of mutual funds began a new television campaign.   The theme: “You’re not just an investor, You’re an Owner.”

This is only the second national TV campaign in the firm’s history.  As their initial product advantage of low cost, index-based mutual funds and ETF’s was matched by all their competitors, they are now singling out the one difference no other fund can match.

The message: “A rich life is about more than just money. That’s why at Vanguard, you’re more than just an investor — you’re an owner. So you can build a future for those you love.”

The agency which created the ads explained: the campaign was introduced “to celebrate the benefits of Vanguard’s unique corporate structure which makes clients, owners” and that the goal is “to underscore the value that investors can realize by investing through a firm with no outside owners other than its clients.”

More than a Design

Credit unions which fail to practice and celebrate their unique member-owner design, may be surrendering the most important advantage they have.

Democratic governance is not just another organizational option.  It is a critical aspect of an organization’s beliefs and practices for relating to the members who created and own the credit union.

When the advantage is not used, it goes away.   Co-ops become indistinguishable from banks.  Members are just another name for customers.  And leadership progressively presumes its judgments and choices are the primary basis for all decisions-even those ending the charter’s independent existence.  Even authoritarian leaders can survive, for a while.

When democratic practices are habitually circumvented, they are difficult to restore.   Without regular succession processes, the ability to find new leaders, or even generate interest in leadership is squelched. And at any moment, the sirens of self-interest can appear, cancelling the credit union’s future for all members.

Democracy matters, until it doesn’t.    The good news is that this is a fundamental flaw that every credit union has in its own power to fix.

 

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Leading with Competence, Not Position or Authority

On January 7, 1984, NCUA Chairman Ed Callahan spoke to the Hawaii Credit Union League’s Political Action Conference.  This was the predecessor to today’s governmental affairs conference.

He opened by discussing deregulation a term he described as “overused and misunderstood.”  “I was not the inventor, but I gave it a good push.”

He then addressed why credit unions had been so uneasy, even fearful with this radical change that would apply to entire financial industry.  The fear was whether cooperatives could compete.  For on December 14, 1982, in a first step, all rates for all institution’s  money market accounts were removed.

He then presented the evidence. Growth in savings showed credit unions, whose liabilities (shares) had been totally deregulated in May 1982, had increased by double digits for three consecutive years, far ahead of the banking industry’s outcome.

The most important benefit of the change was that credit unions would make their own business decisions not government bureaucrats.  There was no more “follow the leader” putting all our “eggs in one basket.”  He also recognized “some will succeed more than others.”

The Rest of the Story

He then explained the additional changes necessary for this result to succeed.

The agency had approved a “more realistic common bond” which he believed would have the most lasting “real impact in the long run.”

He talked about the agency’s decentralization, putting resources into the field where they were most needed in order to conduct an annual exam program.   “We threw out the old cookbook and created a new exam process so we could be “problem solvers” if required.”

The agency needed to be “more efficient” using the resources provided by credit unions.  One example was “resource sharing” where the agency would compensate credit unions who would lend their personnel and knowhow to assist other credit unions experiencing difficulties.

Finishing the Job

He closed asking support for a new design for the NCUSIF.  The Fund was “not competitive” relying on double premiums to try to meet the 1% of shares objective set in the Act.

The new design would be “less costly, puts control of funds in your hands, and makes the fund all yours when you put up the money.”  This change would “complete the system.”

Leadership Change that Lasts

Ed took questions at the end of the talk replying to attendees’ concerns about “overlapping FOM’s, competition for members,” and the threat of taxation.

He closed with the thought that he did not want to be remembered for what he had done as NCUA chair but rather for “being part of the future.”

His ending rouser challenged credit unions: “You’ve been a model for your members; now become an even better one.”

What Sets a Leader Apart-“Feeling Safe”

Ed did not lead change by preaching fear.  Instead in this speech and many others he directly addressed the “fears” that credit union leaders shared.   Fear of the unknown future, competition from without and within the industry, or the lack of expertise and navigating an economic recovery with members.

Hearing him speak, credit unions “felt safe” with his proposals for the future.   They had confidence not just in current results, but in the way the agency presented the context for change-the transparency, the joint efforts, and the shared belief in the unique value of the cooperative system.

In 1984 credit unions supported Congress’ change of the NCUSIF to a 1% deposit-based system, bringing all the benefits described in the plan.   This was critical for credit unions to have a sound, unique and competitive future in the newly deregulated financial markets.

Ultimately the trust in any organization depends on those who interact with it, “feeling safe” with its leaders.   That belief is real; it is earned not granted by position; and it is the fundamental confidence required for any system’s success.

One of Ed’s gifts was instilling confidence in others and their ability to succeed.  Every coach knows this reality if there is to be a winning team.  An example that is  much needed today in DC.