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. The current World Bank controversy is only the most recent example of private activities undergoing public review.
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 customers 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.
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.
Chip Filson, President of Callahan & Associates, will host the webinar, Full Disclosure as a CU Advantage: The Risks and Gains from Transparency. Featured speakers include Mandy Jones, CEO of Oregon Community Credit Union ( $761M in Eugene, OR) and David Doss, CEO of Arizona State Credit Union ($1.1B in Glendale, AZ).