By Frank J. Diekmann
There is an ugly truth taking place at many credit unions, and few have the guts to talk about it. So, let’s start here and we can all be uncomfortable together—at many CUs, the people helping people business has become people helping themselves.
Helping themselves to capital that belongs to everyone. Helping themselves to a retirement plan to which they contributed just a fraction. Helping themselves to a member-owned cooperative that was never meant to be a personal piggy bank.
I’m talking about what’s taking place in many credit union mergers—not all—and especially those at which a smaller, well-capitalized credit union “agrees” to merge into a much larger credit union. The press releases all have some version of the same default claim that the merger is all about “improved products and services.” But what many know privately is what’s really going on here is a merger between a big cash payout and the wallet of the CEO at the smaller credit union.
And increasingly, as I’ve come to learn, there are payoffs involved for board members at the acquired credit union, too, in which these deals pay CU volunteers to become “advisors” after the combination is complete and the new signs are up. I can only imagine how much actual “advising” takes place.
And the members who vote in favor of these combinations—usually a small minority of the overall membership—do so because they’ve taken their credit union at its time-honored, trustworthy word that the merger should proceed.
Have a Business Case? Great
I get why some mergers take place; scale is increasingly important and that reg burden only moves in one direction. Where a case can be made that the members truly benefit and the credit union’s future is brighter as a result, you’ve got my full support.
But often those two things, the only two things that should matter, are never a part of the conversation until it’s time to write the press release, which are very often nothing more than plug-in-the-name-of-acquired-CU-here templates. Instead, certain larger credit unions have been targeting smaller operations where there is healthy net worth and promising as much as 25% of it as part of a compensation package for the manager of the smaller CU (and some other senior managers, plus the board, as mentioned above). I’ve been told contracts are written in ways that encourage these managers to leave as early as possible; just grab your check on the way out, thanks.
And at the larger CU the CEO and senior management pick up a bonus for what is basically plug-and-play growth.
At many CUs, where the CEO has been in the job for a long time and a tired board never put together any sort of succession plan, it’s the easy and lucrative way out. I get it. I understand how some managers at small CUs feel as they approach retirement—they worked a long time and their CU could never afford one of those “packages” so many other CEOs have. But since when is a credit union’s net worth supposed to go to any one person’s net worth?
We’ve all seen the graphs showing the decline in the number of credit unions since this century began. It looks like the trajectory of Blockbuster’s stock price over the last few years of its existence, before it forever stopped reminding us to “Be Kind. Rewind.” You may think a once high-flying chain of movie rental places and not-for-profit financial institutions don’t have much in common other than shopping plaza locations, but the former met its maker by refusing to deal with outside threats (Buy Netflix? What for?), while the latter is at risk of suffering the same by turning a blind eye to insider trading.
What many in credit unions could really use right now is a little less kumbayah, and a little more Come to Jesus.
An Undercurrent at GAC
During CUNA’s GAC last week I spoke with maybe a dozen CEOs and two league presidents about the kinds of mergers taking place that aren’t in any way being driven by what might be in the members’ best interests. I couldn’t help but notice how often each of the CEOs would take a quick look over their shoulders, as if the nearby NSA had suddenly decided to backburner monitoring threats to the country because listening in on CU execs’ private conversations is more enthralling.
Everyone seemed to have a story about being approached by a larger credit unions, including some mysterious phone calls from someone saying they represented “the interests of another credit union,” and being not-too-subtle that the CEO could be looking at six figures plus if they just agreed to push the deal in front of their boards. And if they weren’t receptive? The CEOs said it felt like being threatened, with the caller saying he would go straight to the board itself and cut out the CEO and other senior managers.
There wasn’t a word mentioned about any of this from the GAC stage, of course, even though we’re talking about a far bigger threat to CUs than regulatory burden or the CFPB or even the banking industry. The two league CEOs I talked to—who don’t dispute what’s happening—said trade groups are stuck between a rock (dues-paying CUs) and a hard place (a race to the bottom). Small CUs see these deals as retirement plans, and larger CUs see them as growth strategies.
Painting a Picture
And apparently, no one sees the bigger picture. So, let’s paint one.
If you’re repping CUs, you’re nothing more than just another sanctimonious lobbyist meeting in the very heart of our American democracy and hiking the Hill with some message about democratically run financial institutions that act only in the interests of their member-owners if you don’t have the courage to stand up on this issue. If not, credit unions are just as guilty as the elected representatives in whom so many Americans say they have lost faith. Credit unions, drain thine own swamp.
I was thinking about all this as I looked around the Marriott Marquis ballroom in Washington last week as the celebratory Herb Wegner Memorial Awards dinner was taking place. Sometimes lovingly referred to as the Credit Union Prom, there was so much joy in the room and pride in the work done by credit unions, especially the exemplary accomplishments of the annual winners.
The Last Waltz at the Prom?
I found myself wondering if this annual gala wasn’t the credit union equivalent of Nero and his fiddle, and whether anyone would step up to put out the growing fire. And the next day, a surprising someone did. NCUA.
In his first address since his designation as acting NCUA board chairman, J. Mark McWatters told credit unions they can anticipate a “thoughtful loosening” of regulations, and he introduced a list of more than a dozen initiatives on which the agency is working. Among them was this:
“The agency should diligently work to preserve small credit unions, as well as minority- and women-operated credit unions. In addition, the agency should require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote.”
Here, here! That is thoughtful. Mr. McWatters, along with board member Rick Metsger (since this obviously wasn’t drafted in the short time McWatters has been acting chair), are to be congratulated for taking the lead here. In this case, the agency has proposed a “thoughtful” tightening of rules, and they deserve much credit for it.
No doubt there are going to be critics saying payouts to anyone associated with a credit union merger shouldn’t be disclosed. Seriously? Because democracy always works best in the dark? If there is nothing wrong with the payouts, disclose them. If you’ve got nothing to hide, why do you want to hide it?
No doubt, with this NCUA proposal now announced, some of these big, aggressive, predator CUs are going to be using it like a cudgel to pressure smaller CUs and their managers and CEOs to hurry up, before the disclosures are required. And that should tell you a great big something right there.
Following a CUToday.info report on the NCUA proposal, I watched as a debate unfolded on one listserv where some argued it’s not the regulators’ job to get involved here. Others say it’s not the trade groups’ job. OK, then whose job is it? In any type of democracy, protecting it is EVERYONE’s job. It's my job. It’s your job.
Unless, of course, what you’re really in it for is just a big, fat, hefty payout and you just aren’t going to be needing one.
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.info or @FrankCUToday.