Credit unions are an essential part of members’ lives especially when communities, no matter the size, are hollowed out by changing economic, political or even demographic events. Credit unions’ roots provide local, CEO-level leadership capacity and staying power in ways other economic firms cannot or will not do.
Mergers of healthy credit unions compromise cooperative design
NCUA releases merger totals quarterly. In 2019, there were over 140 approved. In the last five years the total exceeds 1,200.
The most frequent reason provided in the NCUA summary spreadsheets is “expanded services.” A very small number report difficulty finding officials, and only a few cite poor financial conditions.
None of these situations is irreversible or necessarily fatal. Yet the industry has accepted this consolidation as inevitable. Regulators routinely encourage mergers for situations that would be temporary but lack oversight perseverance. Consultants tout their help in arranging new combinations–for a fee.
The agency challenge and board’s fiduciary role
Most mergers, especially among healthy credit unions, are initiated by the CEO. Almost all credit unions merging today were begun at least two generations (50 years) ago or longer. All have survived severe economic cycles, regulatory disruptions, constant technology innovations and leadership changes in their decades of service.
But today the boards, led by CEOs, have thrown in the towel. Forgetting the responsibility for the legacy they inherited and their accountability to future members, the board presents “happy talk” narratives saying the credit union can no longer meet its responsibilities to the member-owners.
Instead of carrying on their fiduciary duties to members, they transfer this financial and relational legacy to another credit union. Often the senior leadership has carved out a better immediate future for themselves. This is often accompanied by a token “incentive” special dividend, if members will give up their accumulated commonwealth reserves and political control over their co-op’s future.
. . .strategies that focus on commercial success are like candles without a wick. No matter how tall, they will never shed any light.
Although boards and their CEO are supposed to be agents of the members, they can also be motivated by self-interest. The best support for this interpretation is that most merger discussions are portrayed as extending over a year or two. Boards state they have routinely evaluated all strategic possibilities. Even though these discussions occur during the annual election-meeting cycle, I have yet to find a board seeking election while stating their intent to merge the credit union.
Rather, a sudden decision is announced with no prior public information. Members are asked to give up their independent charter on short notice. Their accounts are transferred to another credit union seemingly offering a better deal than what their own board and senior management are able to provide.
In this message-controlled process by the CEOs and boards, there has never been a member vote against a merger. Developed in secret, the charter surrender is then marketed as a logical decision to members, completely unaware such a pivotal event was even needed. No other option is allowed to emerge. The incumbent always wins.
The irrelevance of size
The benefits of cooperative design do not depend on size. Very large credit unions can be just as focused on member well being as small ones. Often a credit union’s size ambitions reflect its market reach. As fields of membership (FOMs) expand, so does the logic for larger and larger size, resulting in a self-justifying need to seek mergers.
The difference is not the size of the credit union, but its approach to business strategy. Some credit unions want to be primarily commercial firms with institutional ambitions that mimic the for-profit banking sector. Other leaders focus on innovation in member service. Both approaches can fit within the cooperative model.
The difference is what success criteria are used. One is driven by institutional performance, the other by member well-being. Regardless of size, I believe that strategies that focus on commercial success are like candles without a wick. No matter how tall, they will never shed any light.
Shredding the legacy
Why should credit union leaders care whether mergers are driven by commercial motives or member well-being? Because democratic co-ops are hard to sustain if the member focus is subordinated to agent self-interest. Cooperative democratic governance depends on values where leaders follow the highest standards of fiduciary conduct overseeing collective wealth. It is based on the foundation that members’ interests will always be paramount. Abdication by boards and CEOs of decades of cooperative investment justified by marketing bromides about future benefits compromises the reasons credit unions were created in the first place.
The unchallengeable progress of the credit union system demonstrates both the need and power of cooperative design for the American economy. If its distinctive purpose is increasingly hijacked by questionable combinations driven by self-interest, then the entire system’s foundations are at risk. For if credit union CEOs do not believe in their own institution’s autonomy, but instead are open to the best offer, will members themselves respect the cooperative choice?
Mergers are complex and hard to engage in non-interested discussion. However, everything we say or do affirms or critiques the status quo. To say nothing is to say something; in this case, that the status quo in merger trends is okay. I believe these trends are not okay.
Denise E Wymore#1
I could not agree more with your statements. I have always said “Bigger is not better. Better is better.” I have been tracking some of these mergers of larger credit unions that seem to be totally unnecessary. In one instance the reason cited was “Expanded services” so I went to each credit union website to see what services the members were lacking and potentially gaining. There was only one, notary services. I think you can get that at a UPS store.
Thanks for “shining a light” on this horrible trend. The cooperative model is more relevant than ever, and we should be looking for ways to start NEW credit unions, bringing people with a shared bond together to help them through this financial crisis. Let’s call it “People helping People!”