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Rex Johnson (1943-2021) Part 1: The Player-Coach

Going to college in the Boston area in the ‘60s meant following the Boston Celtics. They were the dominant team in the NBA led by coaching legend Red Auerbach. Near the end of yet another Celtic victory, he would light up a cigar to celebrate the win, before the game was even over.

When he retired the critical decision was who could follow this extraordinary leader. Management chose Bill Russell, the team’s center, to be a player-coach. An unusual and risky option.

Russell was a five-time NBA Most Valuable Player and a 12-time All-Star. As the centerpiece of the Celtics dynasty, the team won eleven NBA championships during his 13-year career. In his three-seasons (1966–69) as player-coach he become the first black coach in American professional sports and the first to win a championship.

To perform both leadership roles well requires not just a superb athlete, but unusual awareness of the team and game’s multiple dynamics. During a season as a member of a military basketball team for the Naval Supply Depot in Yokosuka, Japan, I volunteered to do both roles when our coach was away on temporary duty. At halftime the best player on the team took me aside and said, “Chip, you can play or coach, but you can’t do both.” My brief Russell-like imitation effort was over.

The Player-Coach dual role was a perfect fit for Rex Johnson. As CEO he repeatedly proved he could perform at the highest levels of lending keeping Baxter at an 85% or greater, loan-to-share ratio. As a consultant, he taught (coached) thousands of credit union loan officers and managers the art of lending using their own institution’s examples.

The Case Study-The Core of His Teaching Method

The following example “Who Will Trust Me?” is from Rex’s book More Passion for Lending. It demonstrates his skill as a loan manager-“player.” From this experience he developed specific lessons on  the art of sound loan decisioning. Here’s the case.

Just Starting Out-Who Will Trust Me?

“To illustrate that lending is based on judgment, not formulas, let’s review the case of a young, first time borrower.

On the application, we learn that Doug is nineteen and is just starting out on his own. He has been a member of the credit union for two years. His parents are also members.

Doug wants to buy a new Chevy truck and finance the $10,500 loan in his name only. He is just beginning his first real job, and has no credit history, and might well ask, “Who will trust me?”

That’s a good question. You could see a lot of reasons for turning Doug down, or require his parents to co-sign:

  • lack of credit history;
  • short time employment;
  • no credit bureau report;
  • no real assets.

Every situation is different. There are 19- and 20-year-olds who may be excellent credit risks. When Doug applied for the loan, some of the things you should have liked were:

  • He saved his money and was paying $1,795 down on the new truck;
  • He had worked all through high school and although he is not going to college, he did want to learn a skill;
  • The credit union will have a 100% secured loan;
  • The credit union knows the family; and
  • There is good stability-Doug has lived at the same address in an established area for nineteen years.

When the application was taken, the credit union learned the following:

  • Doug had enrolled in a trade school for four years to learn to be an electrician. Doug is good with his hands. His employer allows him to work full-time while going to school; and,
  • Doug had completely restored a 1969 Pontiac GTO. It looks as good as new, and Doug wants the truck to haul it to car shows. The GTO has a value of $12,000.

If you are looking for a way to make loans, sometimes it is vital to take time to develop the application by asking the right questions. The new information above made the loan application much stronger. Developing an application is an art that can be taught.

Doug is not going to college. However, he is a very industrious young man. Based on this information, the credit union made the loan three years ago without the benefit of payroll deductions.

Doug has only two years left on his loan. He has never missed a payment. He is now earning $12.75 an hour and will graduate from trade school next year. The credit union has since given Doug a credit card, which he is handling very nicely.

I do not suggest that you start out granting loans to every 19- and 20-year-old who applies. I am suggesting you treat them as individuals and look at their qualifications based on their age. Doug always appreciated the fact that the credit union gave him his start, and my guess is that the credit union will have a life-long member.

Look at each application individually, even those showing no credit history. You may find some of the applicants well qualified. Remember, lending is a judgment business.”

(An observation on this first case in More Passion. I cannot help but wonder how much Rex empathized with this applicant whose life seems a close parallel to Rex’s own starting out.)

A CEO on Rex as Coach

By Karen Church, CEO,
ELGA Credit Union

Rex was my hero and mentor. I’m not sure where our credit union would be today if I hadn’t called on him in 1993. 

Rex revolutionized lending for the credit union industry. He taught us to listen and record the story of each member coming to us for a loan. He said, “ask good questions to understand their future attractions rather than dwell on their colorful credit from the past”. He explained that we would help them with affordable loans, and they would help us with higher yielding loans. Rex was spot on!

He was a phenomenal credit union leader!

A Brief History of Elga Credit Union

“We are a not-for-profit cooperative; formed in 1951, owned and operated for a single purpose: members helping members.”

“ELGA Credit Union had a humble beginning, helping Consumers Energy employees that were paid below the average of other industrial workers in the 1940’s and 50’s. ELGA got its name from a contest held in 1959 to rename the credit union, replacing the previous name, Flint Division Consumers Power Company Federal Credit Union. The name incorporates the first two letters of Electrical and Gas. Today we like to say it stands for “Everyone Loves Goals Achieved”. We are dedicated to helping you achieve financial success.”

In Part II tomorrow, I will present Rex’s four decade- long contribution to the ever-evolving credit union story.

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A Cooperative Distinction: Owe versus Own

The British writer on religion,Joseph Pearce, used the period of Lent to write the following observation on life.  His distinction between owe and own is helpful in understanding how cooperative value is distinct from private sector intent. And how easy it is to confuse the words in practice.

The following is from a longer essay on Lear and Shakespeare.

“The paradox at the heart of Lent is that life itself is lent. It is not owned outright by those who possess it. If it were, we would not relinquish it when our life’s sand is sifted softly away.

“Off, off, you lendings!” Such is King Lear’s exclamation as he strips himself naked on the heath, the moment of madness being the moment when he comes to his senses. Lear, powerless in the face of elemental nature and stripped of his political power by unscrupulous treachery, realizes that the very clothes on his back are but lent to him. We can take nothing with us when we shuffle off this mortal coil. We will leave as naked as the day on which we arrived.

“Shakespeare knew this, as the “lendings” scene on the heath shows; but most of his critics seem oblivious of this elemental fact of life. It is, for instance, all too common that Shakespeare’s use of the word “owe” in relation to human life is glossed as “own,” an egregious error that exposes the pride and ignorance of those who consider themselves experts. As Chesterton quipped, it didn’t matter how much he made the point of a story stick out like a spike, the critics would still go and carefully impale themselves on something else.

“As Shakespeare affirms in his multifarious works and manifold ways, we do indeed “owe” our lives. And this stark reality has practical ramifications. It means that life is not simply a gift; or, in any event, it is not simply a free gift. It comes at a price that we are obligated to pay. To put it bluntly, if our lives are lent, we are debtors.”

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Redesigning the NCUSIF: The Cooperative Way to “Finish the Job”

On Feb 8, 1984, NCUA Chair Ed Callahan gave his GAC keynote, an annual tradition.  He started by describing the state of the industry with one word: “fantastic”.

He acknowledged credit unions’ success in meeting the challenges of the previous two years: implementing deregulation and expanding credit union access across the country.

But there was one more structural change necessary to complete a sound cooperative system-redesigning the NCUSIF’s premium based funding.

The proposed change, depositing 1% of insured savings for continual underwriting, was recommended in a Report to Congress dated April 1983, Credit Union Share Insurance.

The Report’s  seven sections examined the history of cooperative insurance, risk rating, expanding insurance coverage, merging the three federal funds, and revisions to the current NCUSIF system.  An 8-page appendix listed over 50  credit union commenters, including leagues, state regulators, credit unions and the state cooperative insurance funds.

Why Listen to the Speech Today ?

This eleven-minute excerpt from the 14-minute recording is a critical moment in NCUA and credit union history.  It began a joint legislative effort to restructure the NCUSIF on cooperative principles, a design that has sustained for four decades. In these same years, the premium-based FSLIC failed, merging with the FDIC. The FDIC has had multiple periods of negative equity and still struggles today to find an adequate financial model.

The address is more than history. Ed’s “finish the job” challenge is a prime example of regulator industry collaboration. These mutual connections were empowering. It is a vision of leadership guided by “power-with,” not “power-over.”

Change was made through honest, open discussion seeking “a better way.” Over 2,000 comments were received to the proposals in the April 1983 study in which all parties had a say.  Chairman Callahan’s approach was based on “relational power” not assumed legal authority.  He was committed to teaming with credit unions-“we, not me.”  The cooperative way.

This excerpt is available at:  https://youtu.be/BmxvX7wQxgg 

I believe you will find this talk as enlivening and informative today, as it was years ago.

 

 

 

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Does Infinity Have An Endpoint? Members Comment

On March 25, I published an analysis of Infinity FCU’s proposed merger with Deere Employees CU in Moline, Il whose tagline reads, “Exclusively for the John Deere family.”

Infinity is Maine’s oldest credit union, founded as Telephone Employees in 1921.  The analysis highlighted the absence of facts supporting any member benefit.  Most importantly it pointed out members will lose their ability to vote annually  for credit union directors or on any future mergers due to the use of proxies under Illinois credit union regulations.

April 15-Voting Ends

Federal credit unions purport  to be “democratically controlled” with a statutorily defined one member, one vote governance structure. No proxies permitted. Member ballots must be submitted by the date of the special meeting or by voting in person on April 15.

The member’s comments below augment the many shortcomings outlined in the above initial analysis.  The most concerning critique is of the board’s role outlined in detail by a former Infinity board member.

If Infinity’s 18,000 or more members do not participate in this critical decision to give up their charter, then the democratic process has been circumvented.   A motivated few will impose their way on the unorganized majority.

Ben Franklin’s once observed: “It takes many good deeds to build a good reputation, and only one bad one to lose it.”  Or in this situation, a century old successful $350 million local cooperative.

Infinity Members Comment

All merger notices include an option for members to post comments via a site managed by NCUA.  Three members have posted their concerns.  Names are required with these posts.

John McGinn: I went with Infinity that was then Telco over thirty years because it was a Maine based credit union. I absolutely do not want to be joined with an out of state large corporation credit union. I do not like or support this merger. If it happens, I will be reviewing all my options.

John Lander:  The CEO has changed the culture of the Board of Directors (BOD) during the last six years. Directors must be committed to on-going education to be able to make “best practice” policy decisions. The current BOD is averse to on-going education and has, as a result, become dysfunctional in many areas. . .

About ten years ago, The BOD hired a local Board Source consultant to help the BOD with governance. Using a Filene Research and Board Source collaboration we developed roughly 12 principles of good governance to guide the consultants’ work. The BOD accepted the concepts and directed the Governance Committee to implement the recommendations with the consultants help.

Unfortunately, the Governance Committee chair relied only on advice from the COO ignoring the consultants. A few years later, the committee quietly reported their satisfaction with our governance. Now dysfunction is present in the development of mission and vision, strategic planning, BOD evaluations and succession planning.

Directors must be committed to on-going education to be able to make “best practice” policy decisions in the best interest of members. . .

Nine months before my term expired, I attempted to join the Governance Committee, but Board Chair and the Governance Committee Chair said no. During my many years on the board, directors have always been welcome to join a committee. . .

A few months before the end of my term, I requested a discussion on governance be put on the agenda. At that meeting the CEO brought an attorney. The hiring of an attorney was not approved nor previously discussed by the BOD. The Chairman did not give notice if he approved it. The CEO asked the attorney to comment on my governance discussion. The attorney agreed with me in his own words. After this BOD meeting the Governance Chair withdrew from her BOD position.

She is now on the Supervisory Committee. The committee usually has had an odd number of members to avoid ties, but not now. As a Board Director and Treasurer, I tried to meet with the Supervisory Chair; I wanted to discuss governance including member service. He would not meet with me. Board members said, “I can only talk to the Supervisory Committee if I file a complaint.” This is dysfunctional governance.

Effective directors maintain an attitude of constructive skepticism; they ask incisive, probing questions, and require accurate answers. This BOD does not have a culture of inquiry because of its lack of commitment.

In 2020 Infinity’s capital was strong. We have opened two branches in four years and ROA is low. Membership growth is also low. We had better loan growth than five larger credit unions in our area.

We don’t need to give away control of our credit union so that we can open another branch soon. We need the BOD to commit to good governance. Please vote against the merger and demand the BOD fulfill their responsibility. John Lander, MBA, NAFCU Certified Volunteer Expert, 2017

Joe Mottershead: I Have Been a Loyal Member Since Infinity Was Telco Credit Union 1990s. I can Not Imagine what Benefits there are to Merging with John Deere CU That is a Billion Dollars in assets Larger? Are any of the Officers of Infinity Getting Stock or other Benefits From this merger? I am TOTALLY AGAINST this Merger!!!

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Two Cooperative Webinars-No Charge

Both are on April 13, but at different times.

I. Rochdale & The Early Co-operative Movement
 (from: National Farmers Union)
Description: Working People and Business Owners. Weavers and Socialists. Democracy Activists and Abolitionists. Over 170 years ago, a small group of people founded a humble grocery co-op in the North of England with an ambitious vision for a better world. Building on earlier experiments in co-operative enterprise, their ideas soon spread around the world, complementing local struggles, traditions, practices of mutual aid to help inspire what became an international movement for economic democracy.

What became known as the Rochdale Principles were taken up by groups such as the National Farmers Union, forming the basis for organizing successful agricultural co-ops, and other organizations focused on their adaptation to consumer, worker and other co-operative models. In this webinar, we will discuss the origins of the Rochdale Society of Equitable Pioneers, the challenges that they were trying to address, and how their legacy remains relevant today.

Submit any questions to: elindberg@nfudc.orgDate Time: Apr 13, 2021 02:00 PM Eastern Time (US and Canada)

II.  Cooperative Board Self Evaluation
(from: UW Center for Cooperatives: Fostering critical thinking and understanding about cooperatives.)

Description: Board evaluations are a critical component of maintaining a healthy, functioning board of directors, however they often fall to the backburner. This session will explore why and how to conduct board evaluations. It will also explain different methods for conducting board evaluations and their respective advantages and disadvantages.

Submit any questions to: mawebster@wisc.eduDate Time: Apr 13, 2021 10:30 AM Central Time (US and Canada)

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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.

 

 

 

 

 

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Timeless Wisdom: Why Dual-Chartering

“I think if you took the pulse of credit unions today you would discover two feelings: worry over the growing authority of NCUA; and a desire for more flexibility than now exists under the charter options. . . The best remedy to this climate is a vigorous dual-chartering system, that is both a vibrant federal option and a vibrant state-chartering, non-federal share insurance. Danger grows if there is only one option. Such a climate breeds bureaucracy and lazy thinking.”

Ed Callahan, Callahan Report, May 2000

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Universities are Hotbeds for Startups

In a February 28, 2021 article Forbes highlighted the growing number of business startup programs at colleges around the country.

“Gen Z grew up in an era when entrepreneurs were put on pedestals, and business leaders like Elon Musk and Jeff Bezos hold a disproportionate mindshare of the U.S. public. Entrepreneurs have a new prestige factor.”

“Entrepreneurship is an unusual discipline, in that there is no set path for creating a successful company. The competitive landscape changes so fast that it’s tough to study, learning to be an entrepreneur is very much about learning by doing.”

Learning by Doing

The story stated there are more than 250 university startup programs around the country. To determine whether a school offers a good environment for “learning by doing” the article cited a raking of the Top 20 Entrepreneurship Competitions by the Times of Entrepreneurship.

The New Venture Competition (NVC) at the George Washington University in DC is ranked the 3rd largest student enterprise program in the country.

The 466 participants this year were the most in school history. The 12 final teams were selected by 150 judges from all over the world.

These 12 are divided into three tracks of four teams each-Tech, New and Social ventures.

On April 15, at 6:30 pm they will compete for $500,000 cash and in-kind awards at the annual NVC Award Show.

You can register to watch live here: RSVP to get the live stream link

Why Watch?

The live business presentations are well honed, documented and excellent examples of “elevator pitches.”

The business passion and skills of these students is inspiring.

Some of the ideas would seem to align well with credit union purpose. For example, this is one finalist in the social venture category:

P.E.E.C.E. Homes

P.E.E.C.E. Homes is a real estate venture determined to supply affordable, energy-efficient homes for underserved communities in Baltimore City.

Team: Brookklin Brown (CPS MPS ’22), Marylynn Jones

Look in Your Area

Check the list of the top 20 or look for a similar college/university  initiative in your area. Then reach out to see if there is a role for a credit union.

Some call this the entrepreneurial generation; others see this as reaffirming the American spirit. There might even be a credit union startup inside one of these higher education business incubators.