By Frank J. Diekmann
When NCUA investigators began pulling back the sheets on the bodies at the crime scenes, it didn’t take long to deduce that the motive was robbery. Take, for example, the case of the “volunteer” board at one credit union that was being acquired in a merger that had signed its board members up for expensive season football tickets for three years as a little going away present to itself before closing the deal.
In another case, the team from Law & Order: CU Mergers uncovered a total payout in the low-seven figures paid to 18 people at an acquired credit union, with the bulk of that money going to four people.
And then there was another deal, and this is a standard MO, where the merger agreement 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 get the full five years,” staff said.
In other words, it was the kind of “no show job” you might have previously seen during an episode of the Soprano’s. But the thing is, this wasn’t fiction, and credit unions aren’t supposed to be run like the mob. In fact, they're meant to be just the antithesis.
So, while some CU “leaders” won’t be applauding because they are counting on a sweetheart retirement package hidden from the member-owners as part of a merger, the rest of you should be on your feet clapping for Mark McWatters and Rick Metsger of the NCUA board for a proposal that pulls up the shade and lets the sunlight shine on what’s really in so many CU merger agreements.
The Ugly Truth
As I wrote here in March, “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.”
That “ugly truth” was and is that in many merger deals some large, aggressive CUs are enticing the management teams and boards—yes, boards--at smaller, well-capitalized credit unions with payouts from the acquired CU’s capital. The same net worth that belongs to all the member-owners. The same member-owners who are asked to vote in favor of mergers because it’s good for the credit union, but who are never told it’s even better for a select few.
The practice is anything but isolated. At the recent NCUA board meeting, agency staff said that in “75% to 80%” of mergers reviewed they had found “significant merger-related compensation” being paid to people at the acquired CU, news of which was never shared with members.
Transparency & Communication
Back in February during CUNA’s GAC, NCUA Chairman McWatters had called for “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.”
Now the agency has delivered with a proposal now out for comment aimed at doing just that, including greater transparency when it comes to benefits and compensation that may be paid to the five highest paid employees and board/supervisory committee members of the CU that is being acquired.
The proposal also provides for better opportunities for members of a CU considering a merger to communicate with each other. That seems appropriate, doesn’t it, that members in a democracy ought to have a means to be in touch with each other? The plan, which borrows from rules NCUA put in place years ago to address the pull-the-shades-down sneakiness endemic in attempts to convert to banks, is a terrific idea in keeping with the spirit of credit unionism.
This is 'Important'
“I think this rule is important,” said NCUA Chairman Mark McWatters during the board meeting. “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.”
NCUA Board Member Rick Metsger, responding to all the complaints and pushback he has heard from credit unions about the cost of regulatory burden, must have relished being able to hold up a mirror to credit unions and say, “As I frequently hear when I address CU groups, these dollars belong to the members of the credit union.” He later added, “The net worth of the credit union belongs to the member and they deserve a full and transparent accounting.”
Indeed. The. Members. Do.
Another Kind of Transfer
There is one little hitch in that plan, and that is for now the proposal only applies to federal CUs. The NCUA board did indicate it is also open to considering extending the rule to all federally insured credit unions.
In response, the CEO of the National Association of State CU Supervisors, Lucy Ito, said, “While some state supervisors may share NCUA's concerns over transparency and member interests, states may also view this as a credit union governance issue and business decision as opposed to an insurance matter.”
But this is really more about assurance than insurance, i.e., the assurance that at the places that champion one member, one vote equality, the votes of insiders don’t count for more. Talk about a rigged election. And state regulators, who for decades have made a case out of the overhead transfer rate, ought to be just as outraged as the two NCUA board members over what’s going on in many mergers—the underhanded transfer.
NCUA is now accepting comment on the merger disclosure proposal. For those of you opposed to what the NCUA board is proposing, all I ask is that you begin each letter with the words, “I believe this information should be kept secret from the member-owners because…” And I have to add, it’s going to be fascinating to see how the CU trade groups respond. Will they take the short-term view with some Olympic-caliber, finely balanced fence walking as the preachers and promoters of credit union democratic virtues try to assuage some of their biggest dues-payers? Or the long-term view of what’s best for credit unions and their members?
The trade groups—as well as every credit union that cares about the future of the movement—have a singular opportunity to put (the members’) money where their mouths are and to stand up for the right thing. Because integrity never goes out of season, and that’s the only season tickets any CU should ever buy.
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.info or @FrankCUToday.