One Answer To The Controversy Around Conversions
I believe I have a resolution to the controversy over credit-union-to-bank charter conversions. And just like the mother tongue, fish and chips and 007, this solution comes to us from England: commit to giving any insider profits to charity.
This should make the best out of a bad situation, and I can't imagine how the proponents of such charter conversions could possibly object. After all, the consultants and law firms that are filling their own pockets by emptying those of others via charter conversions are always arguing that it isn't insider greed that is driving the move, but rather the institution simply has no choice. In order to compete, the institution must offer more products, must be able to serve more people, and needs relief from capital constraints, the consultants suggest. (As State Employees CU CEO Jim Blaine frequently points out, a credit union is not an institution, but there remain more than a few who have difficulty grasping that concept.) The fact that members of the board and senior management (and not the institution) always end up with riches after the mutual savings bank converts to a commercial bank, and they always do, is pitched as some type of windfall benefit that no one could have ever seen coming, and certainly was never a motivation for the conversion. Why, perish the thought!
So here's a chance for those proponents to put money where their mouths are.
Charter conversions aren't an American phenomenon. England saw an extraordinary wave of conversions among its credit union-like building societies. Despite the upheaval, Adrian Coles, who heads up the country's Building Societies Association, takes a remarkably balanced view of such conversions (known as demutualizations outside the U.S.), going as far as to note that if access to more capital is truly needed, "that's a valid reason to demutualize, in my opinion. The BSA is philosophically apposed to demutualization, but we do understand where the other side is coming from."
You always get a different view when you're on the other side of any pond, and this case is no different. Now that many of those in the U.K. that have demutualized have been operating as banks for a while, the changes in their operations can be seen. In addition to branch closures and changes in culture, "on average, management expenses plus dividend payments are now 30.25% higher than management expenses alone in the converted institutions. This is the cost increase resulting from demutualization," Coles said of the stock-based institutions.
In Australia, today there is one credit union fighting a takeover by a bank, and England saw a similar scenario. One early defensive measure, explained Coles, was aimed at hit-and-run profiteers who would join a building society in order to get a payout when it converted. In this case, the building society adopted a policy that any member had to belong for at least five years in order to profit; profits for newcomers would have to go to charity (when a building society demutualizes members are paid a premium over shares, unlike the U.S. where members actually give up their shares and equity for nothing).
Every credit union in this country should adopt a similar bylaw right now-with a twist. If it is indeed concluded that the credit union has no choice but to seek a charter conversion, then any insider profits or stock deals that would otherwise be reserved for board and management at an initial public offering should go to charity, instead. Indeed, each member of the board and management team could even select the charity to which the profits are to go when the mutual savings bank goes public. The management team and board can buy stock in the same market and under the same conditions as any other consumer or former-member. (Don't feel too bad for the board-they'll still be voting themselves big meeting stipends after the conversion.)
How could anyone object? The consultants are always stressing how conversions are made solely to benefit everyone in the membership and that the board was acting in the best interests of all. Here's a way to demonstrate that, and help out some local charities, as well. This wouldn't be a poison pill, but instead a passion pill.
Already, as reported in this issue of The Credit Union Journal, we've seen one credit union make a related change. NCUA has approved Chocolate Bayout Community FCU in Alvin, Texas (see related story) to vote on a non-standard bylaw amendment that would require any proposal to convert to mutual savings bank be initiated by members at a special meeting, and not by the board of directors and/or management. The non-standard bylaw would help ensure that conversions are not proposed by those insiders, directors and management, who stand to benefit most from the charter switch, credit union officials said.
Both steps fit nicely with another observation made by Coles: "If you tell the world you are different, then you have to live the story."
A correction to a note in my column of July 4. The Florida league said it was not "forced to pull up stakes" and move to a new hotel for its annual meeting due to a conflict with CUNA Mutual's Discovery Conference, as I had implied. League spokesperson Mark Ivester said the league's contract with the Marriott World Center expired in 2003 after it chose not to renew. It has moved to the J.W. Marriott, where it plans to say for "years to come," Ivester added.
Frank J. Diekmann is Editor of The Credit Union Journal.