Category: Mergers

Posted on

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.

 

Posted on

A Theft of $10 million or Just Spreading Credit Union Goodwill: You be the Judge

This is a true story.  The lead characters are the CEO’s and boards of the two merging credit unions, NCUA’s Regional Office, CURE in DC and the California Department of Financial institutions.

The facts are from documents sent members, IRS 990 filings, FOIA data and public statements by those involved.  I give my point of view.  You can decide what your interpretation of the information would be.

The Story Begins

The first step was for the actors to draw up their scheme, include a lot of financial “chaff”  around the theft and then decorate the proposal with positive sounding future rhetoric  about “empowering people and economies of scale.”

Next, submit this draft proposal to NCUA’s Regional office for their OK.

No surprise there. NCUA approved the plan, detailed below.  Now it is full speed ahead.

With the regulator’s green light, the next step was to form a California based non-profit with initials mimicking the credit union’s name: FCCU2 Foundation.  The stated purpose is to “support charitable and educational activities for the betterment of the Stockton area.”  Despite the name, it is neither a foundation in traditional meaning nor tax exempt.

The two executives responsible for this new “charitable foundation” are the credit union’s CEO, Michael Duffy and the Board Chair Manual Lopez.   The organization was registered on June 25, 2021 with Lopez the CEO and Duffy the agent.  These two are also members of the five-person credit union board which approved these actions.

On August 6, or forty-two days after registering FCCU2, Board Chair Manual Lopez signs Financial Center Credit Union’s Notice of Special Meeting announcing the intent to merge with Valley Strong Credit Union.  Voting will end on September 23.

The Notice contains required information about the transfer of credit union reserves to this just created organization including:

  • the $10 million “capital distribution” to the newly formed non-profit FCCU2;
  • a new job for CEO Michael Duffy as Chief Advocacy Officer for the continuing credit union, Valley Strong;
  • Valley Strong Credit Union CEO Nicholas Ambrosini’s commitment to provide “an additional $2,500,000 to the FCCU2 Foundation over a term of ten years.” The wording is unclear whether this is $2.5 million in total or $2.5 million per year ($25 million) for ten years.

Other mandatory disclosures in the notice detail the additional financial benefits four of the five senior managers will gain from the merger.  A special  dividend will be paid to  members if the combination is approved in their vote.

This special dividend is feasible because the merging credit union’s net worth, over 16%, is double the 8.7% at Valley Strong.  The proposed dividend will be determined by a complicated proposal based on member tenure, most recent 12 month share balance with a maximum cap on the share balance.  The estimated payout is “approximately $14,973,948.00” in the Notice-an unusually precise number, suggesting a very detailed plan.

Members were given 48 days to cast their vote. On September 23, 2021, the called special meeting took place.  38 members attended in person.  Thirteen voted in favor and zero opposed. 2,667 members mailed ballots with 383 opposed and 2,284 in favor.

The final tally was 86% of members for and 14% opposed. Only 9% of the credit union’s 29,672 members voted on this request to give up their charter.

Financial Center’s Final Bottom Line

The merger was formally completed on October 1, 2021, seven days after the vote.

The financial results of the merger are reported in Financial Center’s last call report as of September 30, 2021. The loss for this final nine months  of the credit union’s 66-year life span is $23.7 million. This is due to the $10 million “capital distribution” to FCCU2 and recording the special dividend of approximately $15 million.

This one quarter’s loss reduced the credit union’s net worth ratio, accumulated over seven generations, to 12.4% from 17.2% one year earlier. That ratio was still 4% points (50%) higher than Valley Strong’s net worth at the same date.

Faking It Till You Make It

Recent events in California have highlighted the ethos of self-enrichment, especially in Silicon Valley startups.  A phrase used describing these unproven business ideas is: “faking it till you make it.“

This is the practice of promising future bold success even though past results do not support the vision.  When there is little or no objective evidence that a concept could succeed, a hyperbolic sales pitch is necessary to continue fund raising and keeping the effort going.

Michael Duffy has worked at Financial Center since 1993, the last 21 years as CEO.  His sister, Nora Stroh, also joined in the 1990’s.  She was Executive VP and COO, the number two position, all the time Michael was CEO.  In the 990 IRS filing for 2018, each reported total compensation of over $1.0 million.

During the final five years of their leadership, the credit union’s loans declined every year, from a peak of $176.5 million at December 2016 to $102 million at the merger date.  This is an annual growth of -10.3% (negative).  Total members fell by 2,700 or almost 2% per year in the same time frame.

However, the credit union continued to increase its net worth ratio reaching a peak of 20% at December 2018, before falling to 17% one year prior to the merger. Until January 1, 2022, regulators considered credit unions well capitalized with 7% net worth.

As net worth rose, falling loan balances resulted in the loan to asset ratio declining from 39% to 16% at the merger date. As these risk assets fell, the credit union continued adding unnecessary  reserves, reaching almost three times (300%) the well capitalized standard. This resulted in shortchanging members on their savings returns and/or charging higher loan rates than necessary for a safe operation.

The credit union’s leadership failed year after year in its most critical member service: making loans.  However, it piled up reserves relentlessly, until the leaders decided to bail out.  And take some of the surplus reserves with them.

Maintaining a Positive Public Profile

During this same period of decline, the credit unions maintained its public relations in high gear.  According to the 990 filings for 2017 and 2019, the credit union made political donations from members’ funds for local political campaigns, such as Stockton city council and mayor, and for statewide office, Newsom for California Governor.  Political donations in 2019 went to ten campaigns and $25,000 to the California Credit Union League Pac.

Maintaining the positive  image was important for Duffy. On June 1, 2020, the credit union announced a $1.0 million donation by the Michael Duffy Family Fund and the employees of the credit union.  An enlarged symbolic check to Stockton’s COVID-19 Response Fund was given by Duffy to the mayor, recorded for TV broadcast, and later published on social media.

The same press release also stated that the credit union had developed a Loan Holiday program to “alleviate financial burdens for its members.” Whatever the program’s intent, outstanding loans at the credit union fell by $40 million in 2020 from the prior year.

In the many years leading up to the merger, the credit union had been operating with the form but not the substance of a cooperative charter.  It was run as a family business, promoting the public profile of the CEO, not the well-being of members.

In contrast with the nationwide member and loan growth in the industry, Financial Center’s data shows it had ceased serving members as its primary activity. Instead, it added to a bigger and bigger reserve nest egg to dip into down the road. In other words, faking it till you can take it.

A Change of Perspective

Michael Duffy’s public  announcement of the merger intention at the end of May, 2021, was accompanied by uplifting logic and his recent strategic  insight:

“As the CEO of Financial Center Credit Union for the past 21 years, my perspective on mergers has evolved just as much as our industry has in that same time period. As credit unions built by select employee groups (SEGs) increasingly partner with community credit unions, I have marveled at what credit unions of today’s scale can accomplish when they join forces with their Member-owners and communities chiefly in mind.

In a financial services sector that is constantly evolving, this merger is a true embodiment of the credit union industry’s cooperative mind-set. At its core our partnership with Valley Strong represents us selecting the best credit union partner to help us achieve our goals faster than we could duplicate on our own.

The phrase ‘Growing Together,’ is a perfect adage, as this merger represents a strategic partnership between two financially healthy, future focused credit unions committed to providing unparalleled branch access, digital access, and amazing service for the Members and the communities they serve.

After three decades of leadership of the credit union, Duffy has concluded that the institution he led can no longer serve its members because it is not big enough ( “scale” )or “fast” enough.   His reward for this insight and merger endgame is a new position as Credit Union Advocate at Valley Strong. He gains control of  $10 million  funded by the credit union, a firm  no longer able to keep up with the times under his leadership.

It is more than self-dealing hypocrisy.  It is pilfering the members’ money.

Brain Dead Regulatory Oversight

One member who saw through this charade posted a comment on the NCUA’s member-to-member web sight, reviewed by NCUA’s CURE.  He urged a No Vote stating in part;

If Financial Center Credit Union is so flush with cash that it wants to give away $10 million, then that amount should be distributed to members. I’ve written to FCCU twice asking for the rationale for giving away $10 million. They have failed to answer me, obviously because there is no rational reason for giving away $10 million from its member-owners.

However, this brazen appropriation of members’ funds was condoned by the regulators-at every step.

NCUA’s multiple levels of review as well as California’s Department of Financial Protection and Innovation must have been braindead when reviewing this diversion to the control of Duffy and his board Chair, the two founders of FCCU2.

The magnitude of the grab and the cover story of good intentions diverted multiple regulators from their public responsibility.  Especially when accepting these future plans by leadership that had conned their members for years.

NCUA is fully aware of the self-dealing possible in mergers. It posted some of its  concerns when explaining its new merger regulation approved in June 2018.  The following are some of the reasons in the Board Action Memorandum supporting this updated rule:

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

The Board also 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.

Each Federal credit union director has the duty 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 questioned the NCUA’s authority to regulate credit union mergers, or suggested that the NCUA’s role is limited to safety and soundness concerns. These comments are inaccurate. . .

“In contrast to commenters’ assertions, 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. . .

“Another (commentator) suggested that members have no role in considering merger-related payments to employees. These comments are legally inaccurate and philosophically off-base. 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. . .

“Further, 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. . .

(Note:  At June 30, 2021 the credit union reported $109.2 million in total capital.  Cash on hand was $138.9 million.  Net worth ratio was over 16%.  If the credit union were liquidated this would have given the greater Stockton community this immediate cash benefit. The 29,000 Members could choose to join another credit union or use the funds for immediate needs.   Instead the members received just 13.7% of their collective savings in a one time dividend.  Even though this option is referred to in the rule, there is no indication this was ever considered.)

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

If these specific statements are insufficient for exercising regulatory judgment, the common law understanding of fiduciary responsibility is even more clear:

The duty of good faith is the principle that directors and officers of a company in making all decisions in their capacities as fiduciaries must act with a conscious regard for their responsibilities as fiduciaries.  These include the duty of care, duty of loyalty and the duty to act lawfully.

Self-dealing is an illegal act that happens when a fiduciary acts in their own best interest in a transaction, rather than in the best interest of their clients.

“General Character and Fitness”

This misappropriation of $10 million of member funds by the CEO and Chair of Financial Center should bring the following actions by NCUA:

  • the full amount of the $10 million diversion should be clawed back from FCCU2 and distributed to the members;
  • the instigators at the board and in management who developed and implemented this scheme should be permanently barred from participating in credit union affairs;
  • the minutes and all other documentation relating to the additional required contribution(s) of $2.5 million by Valley Strong to FCCU2 for ten years should be reviewed. If this commitment was a quid pro quo (inducement) in return for the merger, then all parties approving this payment(s) should also be barred from engaging in the affairs of a credit union-board and management.

Every person in the regulatory approval process of this merger should have their actions reviewed to determine if they should continue to be in positions of responsibility.

Every participant will have an excuse. The creator and enablers of this transaction will defend their role by saying NCUA approved it.  Then they will point out that the members voted on it. NCUA staff will assert there was no safety and soundness basis to object-despite the many Board  statements quoted above.

Citing deeply flawed processes to defend one’s conduct, does not make the actions proper.

In presenting these defenses, the parties involved merely demonstrate incomprehension of one of the oldest rules of society: Thou shalt not steal.

Were such excuses offered, it would  confirm the absence  of fiduciary awareness and protecting member interests by the parties to this transaction.

These failures are not due to a rule needing updating. Rather it is an example of persons who lack commonsense judgment about accountability.

If NCUA fails to claw back the funds and do nothing it will demonstrate that it has neither foresight nor hindsight when it comes to protecting members. However, this would not be the first time such blindness has occurred; only the latest example.

Ignoring this case will just create a new benchmark for the next merger personal enrichment effort. It’s time to halt these sham merger member deprecations.

 

 

 

Posted on

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

* * * *

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

* * * *

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)

* * * *

 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.

* * * *

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)

* * * *

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

* * * *

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.

Posted on

Member Voices After Being Merged

In June 2018, the NCUA board approved a new merger rule.  The rule was extended to all FISCU’s because the agency believed there were safety and soundness risks if a merger was not done in the members’ interest:

For example, members of a merging credit union who discover, after the fact, that they were inadequately informed about the details of the merger may become disgruntled. The dissatisfied members could create bad publicity, creating a reputation risk for the continuing credit union. Unhappy members could also choose to stop doing business with the continuing credit union, affecting earnings projections.

In contrast to commenters’ assertions, the statutory factors the Board must consider in granting or withholding approval of a merger transaction include. . . the general character and fitness of the credit union’s management.

Members Reacting Post Merger

There is no “after the fact” process for NCUA to learn members’ reactions to the merger of their credit unions.  The following  comment posted on January 14, 2022 to Just a Member is an example of one reaction:

Comment:

Recently, Teresa Freeborn has left Kinecta to manage her Daughter’s Business interests.  The merger of Xceed FCU and Kinecta was a disaster.  After months of wait, the transition was a bust.  Poor customer service.  Problems with online access and mismanagement of credit cards from XFCU visa to Kinecta Mastercard.  I paid off my Visa and the balance rolled to the unactivated Kinecta Mastercard.  I had to file a complaint with NCUA to get it resolved.  I have now closed my accounts and ended an over 40-year relationship with XFCU.  I have found better banking deals at BOA and Citibank.  I think you have made a smart decision, Teresa Freeborn, to exit credit unions after protecting your interests and abandoning the Credit Union members!

George E. Skelton

Today’s social media options provide multiple sources for members’ post-merger experiences.

When PenFed merged with Postal Employees in Madison Wi, in April 2021 the following comments were provided about the subsequent service:

NameWithheld
August 30, 2021

Lousy place. Abusive. Fails to do what’s requested. Online phone help just as bad. Says being done but not. Waited 65 days for free personal checks that never showed. Still waiting for refunds and account closures. Worse place ever in my 45 years of banking. Local Person at Madison Wi extremely abusive. Place needs to be shut down. Don’t waste your time here. Consider a class action lawsuit.

PETER SCHNEIDER
August 24, 2021

POOR customer service…..so impersonal….hate being treated like a number and not an individual.

PenFed’s Merger with Miramar FCU

Years after the May 1, 2017 merger between PenFed and Miramar FCU, members continue to compare their post-merger service to that received prior to the event:

February 8, 2021

The employees here are nice but the service is not efficient – employees do not know procedures for certain requests or processes. When it was Miramar FCU the staff were more equipped to answer questions and work through solutions with members.
Also, the hours are incorrect. Penfed office of Miramar is closed and there was no update on the website nor any message to inform members. Penfed, please update your information on your website and your employees on procedures. 

Joanne
July 31, 2020

It is 1245 on a Friday afternoon and the hours are stated that you are open until 1pm. so why is no one picking up the phone? have been on a continuous ring and redialing for the 15 minutes, until 1 pm. a business is supposed to answer it’s phone. this never happened to me in the the days of mfcu.

Brad Hines
April 9, 2020

This was a topnotch organization when it was Miramar FCU. Since PenFed took over there’s been a complete overhaul of the staff – and not for the better! I’ve had numerous times where tellers have made mistakes, or they just didn’t know what to do and had to ask for help. Most recent situation was transferring a large amount of funds out of a CD that had matured. The teller didn’t know the procedure, so had the manager come over to help. She explained that my best course of action was to put the funds into a “premium” savings account which yielded decent interest. I authorized this, and the teller made the transaction (after the manager had left). Several days later I just happened to check my account online only to see that that large amount of $ had been put into a “regular” savings account that had very poor yield. Fortunately when I called the national help desk they were able to fix this – but what a gigantic error and problem this would have cost me if I hadn’t discovered it!

A member’s report of service at a former branch of Ft. Belvoir FCU, now merged with PenFed, and the credit union’s response:

Chandra G a month ago

I would like to say that I was so hurt when I left the PenFed on Davis Road. A teller was helping me with an issue. I needed a letter to send to my other bank so she had to refer me to a manager. Before I went into the office, I told the teller that I needed that document back when they were done with it.
By this time I was walking in the office with a manager and a member service representative. The teller is so kind so she wanted to tell the manager that I needed the document back. Before she could say anything, Regina Lawton told her, “you don’t need to be in here. Go back out there.”
She then repeated it two more times, “You don’t need to be in here. Go back out there and help them. You don’t need to be standing in here.”

The teller was just attempting to tell her that I needed the document. She was providing excellent customer service!
I couldn’t imagine working for Regina Lawton. If you speak to your employees like that in front of customers, I can only imagine how you speak to them privately. TERRIBLE
Also, the teller DOES NOT know
I’m reporting Regina Lawton. I went to my car, after the incident, and my conscience wouldn’t allow me to leave knowing someone is being treated like this.

Response from the owner a month ago

Hi Chandra, thank you for bringing this to our attention. We will share this with our branch leadership team. We appreciate your membership and feedback.

Google reviews of PenFed’s merger with a Georgia Credit Union

Yasmin 4 days ago NEW

No customer service whatsoever. I’m a patient person so I waited 30 minutes to eventually walk away and take my business somewhere else. But what I don’t tolerate is when you have 2 customer service reps just staring at the group of people waiting for membership services. No, we will be with you. No, thank you folks for your patience. Just no acknowledgement whatsoever or managing expectations. Then for some reason, they were done with the prior members, it had been about 10 minutes, and they didn’t come for the next group. Not efficient at all. So rude.

Jason Boyd 3 weeks ago NEW

This is a federal credit union that is united but you can’t do business with your other credit union accounts (such as safe federal credit union) unless you have an account with them directly. Not only is that greedy but a poor business model. I will never bank with you and I will make sure no one I know does either. Oh, and thanks for the 15 minute wait for nothing too btw.

Where’s the Problem?

NCUA’s statement that poorly done mergers create bad publicity and soundness risks affects more than a merging credit union’s members.   The reputation of the credit union system is stained.

But the problem is not just badly executed mergers.  When mergers are pursued as an acquisition strategy, institutional ambitions easily become more important than the members’ best interests.

There are fundamental gaps  in NCUA’s oversight  of its merger rule.   Board member Metsger stated at the time of the revised rule:

“Our focus is on ensuring member interests are protected through the regulatory process.”   

However efforts to protect member interests are not evident in NCUA’s supervisory oversight. Egregious self-dealing and hollow future benefit promises are routinely approved.

The member comments above are indications that something is amiss in regulatory oversight.  A later blog will provide some examples of self-dealing, at the members’ expense, routinely approved by the agency.

 

 

 

 

 

 

 

Posted on

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?

Posted on

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.

 

 

 

 

 

 

 

Posted on

Two Cooperative Applications of Clayton Christensen’s Final Message

I met business theorist Clayton Christensen once.  He had just finished a panel on the potential for disruptive innovation in higher education-including his courses at the Harvard Business School.

Thinking that his new online offering on disruptive concepts might be useful for credit union strategy, I asked if we might talk with him about this innovative effort.  He gave me his card, turned it over to show his administrative assistant’s name, and asked we contact her.

We did.  That is how Callahans became a partner in distributing and applying his ideas of disruptive analysis  with credit unions.

His Final Work

Professor Christensen’s last work was How Will You Measure Your Life? In this brief excerpt he begins with a case– the example of Blockbuster’s demise after Netflix’s replaced the DVD rental model with online streaming.  By 2011, Netflix had almost 24 million customers while Blockbuster had declared bankruptcy the prior year before.

His explanation of how this happened:

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. 

In this article he extends the errors of marginal-cost logic to a person’s choosing right and wrong. He tells the story of deciding not to play in the British Universities National Championship basketball game for Oxford where he was studying on a Rhodes Scholarship.  He learned that the final game would be played on a Sunday, the Sabbath for his church.   He was the starting center.  His teammates challenged him: “You’ve got to play. Can’t you break the rule, just this one time?”

He did not play.  He compares the temptation he felt to “adjust” his principles just this once, as similar to the logical error in marginal cost thinking.

If you give in to “just this once,” based on a marginal-cost analysis, you’ll regret where you end up. That’s the lesson I learned: It’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. The boundary — your personal moral line — is powerful, because you don’t cross it; if you have justified doing it once, there’s nothing to stop you doing it again.

The Personal Decision Underlying Every Merger of a Sound Credit Union

Sometime in the first decade of this century a credit union manager described the private merger deal making going on in his state.  In the example cited, he said the “retiring CEO” had requested a payment of six times the annal salary to recommend his credit union as the merger partner.   The CEO turned down the “opportunity.”

Tomorrow I will address Christensen’s business critique of marginal cost analysis in bank purchases and mergers.   Today I  will apply his logic to the underlying principles that guide our thinking when making any consequential decision.

He describes his importance of his decision at Oxford not to play on the Sabbath:

Resisting the temptation of “in this one extenuating circumstance, just this once, it’s okay” has proved to be one of the most important decisions of my life. Why? Because life is just one unending stream of extenuating circumstances.

The Moral Challenge in Mergers

Since NCUA’s 2017 rule requiring disclosures of additional compensation for senior executives when merging with another credit union, the payouts, once private are now public.

The amounts range from bonuses and Golden Parachutes as high as $1.5 million plus continued employment in specific cases.  One CEO set himself up with payments of $35 million to a non-profit he incorporated just  60 days prior to the merger announcement.

CEO’s defend this additional bounty with various rationales.  These vary from “this is the usual and customary practice” to legal obligations for payments under employment contracts when a charter is ended.

Some situations appear to be nothing more than the CEO selling the credit union and taking a portion of the reserves as a bonus for so doing.

Rarely are any specific plans or concrete examples of member benefits presented in the members’ merger notice.  Rather it is the deal makers who  reap immediate, specific windfalls.

The CEO’s and senior management who have negotiated these benefits have done so publicly.   Their personal choices are clear.

However every “seller” requires a willing buyer.

The issue Christensen raises is about the other CEO’s, those on the accepting end of  these conditional deals.  How do their employees and boards view these significant “bonuses”?   Will their CEO be tempted to follow the same path?   What member interest is being served?  Are these situations promoting their credit union’s values?   How do these mergers  support the purpose of their member-owned credit union?

What will be the character of a movement built upon internal consolidation of long serving, strong performing firms versus growth from  winning via market competition?

I have heard the reasoning that these are one-off opportunities.  If we had not agreed the CEO would have just gone to another credit union and we would have missed our chance for this free and easy growth.  Moreover since we are larger now, the members will be getting a better deal, etc.

Christensen’s explained his choice of not playing on the Sabbath:

It’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. The boundary — your personal moral line — is powerful, because you don’t cross it; if you have justified doing it once, there’s nothing to stop you doing it again.

The Choice

One of the cooperative values is autonomy, the ability to manage an independent institution free to make its own business decisions. For some, this will be  to “roll up” smaller institutions, take  their free member capital and pursue an open-ended effort at acquisitions.

For others, the decision will be to turn down overtures, focus on innovative growth, and support the diversity and variety of institutions flying the credit union flag.

Christensen’s bottom line: Decide what you stand for. And then stand for it all the time.

 

 

 

Posted on

Two Reasons Mergers Fail to Advance the Cooperative System

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

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

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

Posted on

Missing Voices

 

          NCUA’s New Logo

“I wish I had kept the phone numbers and emails of CEOs that are now gone from view.  Ex-CEOs that could tell me what they had wished they had done when they faced downward curves on the way to the end.

I worry that lessons lost and archived outside our industry are what is needed now.

What did we miss when we justified the NCUA or regulators’ actions to end an organization?  What did we miss when no owners really dug into a vote to end a charter?  What did we miss when the life-cycles of leaders and volunteers were more important than CUs needing young blood?

What did we miss when we followed models based on scale that left local communities and individuals on the sidelines?  What did we miss that are the keys to turning a losing streak back towards winning?

Some might say we missed nothing, we witnessed progress and the natural march towards an industry’s maturation.  But that sounds to me like short term winners talking.” (Randy Karnes, 2018)

Tens of Thousands  Fewer Voices

NCUA was converted to an independent agency with a three-person board in 1977.

The results include 12,000 fewer charters and the elimination of  12,000 CEO’s and volunteer board’s leadership platforms.   Their employees  lost independent career opportunities as these organizations were shuttered. 

The movement’s human capital–enthusiasm, insights and entrepreneurial spirit–has been lessened.   

Communities have fewer options.  As charters are pulled up by their roots, the movement becomes less diverse, less democratic, more concentrated and remote.

Credit unions are being depleted.   No movement can sustain itself built on subtraction rather than addition and multiplication.

In the end there will be no need for an NCUA or logo.

 

Posted on

Combinations, Corporations, Culture and Credit Unions

Are credit unions corporations?   Not in the technical legal sense, but in the way they see their role in society as they grow?

A critic of many aspects  of corporate activity is writer Jared Brock.   His posts cover many segments of endeavor, but always come back to an institution’s impact on individual lives.

Here are some of his recent assertions:

The entire point of multinational corporations is to shatter local resilience and self-reliance, disconnecting people from land and place and generational skillsets, creating a system of utter corporate dependence.

But as you can see, much of our shopping is human-scale and relational.

If you’ve ever been to a corporate “community event” or witnessed a corporate-created “grassroots campaign,” you know exactly what I mean. Everything’s a bit sanitized and clean and proper and nice and… off.

That’s because corporations aren’t relational — they’re transactional.

They can’t give freely and creatively.

Their legal fiduciary reason for existence is to take.

And human beings can smell it from a mile away.

People create culture → Corporations kill culture.

A question for credit unions:   Given his critique, do mergers of financially sound and long serving credit unions promote cooperative culture? Or are they examples of the transformation to a corporate mindset?