Category: Cooperative Design

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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.

 

 

 

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Counsel for 2022

Several observations on entering the New Year; but  first a poetic note of hope.

 

The New Year 

by Carrie Williams Clifford (1920)

The New Year comes—fling wide, fling wide the door
Of Opportunity! the spirit free
To scale the utmost heights of hopes to be,
To rest on peaks ne’er reached by man before!
The boundless infinite let us explore,
To search out undiscovered mystery,
Undreamed of in our poor philosophy!
The bounty of the gods upon us pour!
Nay, in the New Year we shall be as gods:
No longer apish puppets or dull clods
Of clay; but poised, empowered to command,
Upon the Etna of New Worlds we’ll stand—
This scant earth-raiment to the winds will cast—
Full richly robed as supermen at last!

The Right Attitude  (by John Horvat)

As we enter 2022, we must face a “not-normal” world that shows no signs of returning to order. Having the right “improvise-and-dare” attitude will enable us to survive. It will allow us to exploit any good opportunities to act that come our way. It will mitigate the disasters that strike us.

The Dalai Lama

When asked what surprised him most about humanity, answered “Man. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

From a review of the Movie: Don’t Look Up (Netflix)

This December release starred Leonard DiCaprio and Meryl Streep.  The story featured two Michigan State academic astronomers who identified a comet heading directly to earth–and the President and public’s response to this “environmental” crisis.  One reviewer’s reaction:

I am alive. I exist. I don’t need to be told that humans will choose what feels good over what is right every time.

Honestly, I spent the movie rooting for the comet.

Shakespeare on Future Forecasts

Prophecy remains elusive, for who yet can answer Banquo’s “If you look into the seeds of time/And say which grain will grow and which will not/Speak then to me.” (Macbeth, 1.3, 58-60).

The Gift of  Enduring Ideas

As we begin 2022, I am in awe of the remarkable  year just past, and how members and communities across the country benefitted from cooperative efforts.

Credit unions from the earliest days of the pandemic stood tall with their presence, their passion and  dedication to service. When the temporary normal returned, they opened up offices with enthusiasm, and understanding—and an unwavering belief in the transformative power of cooperative purpose.

Credit unions ended the year historically strong. They are ready for a new time of  vital caring using  their  unique capacity to combine educational and transactional financial services.

I am eager to share  what I hope will be “enduring ideas” with you in coming months. One writer described this need as follows:

Amid the present insecurity, endearing objects (read high net worth ratios) are not enough. Our desire for certainties must also be addressed by turning to the things that feed the soul. We must turn to enduring ideas to anchor us in the storms ahead.

 

 

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The Power of Local-Where People Meet Face to Face

The number of Christmas cards I received in the mail this year was overwhelmed by solicitations for yearend donations.   They came from near and far: Chevy Chase Rescue Squad (volunteers), theater and dance groups, churches, hospitals and many national organizations from Doctors without Borders, the Salvation Army and Planned Parenthood.

What each tried to do in their appeals was to stress their local consequences. Here is one request from a supporter of our local live theater:

Dear Charles,

I know you have many options for charitable donations during this year’s holiday season. By now, you’ve been flooded with emails, texts, and phone messages asking for your generosity. 

Instead of getting lost in the shuffle, I’d like to tell you why I’ve been giving to Round House for more than two decades and will continue to do so.

For my wife Lorraine and me, it started out quite simply: we wanted to support a local theatre serving our community both artistically and educationally. Round House stood out because it was right in our backyard, doing quality work, and truly impacting the community. 

Through our giving we have been able to help not only in Round House’s growth but also in enhancing Bethesda and the greater DC area—a place we have loved and been a part of for so long.

I am incredibly proud of how Round House has confronted the many challenges of the pandemic—from being one of the first theatres in the country to pivot to virtual productions and continuing education programs online to safely returning to live performances and in-person classes with robust covid protocols and viewing options in place to protect artists, patrons, and staff.  

Despite all that has happened in the world over the last two years, Round House has remained resilient and continued to be an asset to this community by offering bold, outstanding theatrical and educational experiences both virtually and in-person.

Your contribution helps Round House be a theatre for everyone and continue making an impact in the community. 

The Advantages of Local

Local is about connections, being involved with people where they live, work and play.   The impact is not limited by geography, but is rooted in people’s ability to see their organization at work.

Writer Nick Wolny who promotes online business effectiveness, has written about the lessons from brick and mortar, what he calls the entrepreneurial efforts of the “Original Gangster” (OG) firms.

My first job when I was 16 years old was working at a bakery. I was slingin’ scones and washing dishes until my fingers were pruned.

The owners were a husband and wife. The husband baked all the bread. 

We lovingly called him “Bread God”.

This guy was at the shop at 3:00am to start the breads… seven freaking days a week. 🥖

And he did it with a smile. 

In the years that followed – and eventually when I came to have my own business as well – 

Reminding myself of the brick-and-mortar hustle kept me honest and focused.

It’s easy to cut corners as an online entrepreneur.

In his article Four Insights Creators Should Steal from Offline Business Owners, he describes the advantages of local presence for which there is no on-line counterpart.  He closes the article:

In its current iteration, the creator economy has existed for about ten-ish years. Meanwhile, brick-and-mortar business owners have been grappling with the fundamentals of business for centuries. We could learn something from what they prioritize.

Credit unions have existed for 112 years.  Their virtual strategies for two decades.   How credit unions sustain the advantages of local while expanding online transaction capabilities is the critical investment decision all will continue to confront.

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A Season Uniting Two Cooperative Virtues

Christmas in all its joyous celebrations seems to walk an awkward line between secular, commercial activities at their frenzied peak and the religious meaning of the Advent season.

There is a minor echo of this tension in credit union history.  As the decade of the 1950’s evolved there was increasing friction between two priorities.  One group wanted to promote the business potential of the cooperative system versus the expansion minded pioneers whose primary intent was forming more credit unions.

Today these differing views might be categorized by those who focus on purpose as the driving force,  versus those who belief that growth through acquisitions of their peers and bank purchases are the way to secure the future.

How One Company Combines the Season’s Messages

Occasionally a firm will try to unite the business and religious aspects of this special season.   The UK grocery chain, Sainsbury, has created a unique “commercial” each Christmas for over a decade.   Each new effort commemorates an important value of the season while reference to the company’s business is at best tangential.

In 2014 their “offering” lasted over three minutes.  As described by Stephen Masty:

“it recreated the informal Christmas Truce that spread among soldiers in the trenches near Ypres in 1914, one hundred years earlier. Instigated by a British officer writing to his German counterpart across No Man’s Land, it spread up and down the battle lines as, for a few hours, the guns stopped firing. Yesterday‘s and tomorrow’s combatants sang hymns together and celebrated the birth of the Prince of Peace.

The 2014 ad was the first to mark the Christianity of Christmas. German and British soldiers start to sing “Silent Night” almost spontaneously; while the only visible product is a WW1-era chocolate bar. I find it emotionally powerful.”

“https://www.youtube.com/watch?v=NWF2JBb1bvM”

The story of the ad’s creation is in an accompanying video of just over three minutes.  It demonstrates why and how a very large for-profit firm honors lasting human values while supporting their business.

“https://www.youtube.com/watch?v=2s1YvnfcFVs”

The videos’ message is that in the worst of times there can be humanity.  And this impulse is to be honored in better times.

Peace, for a moment, broke out in the midst of war.   Individuals overcame the ever-present demands of military imperatives and the survival instincts created by trench warfare.

The Blessings of this Season

I am pleased to have shared my observations about credit unions with you this past year.  

Cooperatives are a special way to combine our resources to help with everyday individual needs.  This is a practical necessity that has existed since humankind first gathered in groups.  Whatever the state of the economy.

This season reminds that sharing is an essential human value that is uniquely enabled by cooperative design.  Whatever the difference in operational priorities, our unity arises from the belief that the needs of others will be met with common, not just individual, effort.

 Merry Christmas.   Peace.  Goodwill.  

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A Dangerous Way of Thinking: Clayton Christensen’s Final Message

Harvard Business School Professor and creator of disruptive innovation theory, Clayton Christensen described the use of marginal cost/revenue analysis as “a dangerous way of thinking.”

Here is the critique from his case analysis of Blockbuster’s corporate failure:

Blockbuster followed a principle that is taught in every fundamental course in finance and economics: When evaluating alternative investments, ignore sunk and fixed costs (costs that have already been incurred), and instead base decisions on the marginal costs and marginal revenues (the new costs and revenues) that each alternative entails.

But it’s a dangerous way of thinking. This doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. 

Previously I showed how he applied this concept to personal, moral decisions.  How easy it is to give into the ever-present temptation to do something “just this once.”

But he also had great doubt about this approach to everyday business decisions.  I believe his analysis is relevant to some of the largest transactions now undertaken by credit unions:  buying whole banks.

How Credit Union Whole Bank Purchases are an Example of Christensen’s Concern with Marginal Cost Analysis

Twelve whole bank purchases have been announced by credit unions in 2021.  These are cash purchases of all the assets and liabilities of a bank.  A credit union cannot own a bank charter so the existing firm is bought as a single entity,  and any activities not authorized for credit unions sold off.

Cash is paid because credit unions cannot issue stock.  Stock is the more common currency in which interbank purchases are transacted.   The selling shareholders receive shares in the new combined entity.  These shares’ future value will depend on institutional performance and market trends.   There is no such future risk with a cash sale.  The seller can use the proceeds for any purpose.

These sales are off-market transactions.   That is credit unions negotiate the purchase in private, and unless the bank is publicly traded, the terms are rarely revealed.  Because the transactions are carried out without credit union-buyer disclosures, the bank seller controls the critical information about other offers and why the credit union was the chosen purchaser.

Unlike bank sales paid for with shares of stock, there is no  follow-up process  to determine if the promised benefits and/or institutional goals are achieved.   Sometimes the stated purposes is to offer bank customers the advantages of credit union services.   This is circular reasoning. In a purchase customers do not choose to join the credit union, their accounts were sold to benefit the bank’s stockholders.  It might even be counter- productive for the credit union to re-write customer loans purchased if this lowered the rates and thus the ROI on the credit union’s investment.

Without public statements of expected outcomes, the results of mergers become mashed in with all the credit union’s other financial outcomes.   There is no separate accounting of whether the return benefits the current member-owners.

The existing members’  should be informed how their value is increased  when their collective savings (reserves) are paid out to bank owners.  The price paid is often at a significant pick up over the bank’s reported book  or stock value.   This is especially important when the acquisition is outside of the credit union’s current market area and bringing no immediate service benefits.

Christensen’s critique of marginal analysis is most critically a strategic concern.  The prospect of  incremental growth is the frequently  stated or implied  reason for these purchases.   By adding  the existing savings and loans of bank customers,  the credit union will increase scale and incremental ROA and  maybe eliminate duplicate overhead expenses when combining firms.

Moreover the credit union’s net income is tax exempt, a fact that may be used to project enhanced earnings results than achieved by the bank.

Christensen’s observation of “dangerous thinking” is not about the financial math.  There can be more revenue, cost cuts and higher net income when adding more assets and liabilities.   That is not his point.

In these transactions credit unions are buying businesses that are mature.  The bank owners decided to cash out now and seek a better return for their funds versus continuing to grow  the bank’s business.

Marginal analysis to support investments in yesterday’s business models can jeopardize a credit union’s future.   Tomorrow’s financial services are being shaped by new fin-tech models, the growth of crypto currency transactions, and decentralized autonomous organizations (DAO’s) which operate outside current regulatory boundaries.  This is not what credit union’s are buying in these transaction.

Even the increased regulatory and competitive threats to overdraft (courtesy pay) income and credit and debit exchange fees, could upend the financial assumptions in these purchases.

Credit unions are buying financial firms whose owners believe their best days are over.  These credit union purchases are cash spent on yesterday’s businesses not tomorrow’s. Buying a firm’s old business models might boost short term marginal  revenue  but accelerate a longer run decline in competitive positioning.

Quantifying the Risk

As the number and scale of these transactions grows so does the risk. Most transactions are done at a premium over the latest stock price or a multiple of  book value. One analysis reports  recent sale prices range from 1.3 to 1.9 times book value

In the examples that follow, the three credit union purchasers report total net worth of $1.863 billion in their September 30 call reports.   The five banks being purchased by these credit unions report total book equity of $678 million.  If the agreed purchase price was just for book value, these  bank  investments would average 36% of the credit unions’ total net worth.

However, if the purchase price was greater than book, for example at 1.5 times, then the credit unions have paid out cash of over $1.0 billion, or 55% if their net worth, to these bank stockholders.  The difference between the bank’s book value and purchase price would be recorded as goodwill, an intangible asset, for the credit union.

The examples share common operational challenges and also demonstrate three different primary risks.   They illustrate why increased transparency by  credit unions in these deals is sorely needed.

In each example, the credit unions are playing with “house money” that is the members’ collective savings/reserves. If the risks assessed and returns hoped for are not achieved, then the investment shortfalls will reduce existing member-owners  value. And if the purchase proves totally mistaken, the risk is the entire credit union system’s.

Playing with House Money

Example 1:

Vystar’s Purchase of Heritage Southeast Bancorporation (HSBI) is the largest bank acquisition announced so far.   HSBI is a bank holding company, a recent combination of three previously separate firms, with $1.6 billion in assets and 22 branch locations.

Before the purchase was announced, HSBI’s stock price traded in the $14-$!5 range.   Immediately after Vystar’s offer of $27 per share (approximately $196 million) the stock jumped overnight to $25-$26, where it has stayed since.

HSBI’s assets are only 14% of Vystar’s $11.4 billion.  But this investment would equal approximately 21% of the credit union’s September 30 net worth.    The critical question in this deal: was HSBI woefully undervalued by the market and Vystar negotiated a good deal?

Can Vystar turn around a three-bank conglomerate that had yet to achieve its financial potential?  If the pre-purchase market price is a better indicator of HSBI’s franchise value, Vystar has bet almost $100 million that the market value was under-priced and that it can realize its full value.

Example II:

In early August the $1.027billion Orion FCU announced the purchase of the  $751 million Financial Federal Bank, in Memphis, to “expand its products and services and deepen market share in private banking, residential and commercial lending.”

At September 30, Financial Federal’s $792 million in assets were77% of Orion’s total assets.  This would be by far the largest whole bank acquisition as a % of the purchasing credit union’s assets.

Financial Federal is privately owned.   The bank’s capital at September was $93 million.  If the purchase price were 1.5 times book, this would be a cash payment of about $140 million.   This amount would be 120% of Orion’s September 30 net worth.   If book value was the cash purchase price, that would equal 80% of Orion’s reserves.

The credit union is putting all of its chips on the table with this purchase.  In November a state judge imposed a temporary injunction  on the purchase  at the request of the Tennessee Department of Financial Institutions.  TDFI argued that it is a prohibited transaction under the state’s banking act.

If upheld, might TDFI have done a favor for the credit union?

Example III:

The $7.91 billion GreenState credit union headquartered in North Liberty, Iowa has announced three bank purchase and assumptions in 2021. They are:

  1. Oxford Bank, Oakbrook, Il. $759mn Assets and $71 mn capital
  2. Premier Bank, Omaha, NB. $383 mn Assets and        $40 mn capital
  3. Midwest Community Bank, St Charles, IL. $352 mn Assets and $54.3 mn capital

The three are privately owned and no terms of  the transactions have been announced.   The total assets of the three at September 30 are $1.5 billion with capital of  $166.3 million.

These $ totals would be 19% and 21% of the GreenState’s assets and capital respectively.  If the purchase prices averaged 1.5 X book,  the cash payouts would be 30% of GreenState’s new worth.

What makes this series of transaction different is not the financial risk scale but rather the operational complexity.   Three banks, three different computer systems, three geographic markets and three very different business models  tied into their local communities.

Oxford has six branches and a head office, Premier bank four branches, and Midwest Community, three branches, a loan production office and a subsidiary Blue Leaf with six loan production offices.

In addition to the operational transitions, are the cultural challenges introducing employees to the credit union way of doing things.  The three bank franchises are distant from GreenState’s existing service network and market network.   This brings the additional challenge of introducing the credit union’s brand to three or more, new marketplaces when the prior community legacies no longer exist.

In March of 2020, Greenstate completed purchase of seven branches of the First American Bank in Iowa with total deposits of $470 million, $200 million in loans and 10,000 customers. The transaction was closed despite the objection of the Iowa banking regulator, himself a bank owner:

The superintendent’s approval of the application is solely for the purpose of settling this dispute, and the superintendent does not admit that an Iowa state-chartered bank may sell substantially all of its assets and liabilities to a credit union under Iowa code. Rather, the superintendent reiterates his conclusion that such a transaction is not authorized and that IDOB will quickly deny any future application based on a similarly structured transaction.

Did this regulatory opposition force GreenState to look out-of-state for future bank purchases?

What Needs to be Done

Christensen’s “dangerous way of thinking” analysis cautioned against the temptation to justify investment decisions by incremental short term benefit at the cost of long term sustainability.

No one knows whether these whole bank purchases above will succeed or turn out bust. Or somewhere in between.  ROI will take years to assess.  In the meantime many other events can make subsequent analysis difficult.

An immediate step to improve the soundness of these transactions is to ensure the full details are disclosed to the members whose funds are being put at risk and to the credit union system which is the ultimate backstop.

Keeping everyone in the dark except the deal makers means no one is accountable.   The asymmetry of information in which the seller holds most of the cards puts credit unions at a disadvantage when sizing up a selling bank.  Every bank owner’s goal is to buy low and sell high.

An example: if the purchase is to gain expertise (eg. commercial lending experience) and/or relationships the credit union does not possess, how does the credit union evaluate situations they claim to know little about?

The credit union model expects leaders to be responsive to members.  But when the data and assumptions underwriting these investments is withheld, there is no accountability.  The transaction is “off market” for members; only the bank sellers are in position to decide it this is a satisfactory deal.

The quicker the entire purchase picture is in the open, only then can those whose funds are at risk and the credit union community at large determine whether these deals make sense.

The time to make this a routine disclosure is before one of these deals goes really bad, not after the lesson becomes a Blockbuster-type case for the cooperative system.

 

 

 

 

 

 

 

 

 

 

 

 

 

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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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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.