How To Stop Exploiting Members In Mergers

There is an alternative approach to self-dealing credit union mergers that corrupt the ideals of member-owned financial cooperatives.

 
 

A building wave of credit union mergers that appear to be self-serving transactions that enrich executives at the expense of the member-owners of these not-for-profit cooperatives raises some critical questions.

What kind of cooperative system do we want? Is the practice of managers and boards selling their institutions what the movement is about? Why does this issue matter?

Credit Unions For Sale? A look at the growing trend of mergers that appear to undercut core principles of the member-owned financial cooperative movement. Read now.

A Slippery Slope

History shows what happens when mutuals and co-ops lose their way. It’s a slippery slope. As one credit union leader observed: Credit union merger shenanigans are a troubling replay of what’s already occurred in mutual S&Ls and mutual insurers such as Blue Cross/Blue Shield affiliates.

The historical record is clear on how this merger trend will evolve and then accelerate. The outcome is also clear as eventually the board/staff gain control and can outlast and out-resource dissidents and traditionalists who are trying to preserve the institution’s accumulated wealth and cooperative ethos for the real owners — the members.

The well-informed, highly motivated economic self-interest of the few, if given time, will always aggregate market and organizational interests against the inattentive, uninformed majority.

That’s what all too often has become the "evil face" of capitalism. And credit unions become the latest system seduced by the capitalistic ethic of the robber barons, the monopolists, the monied interests, and Wall Street.

The well-informed, highly motivated economic self-interest of the few, if given time, will always aggregate market and organizational interests against the inattentive, uninformed majority.

It doesn’t have to be that way. For credit unions, the solution is not to stop mergers, voluntary or otherwise. Rather the solution should be to establish public, agreed upon standards for this activity so industry leaders can continually watch out for one another and for the members.

For mergers, the fundamental principle is that all actions, promises, and decisions be fully transparent and conducted in a manner that members are given time to make a meaningful decision on their credit union’s future.

The following is a proposed list of what should be best practices for voluntary mergers that ensure due process and the equitable distribution of collective wealth.

  • Anytime a board or manager seeks a merger or approval of an unsolicited offer, the decision is immediately made public to the credit union members and the general public. This notice will then constitute the date for member participation in the vote on the merger.
  • If the credit union board and management believe a merger is in the credit union members’ best interest, they agree to solicit offers from any credit union via a public announcement of their intent to merge.
  • There must be a minimum period of at least 90 days from such public announcement before any final decisions are made and members are sent a notice. This will give time for any alternative options to be considered.
  • The board, in making a recommendation to the members, must provide complete information of all the terms of the proposed merger, including but not limited to:
    • Any bonuses or other incentives offered to the board and management.
    • The complete terms of any employment promises or severance packages offered employees.
    • The plans of the acquiring credit union for the merging credit unions assets including changes in rates, underwriting standards, technology, and services.
    • The business model of the surviving credit union.
    • The other offers of interest received and why these were not accepted.
    • Complete financial disclosures including the valuation of the merged credit union’s assets when combined; the disposition of the retained earnings and reserves.
    • Any special payments to member-owners and how that calculation was determined.
    • Other factors that might be relevant to the final recommendation including why the credit union believes it cannot continue to operate as an independent firm.
    • If the merged credit union’s assets are less than 10% of the surviving credit union’s assets, then members will be paid a capital distribution of the credit union’s entire net worth or the entire net worth is contributed to an independent community foundation to benefit all residents.
    • Other details as necessary.
  • All the above information shall be provided at least 90 days in advance of the special meeting notice and included with the notice. The full information must also be posted on the web sites of both credit unions along with a vehicle for members to comment.
  • The final vote cannot close until at least one week after the special meeting has taken place to permit consideration of any information that might be raised at the special meeting.
  • The full vote must be disclosed and the final merger package sent to NCUA for approval must be public for all members of both credit unions until the NCUA gives a final approval.

Why This Matters

How credit unions manage the ongoing consolidation of their institutions could be a defining moment for the industry. Credit unions will be under increased scrutiny as they grow in size and influence. Their role in the economy is becoming more substantial.

Now is the time to act. Once credit union leaders decide their own wallets are more important than what the movement has done for the average American for more than a century, the cooperative model is truly at risk.

Will their role evolve to just another economic choice operating with practices and goals similar to their for-profit competitors? Or will they enhance their cooperative design to continue the mission that embraces the well-being of their members and the capability of creating shared value for current members and future generations?

Now is the time to act. Once credit union leaders decide their own wallets are more important than what the movement has done for the average American for more than a century, the cooperative model is truly at risk.

When member-owned financail cooperatives are sold in a merger that is really a fire sale, the benefit goes to the buyers, the selling board, and senior managers at the members' expense.

 
 

Feb. 14, 2017


Comments

 
 
 
  • As someone who has advised on a large number of mergers and provides advisory services to smaller credit unions who are facing succession challenges and strategic issues of "relevance," I tend to agree that transparency of process could improve within the merger process (and for the cynical - transparency would help prevent self-inurement). Although current NCUA regulations provide guidance and structure to the process, the information and requirements provided to members seems to fall short; and is not effective at engaging a high-percentage of members. However, many of the suggestions here would move the process much closer to that of the banking industry; which is to say directly away from the cooperative model. If the goal is to behave more like banks then why not just switch charters and sell to the highest bidder? For example, opening up the merger talks to "any credit union" would only serve to sharpen the competitive fervor of the largest and most cunning credit unions and would serve to accelerate the pace of mergers - not reduce it - because so many would start making unsolicited offers just to get the ball rolling. At the core, credit unions and their leaders need to find ways to become - and remain - more relevant to their membership; regardless of their size if they want to operate independently. If the decision to merge with another credit union is desirable its usually better to work closely with a potential merger partner that shares your same values, geography, and in many cases existing membership crossover.
    Roger A. Jones, CPA