This article originally appeared in the May 2005 issue of the Callahan Report.
With two Texas credit unions totaling $2.4 billion in assets and 467,000 members attempting to leave the credit union system to become stock-issuing banks, there is no lack of public comment. But what this means for the credit unions, their members and the system is anything but clear.
First, the two credit unions have limited their public communications to those documents approved by NCUA and said that the legal process prevents them from commenting beyond those broad statements.
Credit union trade associations are caught in the middle between members who want them to oppose forcefully the change and those who say they will withdraw if the trades try to stop conversions.
Individual credit unions, while stating they would not want to convert, often take an agnostic position by saying they don’t want to interfere in another credit union’s business decisions. After all, they ask, would we want other credit unions influencing our business choices?
The Community’s Interest
While the credit union industry routinely honors its pioneering founders and those who continue to devote a lifetime of service to the movement, unlike in the private sector no individual can possible benefit by owning stock in a credit union. Similarly, individuals are not asked to put their private capital at risk when starting or joining a credit union, although many do commit long hours of volunteer labor.
Credit unions are different from the private ownership paradigm that drives much of the business and individual activity in our capitalist society. Credit unions are the result of a community’s efforts. This community consists of many individuals who believed in managing personal finances in a cooperative manner went on to invest countless hours in getting laws passed, organizing credit unions and then creating the system structure of trade associations, corporates, insurance and regulation that is the essential framework for credit unions to exist. The goal was to help their community, not personal enrichment.
Managers and boards today have inherited a legacy, a movement of successful credit unions built by their forebears that have united capital of over $60 billion. The intangible worth created by these organization or their “franchise value” of relationships, infrastructure and market potential is worth billions more. That intangible value is one of the reasons credit unions seek to convert to stock and to raise more capital based on their promise of future performance and earnings.
The two Texas credit unions have book capital over $ 210 million, accumulated from earnings they received since they were chartered in the early 1950s.
Why Conversions are Not a Private Event
All credit unions are started without private capital. Their existence depends on a system of laws, share insurance and regulatory structures created to support a cooperative movement. When a credit union chooses to leave this system, it is a community event. The planned conversions take members and resources from the system created, in part, by the goodwill of other credit unions and their supporting network.
Because credit unions are the result of a community effort, when members announce their intent to leave the system, the community collectively and individually is affected. All organizations have a right and a responsibility to their own members to react, and not just view a conversion as a private event with no consequences to the wellbeing of the system.
But what should be the basis of their concern and potential action?
The Critical Question
The critical issue of conversions is: How do the members benefit? Whether individuals joined the cooperative by choice or chance, how does the charter change affect their interest, their rights and their opportunity to pass their cooperative participation onto their families and heirs?
Unfortunately the information provided by the Texas credit unions does not address this issue, or does so only in a general sense by saying that the current terms and conditions of member relationships will not be changed. There is reference to the institutional benefit of being able to raise capital through a stock offering, but this action is not translated into member benefit. Nor is it explained how this institutional change will offset the loss of member ownership of capital, control through voting rights and the impact of creating another segment of interest, the new stockholders.
In essence the conversion puts the capital - which belonged to the members - under the control of the institution to use in raising more capital and creating a new “ownership group.” Members are transformed into customers. The cooperative community value is superseded by the new ownership structure.
How Can the Process be Changed?
Conversions are in essence a private taking of a public or common good. They are similar to the persons who have property adjacent to a public right-of- way and who decide after decades of living next to the land that it more appropriately belongs to their lot, rather than to the public.
I do not believe that conversions should be made illegal. But I would ask: Can the process be improved so that members have a real choice and can make an informed decision? Some people have suggested better regulations. I don’t believe this approach is either timely or effective. Right now the rules are being used by credit unions to limit dialogue rather than enhance it.
If a credit union chooses to begin a conversion, I believe other credit unions should view it as an invitation for a merger. In virtually all mergers, it is possible to clearly demonstrate the member benefits, not to mention the institutional gains of greater capital and competencies. Mergers have been the traditional way that smaller credit unions have elected to improve member benefits when the management and board were unable to successfully compete within their existing charter’s limits.
Mergers have a clear process. Benefits can be compared and documented. Members of the merged credit union have a chance to vote on the outcome. But would a credit union board that had decided on a conversion process be willing to put a merger option to the members, or just turn it down?
While the board might decide to turn it down, the members would then have the option of calling a special meeting of members to consider the merger or suing the directors for “faithful performance.” Board members have a fiduciary obligation to act on behalf of the members. When a merger option is presented, the board must consider and act in the members’ interest.
In essence a merger is just using the market process that the credit union is proposing to take advantage of through a conversion. For by issuing stock, the credit union is selling itself to investors who then have the ability to determine the fate of the credit union in the open market.
Why shouldn’t credit unions have the chance to acquire one of their own and continue the cooperative tradition of members’ interest as the exclusive goal of the organization?