A Down Under Observation That Belongs Up Front

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Six years ago in a hotel meeting room in Sydney, Australia, some of that country's trade association executives were discussing how credit unions Down Under had gotten into such a predicament. At issue was the troubling problem of "demutualizations," which is the general term used in the rest of the world for what in this country are known as "charter conversions" to a mutual savings bank.

Due to a different regulatory environment-specifically, Australia's CUs and banks are overseen by the same regulator, sort of an NCUAFDIC-you can't make an apples-to-apples comparison to the U.S. situation; it's more of a peanut butter to Veg-A-Mite comparison. Yet the concept, and the sad results, are the same.

During that discussion the president of Australia's trade association, CUSCAL, was asked why any member of a credit union in their right mind would vote in favor of demutualizing and becoming a bank? The response was a frank admission of failure in one particular regard, and it was prescient insight for the Americans who were in the same room, although it was largely ignored. "We have forgotten," explained the CUSCAL representative, "to engage our members as owners."

I've pointed before to that observation in this space on other occasions, and believe the statement should be reworded as the first question every credit union and trade association leader asks themselves each morning: "How will you engage the members as owners today?"

Last week the slogan for this year's International CU Day was unveiled: "Members Make It Happen." Not if they don't know they're members.

What made the Australian's statement come so vividly back to mind was a confluence of events in the past weeks that just scream how America's credit union community could learn much from their fellow cooperators Down Under. Most dramatically, 71% of those who cast votes in Community Credit Union's bid to become a bank voted in favor of doing so. Incredibly, they essentially said, "Yes, I favor doing away with my being equal to fellow members, and for giving up my stake in the credit union's equity so that a small group of insiders can profit from it." In short, "I surrender my vote and my money."

No person who has been "engaged as an owner," that is, who understands how the credit union works, would ever cast such a vote. Their ignorance toward what's about to happen to them is exactly what Community Credit Union and its soon-to-be-millionaire board and management were counting on.

It also shows how easily those who don't feel "engaged" can be bought off. At Community, it took a measly $20,000 in cash prizes. Just 36,000 out of an eligible 170,000 ballots were cast, or 21% of members took time to vote-ironically, a vote to give up their vote. Approximately 25,000 members voted in favor, which means that just about 11% of CCU's total membership of 233,000 were able to turn a $1.4-billion credit union into a bank. All of that, of course, depends on how this is resolved, as NCUA has invalidated the ballots.

As an aside, it must be noted that during Community CU's special member meeting last week (see story, page 1), one representative of the law firm that is profiting from pushing these conversions went to lengths to point out to reporters how everyone, and specifically conversion-opponents, was given time to voice their views. That's mighty generous, had they allowed those same voices to be heard before sending out the ballots.

Indeed, the very first item on the agenda at the meeting in Texas included this statement: "Any motions to delay, table, postpone, amend, etc., the vote on the Plan of Mutual Charter Conversion at this special meeting or to adjourn the special meeting prior to a vote being taken on the Plan of Mutual Charter Conversion will be ruled out of order as a matter of law." So much for that pesky democracy stuff.

Raising the issue of law is an intriguing point. I had an interesting discussion last week with one credit union attorney about whether, especially in a Sarbanes-Oxley environment, board members at credit unions that convert haven't violated their fiduciary duty to the membership. Exploring that issue in the courts, unfortunately, puts the credit union at the advantage, as it has the money (and the CUNA Mutual bond coverage) to pay the lawyers.

And as another aside, you almost had to laugh last week when FDIC Vice Chairman John Reich told members of Congress that credit unions have a competitive advantage over community banks. That would certainly explain all the community banks converting to credit unions, and why Community the credit union says its members will be better off when it's Community the bank.

And speaking of Congress, Rep. Barney Frank sent a letter to NCUA Chairman JoAnn Johnson expressing concerns over the agency's move to invalidate the charter conversion ballots at both Community CU and OmniAmerican CU, another Texas CU up to the same shenanigans that has been happy to let Community CU take the heat. A self-proclaimed Massachusetts liberal complaining that a Republican is being "hyper-technical" in looking to protect the membership and prevent a mutual co-op from becoming a for-profit bank?!!!

Yet another member (of Congress and a credit union) who has not been engaged as an owner.

Frank J. Diekmann is Editor of The Credit Union Journal.

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