By Frank J. Diekmann
About 18 months ago I wrote about an “ugly truth” in credit unions that became the most-read column I’ve published in CUToday.info. Later this week we’ll get to see what NCUA plans to do about the ugliness.
The NCUA board on Thursday will vote on what is technically known as Final Rule, Parts 701 and 708b, Voluntary Mergers, but what the proposal should more properly be called is the Walk the Democratic Talk Rule. What it’s all about at its heart is providing greater transparency to members of federal credit unions that are seeking a voluntary merger when it comes to any benefits and compensation that may be paid to executives and board members of the CU that is being acquired.
And as CUToday.info has reported ahead of any other publications, there is plenty of undisclosed compensation that has gone to and continues to go to the management and “volunteers” of credit unions being gobbled up in some mergers. These pay packages are typically not disclosed to members when they are voting on the merger; instead, members are told it’s all about vague “improved products and services.” There’s nary a mention that what’s really being improved is some people’s bottom lines.
When the NCUA board put forth its proposal, agency staff reported that in “75% to 80%” of mergers they had found “significant merger-related compensation” being paid to people at the credit union that was being acquired, nearly all of which was kept from members when voting on the merger.
In one case, staff said, it found a total payout in the low-seven figures paid to 18 people at a credit union, with the bulk of that money going to four people. In another case, an acquiring credit union discovered after the fact that the board of the acquired CU had cut a deal in which each of them were to be provided with expensive season’s tickets to a local football team’s games for a three-year period. At other CUs being acquired, board members have gotten payouts over a certain period of time to serve as “advisors,” and I think it’s safe to say these are the “we’ll call you” kind of deals.
A Deal a Mobster Would Love
When NCUA Board Member Rick Metsger asked staff about how some credit unions have worked to “obfuscate” payments being made to officials at the acquired CU, staff said one common method is that instead of having a clearly articulated dollar amount being paid, benefits are paid out in a different fashion, such as a split-dollar life insurance plan.
And in an arrangement that would make Tony Soprano proud, staff said it also found at another credit union a merger agreement that called for the CEO of the acquired CU to be paid for a guaranteed five years of employment, even if at any point that CEO quit or the acquiring CU terminated him.
“So he could work for one day, quit, and got the full five years,” staff said.
Another person’s analysis pointed to just how much was being paid out at some credit unions just ahead of a merger, which you can read more about here.
What The Proposal Calls For
The proposed rule would:
- Increase the required time for notice to members before a merger vote to at least 45 days
- Require the merging credit unions to disclose all merger-related compensation for certain employees and officials of the merging credit union
- Clarify the contents and format of the members’ notice to provide better information
- Create a member-to-member communications process similar that found in NCUA’s regulations covering credit union conversions to or mergers with banks
There Is No Asterisk
Immediately after it was proposed both CUNA and NAFCU raised “concerns,” an indirect way of saying they oppose it. But that isn’t the trade groups speaking, it’s their largest dues-paying member CUs, the very ones that are doing the very thing we’re talking about here.
But if you’re going to hike the hill under a banner of being democratically run cooperatives deserving of their tax exemption, then that comes with a catch: you have to act like one. Member ownership doesn’t also include an asterisk qualifying that “certain conditions apply.”
If credit unions don’t have the courage to stand up on this issue and practice what they preach, then they’re just as guilty as the elected representatives in whom so many Americans say they have lost faith. Credit unions, drain thine own swamp.
As I wrote previously, I get it. 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 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?
‘Tell the Story and Disclose It’
Perhaps no person has been more articulate on this issue than NCUA Chairman J. Mark McWatters.
“I think this rule is important,” he said at the time it was proposed. “To me as a former securities lawyer, this follows an SEC approach to full and fair disclosure of material items. This is information that is material to someone who is engaged in a merger vote. Some may push back and say you don’t understand this payment is being made to the CEO because the CEO has worked long and hard for this credit union and was perhaps underpaid in the past and now is receiving some sort of lump sum. My response, is ‘OK, whatever. Just tell the story. Tell the story of the CEO. Tell the story of why this payment is necessary and appropriate and disclose it.’ Some say this is regulatory burden. I look at this as regulatory relief, and the members will benefit by having disclosure of this information made public, and also a sufficient period of time to reflect and ask questions of other members of the credit union.”
Mr. McWatters is right. Ask yourself whether you became more confident–or suspicious–the last time someone said they didn’t want any questions asked or a light shined their way. Your gut instinct is right: they're trying to hide something ugly.
NCUA this week has the opportunity to get rid of an ugly (truth) blemish on the face of the credit union business model. And wouldn't that be lovely.
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.info or @FrankCUToday.
P.S. Speaking of lovely, just a reminder if you're seeing some strategies and ideas for 2019 to better serve members and grow the credit union, the CU Tomorrow Conference is just $499. It's set for Sept. 9-11 in Austin. Make sure to sign up before the meeting fills up.