Category: Cooperative Design

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Bon Mots IV-The Power of Local

“A place belongs forever to whoever claims it hardest, remembers it most obsessively, wrenches it from itself, shapes it, renders it, loves it so radically that he remakes it in his image.​”   Joan Didion

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Maurice Smith, CEO, LGEFCU:  “What if credit unions could crack the code for sustainable, scalable wealth-creation for disenfranchised communities? It’s really anchored in the notion that we as credit unions should focus on the people who need us the most.”

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Linda Bodie CEO of Element FCU as reported by Denise Wymore:

Bodie:  “I can offer a lot more products, services and solutions even though I’m small. There’s no reason to sit back and not do something because of your size. Size doesn’t matter … not when you have the power of a cooperative system.”

Denise: Here are the three things your credit union can learn from the team at Element FCU:

  1. Bigger is NOT better. In spite of what our industry is obsessed with.
  2. Live the 6th cooperative principle: cooperation among cooperatives to gain economies of scale. There are alternatives to mergers if we just work together!
  3. Stay loyal to your brand and your target. Make your competition irrelevant by doing something that your competitors WILL NOT copy.

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Notre Dame FCU President/CEO Tom Gryp: “Our ability to pay above-market wages to our incredible partners (employees) is a direct reflection of the loyalty and support of our members. My deepest thanks go out to our growing membership base, who without their ever-increasing utilization of our services, none of this would be possible.”

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Jared Brock, self described  author, PBS documentarian, and cell-free futurist podcaster; a “free market” sceptic on “what we desperately need right now:”

Invest in your community — IE, start a family business, co-operative, community-owned company, not-for-profit, for-benefit, or partnership with one or more competent entrepreneurs with complementary skillsets such as:

  • Local, sustainable, organic food producers.
  • Local, sustainable, organic hemp clothing manufacturers.
  • Geothermal, mini-wind turbine, and micro-hydro installers.
  • House renovators to transform aging units into ultra-efficient eco-homes.
  • Builders of owner-occupier-only houses, neighborhoods, and cities. (We need to build 750+ million houses in the next 28 years or three billion people will be living in slums in our lifetime.)
  • Experienced political operatives to fundraise and start new, pro-democracy, pro-sustainability, anti-corporate political parties.

The reality is that we need a generation to build companies that give instead of take, that contribute instead of extract, that cement communal stability instead of undermining its foundations.

I sometimes wish we could get rid of grow-forever corporations and move forward solely with local/regional companies and partnerships and co-ops and for-benefits.

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In The Speechwriter (2015), Barton Swaim remarks that South Carolina Governor Mark Sanford, whom he worked for, “knew bad writing when he saw it, except when he was the author.”

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Weekend listening, 5 minutes.  Ancin Cooley, credit union consultant:  “give someone else a shot at leadership before merging.”  https://www.youtube.com/watch?v=pUWkTZe-sgg

 

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NCUA’s Merger Supervision is Failing Members

In the June 2018 merger rule update, the board action memo (BAM) outlined the circumstances requiring an updated regulation.  The staff listed examples where self-dealing was rampant and decisions not made in the member’s interest.

This rule had been preceded by numerous press accounts of “credit unions for sale” and merger votes that were railroaded through with minimal notice to avoid any member opposition.

Any government intervention in the decisions made in a market economy should address  failings that market action alone will not correct.  The explanation that these mergers were just  the “free market” at work, is not true.

Most credit union mergers are non-market transactions.  They are negotiated privately between two parties, there is no bidding or competitive offers sought, and the member meeting and voting requirement  is treated as a mere administrative formality.

Before the new rule, mergers of sound, long standing and successful credit unions were routinely benefitting senior employees, and members rarely presented with objective data of any superior benefits.

The Two Aspects of Due Process

The most fundamental step in a merger is the member-owners’ vote to approve or not the proposal of the board.  The one member, one vote democratic governance is an integral part of cooperative design.

The new rule was to insure members were protected by a process which would allow them to make an informed decision in giving up their unique relationship and future direction to another institution.

The final rule’s  requirements for this approval process had two different, but complimentary components:

  • Procedural due process prescribed the formal steps, timelines, documents and  other requirements to give the member-owners the chance to vote;
  • Substantiative due process describes the kinds of information and options that credit unions were to consider and present to NCUA and members.

NCUA’s rule gave it authority over both aspects of due process.  However in its oversight it has failed this second responsibility which was the primary reason for the rule’s update.

NCUA has  supervisory approval on many aspects of credit union operations from initial chartering, changes in fields of membership, use subordinated debt and derivatives and in multiple other operational actions. For these  the NCUA requires detailed plans, financial projections, and proof of the capacity to carry out the requested action in a manner that will keep the members’ interests safe.

In these many operations NCUA requires credit unions to thoroughly document their policies and goals.  Except for one action: giving up the charter.

In the vast majority of formal member merger notices there is little specific detail.  Instead, rhetoric about scale and competition, better service and sometimes a listing of added locations, is the norm.

The actual merger agreements submitted along with the certification of the vote are single paragraphs.  Just a statement of intent or transfer all assets and liabilities to the continuing credit union.  There are no plans.

NCUA posts all the Member Notices, along with approved member comments here.

Mergers have become an administrative rubber stamp with no effort to verify the reasons or assertions of inability to serve members in a competitive manner.

By rule NCUA must review the minutes of both parties for the prior 24 months to learn what work has been done by the boards to reach their conclusion to enter into merger. The applicants must send:

Board minutes for the merging and continuing credit union that reference the merger for the 24 months before the date the boards of directors of both credit unions approve the merger plan

Presumably a reviewing examiner would look at the discussions, forecasts, options to learn if the member owners interests were in fact considered.  And how. What outside expertise was consulted?

This is the same supervisory process established for the changes in power or activities  described above.   One presumes, for example, it is the same detailed review of requests to purchase whole banks.

Best Interests of the Member

The 62 page merger rule BAM provided multiple reasons for NCUA’s substantive, not just procedural review, of mergers:

“The Board acknowledges, however, that not all boards of directors are as conscientious about fulfilling their fiduciary duties . . .

The Board confirms that, for merging FCUs, the NCUA’s regional offices must ensure that boards and management have fulfilled their fiduciary duties under 12 C.F.R. § 701.4 to:

  • Carry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole, and with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
  • The duty of good faith stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act with a conscious regard for their responsibilities as fiduciaries.

“Several commenters suggested . . .that the NCUA’s role is limited to safety and soundness concerns. These comments are inaccurate. . .

“the statutory factors the Board must consider in granting or withholding approval of a merger transaction include several factors related to safety and soundness, such as the financial condition of the credit union, the adequacy of the credit union’s reserves, the economic advisability of the transaction, and the general character and fitness of the credit union’s management. . .

The net worth of a credit union belongs to its members. Payments to insiders, especially in the context of a voluntary merger where a credit union could choose to liquidate and distribute its net worth among its members, are distributions of the credit union’s net worth. . .

“. . the fact that ownership of a portion of a credit union’s net worth is less negotiable than a share of stock in a public company is irrelevant at the time of a proposed merger transaction. A credit union in good condition has the option of voluntary liquidation instead of voluntary merger. . .

The Board agrees that mergers should not be the first resort when an otherwise healthy credit union faces succession issues or lack of growth. . .

The rule’s procedural requirements were to protect the members: The revised member notice will also clearly convey how the proposed merger will affect access to locations and services. These changes give members greater ability to assess whether the proposed merger is in their best interests.

NCUA stated that its authority in mergers was comparable to its authority over credit union conversions to banks, mergers with banks or with non-NCUSIF insured credit unions:  Applying all portions of the merger rule to all FICUs conforms to the approach the Board has taken in these other regulations promulgated under the same authority in the FCU Act. 

Member Best Interests

NCUA has outsourced its responsibility for the asserted future member benefits to the continuing credit union.  However it has no process for validating whether this has occurred.  It routinely accepts generalized assertions about “a wider range of products and services, benefits of scale, and improved technology” as if these  are merely routine operational upgrades.

One simple way would be to examine how many members remained active with the continuing credit union one year later. What happened to those relationships, along with the merged members’ equity?

Yet in  situations where credit unions have made multiple mergers, there is no evidence NCUA has assessed the member impact when the new merger requests are presented.

NCUA is not responsible for the respective judgments of the boards about whether to merge.  However it is responsible that when the requests are submitted that the plans, alternatives, financial projections and planned organizational changes were completed with professional thoroughness and thought.  That is, with substantive due process.

This is the same process for most NCUA  approvals. But that process appears missing in mergers.  NCUA takes years and hundreds of pages of documentation and projections to award a new charter whose benefits will be far into the future.

It requires no such effort for a credit union board and CEO to give up a charter and its accumulated member relationships and goodwill built over generations.  And the requests appear processed quickly, approved within weeks of submission of the required member notice.

The standard for a common sense review of any merger request and documentation should be: Are the transparency and plans sufficient to enable a member, with reasonable capacity and interest, to make an informed decision? 

If the review of minutes, plans and forecasts do not support the decision to give up the charter, then NCUA should ask the credit union to meet  its fiduciary responsibilities of loyalty and care and resubmit before sending Notice to the members.

Members are led to believe this supervisory due diligence has taken place when receiving the Notice of Members Special Meeting.  There is rarely any evidence of this supervisory due diligence did occur. Most member Notices wording suggest just the opposite.

Congress is Interested in Mergers

In a recent hearing Senator Warren attacked banking regulators for their routine approval of mergers.

“Community banks being gobbled up. The market is being dominated by big banks. There is more concentration, higher costs for consumers, and greater systemic risk, and it is happening in plain view of the federal agencies whose job it is to keep our communities safe.

 “The FDIC has a searchable database of all merger applications received since 2013, and there have been 1,124 such applications. Out of those, how many has the FDIC denied? The total number of denials for any reason whatsoever?”

 “It’s zero. This is not just a problem at FDIC. The FDIC, Federal Reserve and OCC combined have not formally denied a single bank merger in 15 years.

Merger review has become the definition of a rubber stamp and the banks know it, and it’s time for some changes. Just saying we’re going to get tougher on this is not likely to dissuade anyone, especially billion-dollar banks.

“This has turned into a check the box exercise where the outcome is predetermined.

“Our regulators have a job to do and it’s our job here in Congress to make sure they do it,”

Credit UnionMergers are Not Like Banks

There is a difference however between bank mergers and credit unions.  As one CEO observed:
Maybe the biggest difference and advantage, unfortunately, to the cooperative CU model these days is that the management can exploit the assets for its own self-interest without effective check…as opposed to the for-profit banks who are rigorously (often ruthlessly!) and transparently scrutinized by the marketplace. 

With no market discipline and regulatory neglect, credit union mergers have become enterprises for extracting personal benefit.

This story  is an example of how regulatory failure can result in the members’ interest compromised by self-dealing by the CEO’s of  the merging and continuing credit unions.

 

 

 

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Corporate Surpluses Top $5.7 billion-$1.5 Billion More to Distribute

In early January the latest AME financial updates were posted on NCUA’s website.  Shareholders of the four solvent corporates are projected to receive total payments from their respective liquidation estates of over $3.185 billion.

Of this total 54% had been distributed as of September 30, 2021.  The remaining $1.470 billion will be sent to shareholders later this year.

Southwest and Members United members will receive a liquidating dividend on top of the return of all their ownership shares.  Only WesCorp members will see no payment.   NCUA expects to have  a deficit on its insured savings liability of $2.1 billion.

That amount appears  to be final actual loss to the NCUSIF for the combined corporate resolution.

Adding these direct shareholder payments to the $2.563 billion TCCUSF net worth when merged   into the NCUSIF (September 2017) brings the total cash surplus to $5.7 billion.   All credit unions were paid two dividends totaling $895.8 million from these merged funds.  The result is that credit unions and the corporate members, will directly receive 72% of the AME’s growing surpluses.  The balance was kept in the NCUSIF.

A $12.9 Billion Total Turnaround

When the five corporates were liquidated in the fall of 2010 the auditor’s estimate of the combined deficit for the TCCUSF was reported by  KMPG as follows:

At the time of liquidation in 2010, the AMEs had an aggregate deficit of approximately $7.2 billion, which represented the difference between the value of the AMEs’ assets and the contractual or settlement amount of the claims and member shares recognized by the NCUA Board as the liquidating agent.

Adding the current $5.7 AME surpluses, the total variance from this initial loss estimate is $12.9 billion.

As recently as the September 30, 2017 final TCCUSF audit, the estimate in the footnotes was that the combined estates would still have a total deficit.

Total Fiduciary Net Assets/(Liabilities) $ (110,863) millions, at September 30,2017

The Schedule of Fiduciary Net Assets reflects the expected recovery value of the AMEs’ assets, including the Legacy Assets collateralizing the NGNs issued through the NGN Trusts, and the settlement value of valid claims against the AMEs outstanding at September 30, 2017

93% of Legal Recoveries Pay NCUA’s Liquidation Expenses

All of this $12.9 billion recovery is from the interest payments and principal pay downs on the legacy assets.  The longer the assets were held, the more valuable they became.  The initial estimates of the credit losses over the life of these securities have proved to be in error by over $12.9  billion.

Some assert that NCUA’s net legal recoveries of $3.85 billion were a critical part of this turnaround.  That is not the case. The net recoveries were important for another reason however.

NCUA’s liquidation expenses, not including payments to the lawyers, total $3.569 billion.  So 93% of  the net legal settlements went directly for NCUA’s operating expenses managing the AME’s and NGN trusts.

Moreover, NCUA’s costs were much greater than just those directly recorded.  In  one of its first actions in 2010 after seizing the five corporates, NCUA sold approximately $10 billion of sound performing corporate assets at a loss from book value of over $1.0 billion.   This  added an actual loss on these fully current securities whose value was temporarily impacted by “market dislocations.”

There were also additional charges paid from the AME’s assets including NCUA’s 35 basis point guarantee fee on the outstanding NGN monthly balances as reported in the audits:

The guarantee fee amount due to the NCUA, at each monthly payment date, is equal to 35 basis points per year on the outstanding NGN balance prior to the distribution of principal on the payment date,

Learning the Lessons of a Crisis

As credit unions receive these final payments, it will be tempting to close the books, move on and let bygones be gone.  The crisis was over 12 years ago.  But it is still referenced today by NCUA as a reason for challenging the adequacy of the NCUSIF’s design, setting the NOL, or even when imposing the new CCULR/RBC capital requirements.

Leaving these events open to these “urban myths” kinds of recall would be a critical error.  There is much to learn when both auditor and NCUA’s initial total projected losses  to credit unions were  $13.5 to $16.5 billion versus the actual outcome of a $6.0 billion in surplus.

Why were the accounting estimates so far in error?   Were the corporates more than adequately reserved even at these extreme loss estimates?  What options for resolution were considered?   What happened to the plan presented by the corporate network?

Why did NCUA refinance the assets via Wall Street at extremely high, above market rates, when credit unions had demonstrated the ability and willingness to continue funding all corporates at much lower costs?

What can be learned from a patient, long term view of problem resolution especially one caused by cyclical fluctuations in asset or collateral values?

The immediate public diagnosis and blame placed on corporate boards and management is a typical reaction when any firm is in difficulty.  However is that criticism still useful as the legal recoveries show that fraud played a role in the design of these investments  all of which were NCUA authorized?  Will the corporate system ever  play a leadership role again, or are they to remain permanently muzzled due to a crisis assessment that has proved wrong in so many ways?

Past problems may seem to offer little for current events.   But not learning from them means the mistakes  of panic judgments, placing blame, misplaced expertise and  failing to respect mutual efforts are easy to repeat.

One of the great strengths of the cooperative system has been its ability to fix things and make necessary changes.   Both at the credit union and the system’s institutional levels.

Cooperative design can check the ambition of  self-interest by the power of collaboration and common purpose.   A through public study of all the circumstances around the corporate events would restore credit union confidence in the ability of the regulator and industry to work together when future crisis occur.

An earlier  analysis of why this look back is so vital can be found here.

 

 

 

 

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A Coop Veteran on Opportunity

Randy Karnes led CU*Answers and its affiliates for over 25 years as CEO.   Combining network strategy in the Internet era with cooperative design was critical to the CUSO’s strategy.

He has stepped back from the CEO’s role and is heading to retirement.  He continues to share thoughts on what makes credit unions and CUSO’s successful.

Seeing Opportunities Within and Without

How do leaders rally their teams to moments of opportunity? Drive themselves to see others’ initiatives in a system as part of their own?

There have been times when inventorying the business problems in a marketplace was the right play to call out opportunity.  But when defining problems becomes more debilitating than inspiring as opportunities you have to change gears. 

This is a market of opportunity for employees and professionals – to open their eyes to the chance to be more.

Show everyone around you how to engage for opportunity, that they are the solutions and entrepreneurs with spirit.  Engage…..and corporate tricks like mergers, re-organization, and internal gambits will be far less inviting.  Engage your team one task at a time and watch your confidence in the way forward grow.

In my entire career I have never seen a marketplace so ready to reward people who are simply positive about the opportunity all around them. 

Cooperative Governance and Advisory Boards

Cooperative Business Designs and the drive for customer-owner governance:

Can 7 directors  (CU or CUSO) be seen as credible for 100,000 customers, 12-24 business lines, multiple product/service distinctions, and the intensity for cooperative passion? 

Our niche (cooperatives and credit unions) doubt it every day in pushing back against our competitive model.   But do we push back with actionable and tangible examples that overcome the issues?

There is a reason that Jim Blaine (SECU) had nearly 300 advisory boards – perception matters – the design and the faces of governance matter.  That is fundamental to a network’s success.  Our governance should be a meaningful platform for our competitive advantage and distinction.

This is not to say that there is a size limit for cooperatives. Rather this is to say that scaling governances, delineating the passions applied, and marketing customer-owner leadership closer to the delivery of the value, are the key to everyone’s seeing that cooperatives are different, no matter the size.

 

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An Opportunity for Credit Union Disruption

Multiple stories have reported banks closed 2,927 branches in 2021, a 38% jump.  The troubled  Wells Fargo closed 267, closely followed by US Banks’ 257.

Even with  recent efforts to align with FinTech startups or other virtual entrepreneurs, credit unions have traditionally followed a “second to market” strategy in their growth efforts.

They have done so using a disruptive model, offering products or services that are better, faster or cheaper than existing providers.

When many think about disruptive efforts, their focus is on technology or other innovation. Two classic examples are digital music downloads replacing compact discs.  Recently Zoom has emerged as a huge disruptive innovator during the pandemic, owing to its modern, video-first unified communications with an easy and reliable performance.

The more classic disruption described by the Clayton Christensen, the author of this business concept, is not about new technology but targeting vulnerable market segments held by dominant firms. This  is the classic definition:

Disruptive Innovation describes a process by which a product or service initially takes root in simple applications at the bottom of a market—typically by being less expensive and more accessible—and then relentlessly moves upmarket, eventually displacing established competitors.

Tapping Undesirable or Ignored Markets

For many credit unions a crucial competitive advantage is local presence and reputation.

They serve members ignored by incumbents who typically focus their products and services on their most profitable customer base.

Closing branches and exiting markets which banks no longer see as attractive can open up opportunities for credit unions. From these market footholds,  they can then move upmarket eventually displacing the original established providers.

Most credit unions establish new footholds by stressing superior service and local commitment.   These bank branch closures may open up new opportunities employing  classic cooperative advantages.

FinTech Innovation may be more fun and sexy to talk about.   But credit union growth has typically followed traditional disruption design.  Are these branch closings happening in your market area?

 

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BON MOTS II for Friday

A member comment on the Proposed Merger of WarCO FCU and First Financial:

The merger may appear to be a financially good move as First Financial of Maryland FCU has more assets. However, the documentation indicates the Pocomoke location “will remain open for a period of time.” There are no First Financial of Maryland FCU’s located on the Eastern Shore. Therefore, all work will need to be done electronically and one most likely will no longer be able to walk into an office anymore.  Brian Cook, Member, WarCO FCU

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“You have to pick the places you don’t walk away from.”  Joan Didion

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Jim Blaine: I think one of the ideas which used to ring true was the thought that trying to compare CUs to banks was like trying to compare Ralph Nader to GM because they were both in the car business….any attempt at comparison doesn’t really make sense…entirely different purposes. Credit Unions should never be “comparable” to banks; it seems a useless exercise…CUs should provide the “contrast” to banks. ( January 2022)

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 Jeff Bezos: If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.

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Ed Callahan: “The only threat to credit unions is the bureaucratic tendency to treat them, for convenience sake, the same as banks and savings and loans. This is a mistake, for they are made of a different fabric. It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together.“  (Chairman, National Credit Union Administration, April 1985)

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Samuel Johnson  observed that “what is written without effort is generally read without pleasure.”

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Weekend reading recommendation: The Fed’s Doomsday Prophet Has a Dire Warning for Where We Are Headed.   The article illuminates the distinction between traditional consumer price inflation and asset inflation (S&P index up 47% the last two years) and the consequences for our political economy.

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Finding Qualified Employees-A Case Study

The $10.6 billion Alaska USA FCU operates branches in four states to serve its 712,000 members (September Call Report).

The distribution of operations includes 27 locations in Alaska, 12 in the greater Phoenix area, six in California and 22 in Washington state.  Total employment (FTE’s) is 1900.

Currently its web site lists 240 openings for credit union jobs.   Twelve pages with 20 positions each.  That is a vacancy rate of 12%.

The number of openings poses questions such as: What is the impact on member service?  How do these vacancies affect its current capabilities?  Are the open positions in one area or throughout its network?  Is this just another example of labor shortages across the broader economy?

A Simple Truth

In the credit union’s web site “About” section, their origin story begins:

In 1948, fifteen civil service personnel gathered in Anchorage’s Alaska Air Depot, pooled their savings and their conviction in one another, and formed a member-owned credit union.

At the heart of that decision was a simple truth—local financial institutions simply could not or would not support the credit needs of the personnel who had been recently transferred to Alaska.

This “truth” raises another possibility:  As Alaska USA’s operations  expand beyond Anchorage  throughout the Western United States, has this lessened their “local” advantage for  attracting employees?  What will be the impact of going Global?

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Situational Awareness, Leadership and Looking Ahead

As leaders celebrate the known wins in the books for 2021, there is also the need to anticipate what lies ahead in the New Year.  Will it be better or worse?  More of the same, or changes planned?

One approach to this forward-looking exercise is situational awareness, sometimes abbreviated SA.

The concept was developed primarily by the military.  It is a skill to improve one’s ability to identify potential threats, be more ‘present’ and aware of your surroundings in combat.

The term has also been used to analyze danger in various worker environments where the potential for accidental injury is great.   Some even apply the concept to personal safety where one might be at risk such as traveling in an unfamiliar neighborhood at night.

Situational Awareness in Sports

A frequent reference to this ability to react in a situation is sports competition.

Success does not always go to the strongest or fastest athlete, but to those that have a superior “feel for the game.”

My son-in-law played offense tackle for Stanford when the team was coached by Bill Walsh, a former NFL coach,  considered a master offensive tactician.

Walsh would always script his team’s first offensive drive with 6-8 set plays so that he could see how the defense reacted.  Based on what he learned would determine how he then approached the overall game plan previously drawn up.

In basketball one of the elite players at every level was Bill Bradley who played at Princeton, for the New York Knicks as well as being the only collegiate player selected for the 1964 US Olympic team in Tokyo.

A description of his extraordinary sense for the ever-changing dynamics of the game is described in A Sense of Where You  Are, the story of his senior year at Princeton and his preternatural feel for the game.

In choosing the title, the author quotes Bradley:

“When you have played basketball for a while, you don’t need to look at the basket when you are in close like this,” he said, throwing it over his shoulder again and right through the hoop. “You develop a sense of where you are.”

At one point the author takes Bradley to a Princeton ophthalmologist to see if his skill is due to an expanded range of peripheral vision versus a normal person’s.  The tests show he has both greater horizontal and vertical  range.   But that does not explain the instinctive way he applied his talent.  That analysis takes the rest of the book!

For many their first experience of situational analysis is when a teacher claims to have “eyes in the back of her head” so you had better be careful what you do.

Situational Analysis Applied in Business

The Wharton Business school offers an online course which applies the theory and practice of situational analysis to business and political leadership.  The initial lecture and course description is here.

The course extends the concept  beyond its military and industrial origins to understand what happens in organizations. How do critical elements in the environment  change over time?

Many  neglect this analysis because they’re so focused on a particular plan or task that they take for granted essential factors in projecting the near future.

It’s a mindset of not paying attention to one’s surroundings.   Or as the British writer George Orwell observed: “People can foresee the future only when it coincides with their own wishes.

Increasing Awareness

Situational awareness identifies the elements in the environment that are important, changing and create greater uncertainty about the near future.  No matter one’s experience in a  role,  understanding the total environment in which the organization functions is critical for effective leadership.

This analysis is front and center in New Year predictions. Or necessary anytime a future course is being planned.

The Wharton program suggests using a four-quadrant model to identify situations that are important and unimportant, and familiar to unfamiliar.

The critical events are those that are important and unfamiliar, the upper right quadrant below.  The goal is to be more aware of these challenges and take care to understand variable risks, uncertainty, what is moving around, and how to respond.

What to Place in the Critical Quadrant?

My list of evolving situations that the credit union system may need to consider differently from their 2021 experiences includes:

  • Increase in inflation and the inevitable rise in market rates.
  • The growing divide between well-to-do members and those living only on each paycheck’s income.
  • The system’s absence of new entrants/entrepreneurs: the ratio of charter cancellations to new charters, is at 50 or 100:1 depending on the year selected.
  • Effective investment of surplus capital-buying banks or mergers versus organic growth to benefit the members.
  • Finding and developing the best employees when 40% of the work force wants to change jobs.
  • Overcoming the  gap between regulatory actions and credit union priorities  to design a mutual  approach to cooperatives’ future.

How any team completes this exercise depends on their role in an organization.  For those at the top, this analysis is most critical.

Bureaucracies by design are bound by organizational processes.  When complacency and habit replace vigilance, that is how an organization gets into trouble.   Situational awareness is critical to counterbalance this self-approving tendency.

Tomorrow I will provide an example of one credit union’s pivot in response to some of the factors above.    I will also share a classic example of robotic performance damaging a critical cooperative institution.

 

 

 

 

 

 

 

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A Finnish Co-operator’s Suggestion for U.S. Credit Unions

The following observation is from Leo Sammallahti, Marketing Manager for the Cooperative Exchange.   He follows cooperative enterprises in Finland, Europe and the United States. His article suggests a specific investment credit unions can make to help another cooperative effort in the US.

“There are many examples of new legislation seeking to help cooperatives.  But  first we in the movement should  try to find ways to utilize the existing legislation better. Before illustrating this existing opportunity, I want to present something extraordinary happening in Iowa City.

Taking on a FinTech

In 2018, the local food delivery app in the city was bought by Grubhub, which already controlled more than half of the market in the US. They doubled the delivery commission from 15% to more than 30%, wreaking havoc among the local restaurants.

John Sewell was one of those restaurant owners, but he had also worked in  organizing purchasing cooperatives and similar arrangements for rural hospitals. He started an initiative that grew into Chomp, a cooperative food delivery app owned by the local restaurants.  Chomp takes a modest commission and distributes any surplus generated back to the member restaurants.

By the end of the year, it had outcompeted Grubhub with twice as many restaurants on its platform. It became a sort of mass movement with the majority of the residents using it. Rather than a global monopolistic rent-seeker, it transformed the model into a local democratic institution creating community wealth.

Typically, each local market has one delivery platform that with a leading market position – most likely Grubhub. Restaurants join the platform with most customers and customers join the platform with most restaurants.

These “network effects” drive platform  businesses models like food-delivery apps towards a “winner takes all” outcome. These kinds of monopolies and monopsonies are exactly one of the market failures cooperatives counter and fix.

Once a for-profit company app gains a dominant market position, its incentive is to extract as much value from the restaurants for the shareholders as possible. However, for a restaurant owned cooperative platform, the incentive is the opposite. If it gains a dominant position, it has no motive to extract monopolistic “rents” from the restaurants.

Rather it can use economies of scale to lower costs. set lower prices or pay higher dividend rebates. By doing this the monetary benefits go back to the restaurants which pay the delivery commission. If the cooperative  kept the money for itself, the restaurants could elect a new board of directors.

The Credit Union-Cooperative Opportunity

This cooperative food delivery option is now being replicated in seven cities (1)– one in Jersey City, New Jersey.  This is one of only eight states where state chartered credit unions can make direct equity investments in other cooperatives.

Only one credit union in the country, Vermont State Employees Credit Union, is actually using this legislation to invest in other cooperatives. This authority is an example of a very useful but underutilized legal tool.

An immediate example where this option could be especially useful is  helping local restaurants in Jersey City who  are creating a platform delivery cooperative to keep money circulating locally and more equitably.

Supporting Local Economies Via the Members

However, there is much any credit union could do besides investments. It’s common for credit unions to provide retail discounts for their members, for example, 30% off  on movie tickets.

Restaurant cooperatives promote themselves with discounts sending a coupon code for a free first delivery. Credit unions could distribute this discount for a free first delivery in the six cities where  a restaurant owned delivery platform cooperative is being formed.

These discounts provide a tangible benefit in the everyday life of a credit union member. It would align credit unions with the wider cooperative ecosystem generating community benefits and social capital. It would help the restaurant delivery coops reach a mass audience  quickly and inexpensively.

It reduces the uncertainty of the startup and avoids the costs of  big tech ad intermediaries like Facebook or Google. Instead, credit unions could directly reach around one-third of adults, on average, who are credit union members.”

(1)The six additional cities are:

KNOXVILLE, Tennessee

OMAHA, Nebraska

RICHMOND, Virginia

LAS VEGAS, Nevada

TAMPA BAY, Florida

LOS ANGELES, California

 

 

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A Reflection on the Anniversary of the January 6th Attack

Today is the one-year anniversary of an attempt to overturn the 2020 presidential election by mounting a physical assault on Congress’ certification of the electoral college vote.

There have been and will continue to be newly researched and passionate reporting about the day’s riot and events before and after.

One well-reasoned analysis is a short essay entitled A Day of Infamy, a year later.

I agree with this viewpoint but want to suggest another lesson. Does a latent January 6th gene potentially exist in anyone in authority? Or are required formal processes and structural checks and balances sufficient to inhibit such leadership temptations?

Everyone Experiences Authority

The crime of Trump and his followers was an attempted coup to overturn  legal and fiduciary  norms of governance and accountable behavior.

Most Americans have or will occupy positions of authority by election, selection or  demonstrated merit.   For example, most households have a dominate wage earner; sports teams-a chosen captain; each church or non-profit–volunteer boards; and coops led by elected directors.

Every public employee, whether by employment or election serves a constituency to which they should be responsible.

Positions of public authority can bring out the best or sometimes, the worst in people.

Bucky Sebastian and Ed Callahan’s decades long relationship showed the vital role of a leader with the right complementary partner.  Ed was an educator, football coach, administrator and powerful motivator–a person skilled in the arts of leadership.

One of Bucky’s important adjunct roles was to be Ed’s “counter-ego,” able to challenge his too emotional reactions to people or situations.  When Ed was tempted to counter someone using direct authority (as a football coach might call out), Bucky would confront him urging he should change his approach versus blaming the other.

Every leader needs a Bucky-like figure when inclined to follow their autocratic instincts in exercising power.

Many adults will achieve authority in an organization through personal ambition and effort, whether that role is paid or volunteer. Once achieved, there is a natural belief in the correctness of one’s judgments whether based on vision, factual analysis or using the rationale-that’s why I was chosen (or elected). 

The Unique Role of Public Servants

This is especially true in governmental employment. Trump’s authoritarian excesses and public delusions are consequential because of the ultimate power and responsibility of the Presidency.  Many believe he subverted the very premise of American democracy with his lies about the 2020 election outcome.

He ignored traditional formal processes.  There were no longer guardrails the public could rely upon.

Whether elected, appointed or selected through competence, public responsibility is always paired with assumed and/or explicit authority.

From parking enforcement, collecting taxes to setting rules and overseeing them, public roles are different in character from private employment.  There is an implied common duty, but often accountability is diffused or lacking.

Regulators of Cooperatives

I believe the Jan. 6th gene is ever-present, latent much of the time, but always ready to be activated in regulatory actions.

The symptoms include unilateral policy diktats, dismissal of inconvenient facts, neglect of administrative oversight, lack of transparency, and most critically, an unwillingness to work mutually with the credit union system.

This authoritarian impulse is most easily seen when those new to the organization first experience the culture.  Mark McWatters joined the NCUA Board in August 2014. He described Chairman Debra Matz’s leadership of NCUA during  in a public speech  several months later:

“NCUA should not treat members of the credit union community as Victorian era children—speak when you’re spoken to and otherwise mind your manners and go off with your nanny—but should, instead, renounce its imperious ‘my-way-or–the-highway’ approach and actively solicit input from the community on NCUA’s budget and the budgetary process. With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community. 

Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation.

NCUA should not, accordingly, pretend that it’s a modern day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”  (source: CU Today May 19, 2015)

McWatters is a very conscientious individual, courteous in manner with a rational temperament. He approached decisions using detailed legal and logical analysis.  His reaction to Matz’s autocratic style only corroborated what credit unions had experienced for years, since the Great Recession and unilateral liquidation of corporates.

The irony is that when McWatters became chairman in January 2016, the agency’s “Stockholm syndrome” effect had overcome this initial misgivings. In 2017 he merged the TCCUSF surplus into the NCUSIF to pay for natural person credit union losses, despite explicit congressional wording against this.  When explaining the action, he also admitted circumventing the FCU Act’s limits on premiums.

My immediate concern is that Chairman Harper, who was Matz’s Senior Policy Advisor and protege, also embraces her view of leadership.  He has shown by temperament, in board meeting exchanges, and prior actions as senior advisor, that he is not a person who should be leading the cooperative regulatory agency.

His primary justification for policy is because that is how the FDIC functions. I have described these positions with his own words  in several articles.

At a time when credit unions are transforming their roles with members due to Covid, Harper’s top priority imposed the hoariest and least relevant of all rules, a 28% immediate increase in minimum capital requirements.  Unlike McWatters when confronting the same issue, the current board members blinked and approved this regulatory tax on members and their credit unions.

The Jan 6th Gene and Credit Union Democracy

NCUA’s performance matters because it regulates  one of the unique features of cooperatives—the industry’s democratic, member-owner governance.

The concept that credit unions are democratically governed is misleading.  Few boards are elected today; most continue through reappointment and renominations when terms expire. Members’ involvement is not sought or encouraged. The idea of a contested election with more nominations than open seats is scary for incumbent directors.

Members are routinely requested by CEO’s and managers to give up their charter via merger for a rhetorically better credit union that members do not know and have no part in choosing.  These same “votes” frequently approve significant monetary handouts to departing senior staff who arranged these sales.  In one case over $35 million of self-funding was set up by a former CEO who continues working at the merged institution.

Even the hint of an external director nomination by petition can cause a credit union to change its bylaws to prevent such an occurrence. Pentagon FCU did this immediately after a successful at large nomination.

Credit unions in these actions are following the unilateral leadership style they see at NCUA.

Democratic Practice in National and Local Arenas

Leadership responsibility does entail authority and explicit processes to function.  How that authority is implemented is fundamental to the sustainability of the enterprise. Whether that is the American democratic political experiment, or a cooperative charter founded generations ago.

The fate of America may feel bigger than any one individual can influence.  But democratic norms and duty are not limited to the Congressional and Presidential elections. It is a skill each can hone whenever we participate in an organization’s governance or membership

The first place to ensure democracy remains meaningful is in the arena s of our participations, no matter how great or how small the organization.

As I consider the January 6th assessments, my hope is that anyone who might carry a gene of this kind, will keep it dormant by exercising democratic efforts in those local and national arenas  we care about.