Editor's Note: The May 2007 issue of the Callahan Credit Union Report was dedicated to the issue of disclosing executive compensation. Three of the industry’s leading thinkers, Chip Filson, Bucky Sebastian and Gary Oakland, all participated in the discussion, supporting the disclosure of salaries.
Although this article was written over 2 years ago, it reads like it was written this weekend to address Friday’s vote on Capitol Hill to curb executive pay (H.R. 3269). The vote occurred in response to Andrew Cuomo’s report that disclosed that nine of the banks that received TARP funds paid almost $33 billion in bonuses. Almost 5,000 executives received a bonus over $1 million; six of the institutions paid more in bonuses than they earned in profit. Here is Chip's article:
My former partner, Bucky Sebastian, used to counsel us when we worked in state or federal government, “Don’t do or say anything you don’t want to read about on the front page of tomorrow’s newspaper.”
This caution was not just about embarrassment for some deed, but recognition of the accountability that public disclosure can bring.
Today credit unions are subject to many disclosures mandated by law, including the terms on loan and savings accounts, member information management (privacy) and even check-hold policies. But many aspects of a credit union’s most important activities are not subject to public disclosure, unless voluntarily done.
The most sensitive issue for many CEOs and senior managers is the publication of their salaries and benefits. Federally chartered credit unions do not have to report this information. Those state charters that file their own 990 Return for Organizations Exempt from Income Tax (not all state charters) do disclose the compensation of officers and directors. This return is “Open to Public Inspection,” as stated on the form itself.
Transparency and Accountability
Companies that sell their shares to the public are subject to a much wider range of legal disclosures than are credit unions. They must report total compensation for senior executives in the 10K form, plus their assessments of business risk factors, including market concentrations and profitability across lines of business.
For example, in the Annual Report for JP Morgan Chase there are extensive discussions of capital, liquidity risk, off balance sheet arrangements, risk management in general, market risk, private equity risk, operational risk, and reputation and fiduciary risk.
The salaries of many CEOs are routinely published in local business publications and newspapers, and also in the national media from Parade magazine to the American Banker and The Wall Street Journal to name a few.
The compensations of the CEOs of both CUNA and NAFCU, as well as the pay of all senior officials at NCUA, appear annually in the credit union press.
The fundamental assumption underlying disclosures is that this will promote ethical behavior, good performance and accountability. If the facts aren’t acceptable to customers, shareholders or the public, then other governance or media publicity can hold management to account.
So where do credit unions stand on this process? Because they are cooperatives owned by the members should they have a higher standard, or not? Do the member-owners have a more comprehensive “right to know” than shareholders in a public company?
Transparency and Competitiveness
Disclosure covers more than institutional practice and compensation. Every communication to members can be a valuable way to “disclose” the credit union advantage compared with other options. If a credit union just uses “marketing” messages encouraging members to buy this or that product, the approach may miss the most important advantage of all. For if members are never told why they have a good deal, how much harder will it be to convince them that someone else is offering a bad deal?
For example, just think about the 0% car loan for a car financed at the dealership that misled members into thinking they were getting a better deal than from the credit union. Today the veiled fees built into otherwise seemingly good-deal credit card programs, overdraft protection and even some kinds of mortgages can easily morph into an exploitive outcome.
Proactive, thorough disclosures of business practices, beyond what is required by regulation, tradition or market practice can build trust and become an important competitive differentiation.
Salaries are the Tip of the Spear
In November 2006, the Government Accounting Office (GAO) issued a report (GAO-07-29) to the chairman of the U. S. House Ways and Means Committee. One of the purposes was to “assess the transparency of credit union senior executive compensation.”
The Report’s conclusions are blunt:
“Credit union executive compensation is not transparent. Federal credit unions, unlike other tax-exempt organizations, do not file information returns which contain data on executive compensation . . . .”
This is not true of all state chartered credit unions, however. The 990s filed by credit unions in states such as Oregon, Washington, Arizona and Florida can be reviewed online, showing the required information on compensation.
However, disclosure without context could be a troublesome member issue. So a proactive approach might include factors used by the board to evaluate and reward management. These factors might include:
Critical performance goals
Key member value enhancements
Institutional performance versus peers
Executive compensation benchmarks in the industry
When salaries are disclosed as components of the credit union’s strategy and performance, then members can see how the board works on their behalf using key underpinnings of the compensation system.
For example, disclosure could help members understand how compensation is tied to performance, as well as the alignment of management and member interests, the relation of their executives’ salaries to market salaries and the focus on long-term versus a short-term orientation.
An Era of Disclosures
The Internet has made information easily and widely available—on almost any topic! On April 20, the House of Representatives passed a bill by a vote of 269-134 that would let shareholders of public companies cast nonbinding up or down votes on executive compensation. An identical bill was introduced in the Senate by Barack Obama.
Rather than resisting this increased openness, credit unions can use candor to their advantage. Disclosures beget dialogue that can build trust. Credit unions are organized on democratic governance principles, and, like all democracies, information is necessary for responsible decisions.
There is no question but that many credit unions are delivering extraordinary member value; but ironically, members may not see this from their limited perspective—unless the credit union presents the message. Not all members will want to analyze a balance sheet, but they will all have an opinion about salary!
This is not a regulatory issue. No rule making is desired or required. This is a marketplace advantage. Keeping compensation private only suggests to the GAO, Congress and the critics that credit unions have something to hide.
Proactive disclosure says we have something you should want to know about—even more important than CEO pay. That something is how we are creating member value, nothing more and nothing less.
Callahan Report subscribers can access the other two articles by Bucky Sebastian and Gary Oakland in the Callahan Report Online Archive. To become a subscriber, click here.