Voting: “The Most Hallowed Act in a Democracy”

A vital aspect of cooperative design is democratic member ownership.   Each member has one vote, regardless of share or borrowing relationships; proxies are not allowed for federal charters. This governance and accountability dynamic is both a moral and an organizational imperative.

Democracy is not merely a set of bylaws, or regulations or another organizing concept.  Rather it is the interactions developed between leaders and their constituents. Member involvement is more than a democratic cooperative value; it is the essential good will on which all credit unions rely replacing startup capital from the beginning.

Voting is the practice that enshrines and enables democratic organizations to legitimize leaders’ decisions.

Voting is Front Page Today

Voting is a front-page story across the country today. State legislatures have initiated changes to restrict voting access in response to the Big Lie of a stolen 2020 Presidential election.  Last week the spotlight turned to Georgia where the governor signed a law that would  prevent water being given to voters standing in line.

Public outrage has grown as evidence suggests that a purpose is to limit voting access in specific segments of the community.

The CEO’s  of Delta Airlines and Coca Cola, whose world headquarters are in Georgia, published strong statements opposing efforts to roll back voting opportunity.

Darren Walker the CEO of the Ford Foundation on NPR explained this change in the traditional low profile corporate leaders prefer on matters of public controversy.

“Voting is the most hallowed, important and sacred act in a democracy that its citizens exercise.”  He continued: “They (the two CEO’s) stood up when it mattered. We hope we can mobilize courageous CEO’s and companies across America willing to stand for American values.”

The State of Member Voting in Credit Unions

There are two occasions when members exercise their democratic role by voting:

  1. The election of directors at the required annual meeting of members;
  2. The voluntary merger of their credit union with another.

I think in both instances the vast majority of credit union practice is not “democratic” in any meaningful sense of the term. Some failures are the result of poor organizational habits, others by deliberate design.

The Members’ Annual Meeting

Recently I received the required Notice of the annual meeting from my credit union. It read in part:

Here’s the good news about our Annual meeting: There’s nothing you need to do. . .sharing this (Notice) is a legal requirement. . .Questions will not be taken during the meeting. . .there is no new business to discuss. . . only matter requiring a vote of members is approval of the 2020 Annual Meeting minutes. . .directors nominated (3)will be approved by acclamation of the Board. . .And this closing comment: We’re in this together. . .Our commitment to improving our members’ experience remains at the heart of what we do.   Signed:  President/CEO

This is not an invitation to participate, vote or become better informed about the cooperative the members allegedly own.  Instead, members should stand aside. Even the required meeting notice is portrayed as just a legal disclosure, like the rate on a loan or savings account.

The problem is deeper than this caricature of democratic governance.  The fundamental strength of credit unions is their member relationship. Member loyalty, initially via a common bond, and subsequently, lifelong patronage, created the credit union that exists today.

Sustaining these core relationships is essential for credit union success.

Members instinctively understand that the cooperative model is supposed to be different even if they cannot provide a precise legal distinction.  Treating members just like customers of a bank forfeits the most important advantage of credit unions in a market economy: the user and owner are one and the same.

Some credit unions use the annual meeting as a daylong opportunity to go beyond the legal formalities by providing workshops on member financial issues.  Sometimes the event is capped by a meal or with an outside speaker to celebrate the success of past year.

If credit union leaders fail to respect their member-owners’ role in this annual event, will members respond when leaders ask them to stand up for an issue needing their support?

Voting in Mergers: A Case Study

All voluntary mergers of sound credit unions require a majority of members voting to be approved.  This critical requirement is often treated as an administrative exercise with boards routinely encouraging members to sign off on the enclosed ballot.  Rarely do vote totals exceed single digits in this required member approval to give up a charter.

The merger Special Meeting Notice frequently lacks any specific data for members to compare their current situation with future promises. The reasons cited are general: “an expanded network of branches,” “improved operational efficiency,” “ the possibility of better rates on loans and shares,” and “we believe we should provide even better service due to additional investments in talent, technology and new products.”

The above are the verbatim explanations in a 2020 member merger Notice.  The vote in this merger, as certified by the Board Chair and Secretary, was 32,494 in favor and 0 opposed.  NCUA’s Director of Supervision for the Western Region acknowledged receipt of this certification and formally approved the combination effective June 1, 2020.

This merger of the $867 million Andigo Credit Union into Consumers Cooperative gave the members’ collective reserve of $107 million (12% net worth) to the continuing credit union.  No member dividend; only  vague promises.

However, Andigo’s senior managers were all given continued employment contracts from two to five years. Their compensation over and above what they were earning includes:

CEO: $226K in early payouts of deferred compensation plus $357K in higher bonus;CFO:  $150K higher; CLO: $165K higher; COO: $167K higher: VP Business Services: $74K higher.

This façade of members’ having voted approval is a perversion of democracy.  The members were provided no reasons supported by data.  No plan.  The process is ripe with conflict-of-interest.  It is an abdication by those with fiduciary responsibility covering up blatant self-dealing.  A scheme of enrichment and a moral swamp blessed by NCUA.

A Challenge to the Integrity of the Cooperative System

Every institution, every system, every country that follows a democratic model faces the challenge of constant renewal.  Democracy at any level of society is not self-perpetuating.  Leaders and circumstances change. Commitment to self-rule requires constant practice and vigilance.

The ever-present temptation for those in authority to exploit their current position for self-advantage is a facet of human character.  A credit union’s legacy bequeathed through generations of member loyalty is wiped out in an instant by self-serving leadership.

Two decades ago, the charlatans of Wall Street were proclaiming the need for credit unions to convert to mutual, and possibly, bank charters.  They asserted the credit union model was an anchor slowing growth and opportunity.  Almost three dozen credit unions took the bait.  Today, only one survives as a mutual.

Two outspoken credit union CEO’s led the fight against these false prophets of doom.  Bucky Sebastian and Jim Blaine did not win every fight; they were even sued for their cooperative gallantry.  But they had the courage to speak out and act when others were reluctant to challenge peer CEO’s.

Their efforts emboldened others who wanted to do the right thing.  However, the reality then is the same now. “The incentive today for corporate leaders in America discourages courage,” explained Darren Walker in his NPR interview on the reluctance of business CEO’s to speak out.

Next Steps

To address these patterns of democratic failure will require CEO’s, directors and leaders to assess their own practices of member governance.  Is the annual meeting just a perfunctory chore or is it a chance to renew and honor the member-owners’ role?

Mergers should be based on facts and logic with a documented plan, not rhetoric and vacuous future promises.  Every other area of credit union oversight needing regulatory approval (alternative capital, derivative authority, FOM changes, et al) requires more documentation than the decision to give up a sound charter via merger.

The century-long evolution of the cooperative credit union system in the midst of an economy driven by competition and private ownership is a remarkable accomplishment. To paraphrase Albert Einstein when asked about religious belief, “it is not that one thing is a miracle but that the whole thing is a miracle.”

To see this miracle of human and community enterprise crumble piece by piece through self-destruction is a tragedy.  One that only today’s leaders can reverse.

 

 

 

 

 

An Open Secret: NCUA, Oxymorons and Merger Truths

An oxymoron is a figure of speech in which two seemingly contradictory terms are used together.  Sometimes the intent is literary, as in “deafening silence.”  Sometimes the purpose is  ironic juxtaposition—“postal service” or “jumbo shrimp” –to highlight conflicting concepts.

I propose a new example Truth in Mergers.  This is a 25-page NCUA publication from May 2014. The subtitle: A guide for merging credit unions.

This document was prepared by NCUA’s Office of Small Credit Union Initiatives (OSCUI). The preface lists three purposes:

■ Understand trends in credit union mergers.

■ Determine when a merger is in (a credit union’s) best interest or, in the worst case, necessary to continue operations.

■ Negotiate a merger agreement that best serves the merging credit union’s interests.

OSCUI’s mission statement read: We support the success of small credit unions … (and) recognize the unique role small, low-income designated and new credit unions play in the lives of their members and communities. We are committed to helping these credit unions not only survive but thrive.

 The “truth” is that the brochure was to facilitate the demise of smaller credit unions.

 Oxymorons can assist the reader to clarify NCUA’s doublespeak. After each of the following verbatim excerpts, I have provided this figure of speech to aid in interpretation.

Statements from “Truth in Mergers”

  • Mergers between credit unions are commonplace in the industry today. (old news)
  • like all businesses and institutions, mergers can be successful or unsuccessful. (even odds)
  • NCUA does not endorse mergers. (seriously funny)
  • mergers undertaken proactively by credit unions in sound financial condition have better outcomes for the credit unions involved and their members. (alone together)
  • many credit unions wait until they are in a troubled financial position before exploring the option to merge. (definite possibility)
  • Weak Financial Condition Drives Most Credit Union Mergers (deliberate mistakes)
  • A merger can also provide direct benefits to credit union members, including lower cost of services, lower loan rates, and higher dividends. These benefits are significant, immediate, and persistent. (true lies)
  • Negotiating the terms of the merger contract is one way a merging credit union can realize the greatest benefits of the transaction. (bittersweet)
  • OSCUI’s study of merger packages also demonstrated a clear link between a merging credit union’s financial strength and its ability to negotiate advantageously with the continuing credit union. (strength in weakness)
  • Best Practices: Shop around for the best fit. Merging credit unions should seek out and evaluate multiple potential partners and critically evaluate major issues, such as: organizational culture, mission statements, and respective memberships. (act naturally)
  • Include a merger in the strategic planning process. Credit unions are encouraged to consider the impact of a merger as part of the strategic planning process. (definite possibility)
  • Develop a succession plan for executives and board members. Avoid letting the board and the CEO grow old together. (open secret)
  • Merger contracts can be negotiated to ensure that the merging credit union’s members, staff, and community continue to be served. (true myth)
  • Take measures to enforce the merger agreement. How can merger agreement provisions be enforced when one party to the agreement no longer exists?

NCUA’s Office of General Counsel suggests that a merging credit union name in the contract the third-party beneficiaries with standing to enforce the contract. For example, if the continuing credit union agrees to keep a branch open for at least one year, the agreement would note that the members of the discontinuing credit union are beneficiaries with standing. Because these matters would fall under state contract law, the wording should be state specific. (clearly confused)

The Almost Final Word

“This brochure has been prepared by NCUA’s Office of Small Credit Union Initiatives (OSCUI) as a resource to help credit unions.

Truth

The truth: this Office of Small Credit Union’s initiative was intended to phase out small credit unions.  Those with problems-for sure.  Those in sound financial condition-in due course.

And Consequences

This  “small credit union” endeavor gave the green light for all credit unions to seek merger opportunities.  No matter the size, circumstance, proximity or business logic.  It began an open season for self-dealing. CEO’s saw the opportunities to cash out at their retirement; long standing member loyalties were  squandered, and a binge of back room deals by leaders of sound local credit unions was officially sanctioned.

The challenge for Chairman Harper and the board: is there a CURE for this official document issued while he was senior policy advisor to Chairman Matz?

To keep mergers in perspective we give the last word to capitalist Henry Ford:  “A business that makes nothing but money is a poor business.”

 

 

 

Readers Opine On Infinity FCU Merger with Deere Employees

Readers reacted to last week’s analysis of the Infinity combination with Deere.

A Maine resident: “Very strange indeed – for many reasons; it goes completely against the Maine community approach of being a state with their own mind and will.”

Two comments posted on blog site:

1. Why, why, why? I can’t make any sense of what Liz is saying. . .Wonder what NCUA CURE will have to say?

2. Size matters to Liz and not a single Maine CU wanted to merge with her.

A Financial Consultant to Banks and Credit Unions:

  1. At $341 million, there is enough “scale” to not just survive but thrive. It’s a matter of allocation of resources. I work with a lot of community banks that are doing just fine at that asset size; quietly going about their business producing a good ROA and accreting capital. Relationships drive their business model and that’s what the competitors don’t provide.
  2. The board needs to be committed to independence. The board needs just one member who understands this, is committed to it, and can influence the other board members.
  3. The CEO and leadership team need to be committed to independence. . . there needs to be something holding the team accountable. If there is a merger, capital should be returned to members, not given to acquiring institution for free.
  4. This is a horribly unproductive credit union. The leadership team needs a kick in the pants in terms how they are deploying the resources the members entrusted them with.
  5. The banker in me says this would be an ideal takeover target. They have a great balance sheet. I’d cut out a lot of expense, and turn this into a money-making machine for CU purposes. It would mean being a lot more productive, and use the capital for growth, member give-back and/or community impact.

The CEO is speaking out of both sides of her mouth. What is the board’s relationship with the CEO if unable to do the job to begin with? Are they competent to govern?

A Coincidence? Two Credit Unions Rethink: Maine Credit Unions Call off Merger- Consolidation discussions end amicably between Midcoast FCU and Maine State CU. March 26, 2021 CU Times.

From a Member Who Just Experienced a Merger:

Just touching base after reading this article about Infinity and Deere. Sounds so much like my member story with Xceed merging with Kinecta.

On March 17th Kinecta FCU sent me a similar packet with a Cover Letter highlighting 3 big changes, a joke. The number 1 bit of news is Reducing of the Insufficient/Uncollected Funds Fee from $27 to $25! Its borderline insulting to think longtime members of a well-run credit union would jump for joy on that news. 

Chase Bank is offering a $200 to new customers and free checking with direct deposit. My folks have used Chase since it was called Chase Manhattan Bank, I think since the 60’s. They have been happy with Chase for 50 some years. 

It seems like credit union mergers have become so common it might happen to a person more than once. It’s like opening a new bank account, changing direct deposits, automatic bill payments and so on. I keep my credit reports locked so unlocking them is an added step. 

Its kind of sad but I’ll miss banking with the same place for so long. I remember when working for USAA after leaving Xerox in the 1990s. Xerox FCU still had a small two-person branch in Clearwater, FL for a few thousand Xerox employees/families in the Tampa Bay area. How many financial institutions today would go the distance to have a two-person branch? I think with all the mergers the days of that kind of a credit union operation are coming to an end.

Rather than go kicking and screaming into the Continuing Credit Union Kinecta, I’ll quietly leave my employer created credit union of 30+ years for my family’s national bank. And $200. 

An Historical Perspective:

“All things are lawful, but not all things are beautiful. All things are lawful, but not all things build up. Do not seek your own advantage, but that of the other.”