On paper, credit unions are ‘consumer owned’, but the reality is something different. Cooperative ownership is the unique feature of this form of business, each member-owner has one vote in major decisions, but as credit unions grow the ‘owners’ are eased out. Their control over the business is lost. In truth, consolidation means that member-owners, and their representatives (directors), have less and less of a role in defining the future.
I recently had a conversation with a CEO of one of the largest credit unions in BC. The talk turned to the process for director recruitment. The case was made that elections were not really necessary, as the board’s nominating committee (with management assistance) carefully selected skilled professionals to stand, and often to be acclaimed. Those individuals who might be disruptive or non-compliant were dissuaded from running for office.
What was glaringly missed was that elections, in a democratic control structure, are the primary means by which member-owners may hold directors accountable, and that by putting barriers up to potential candidates, the ‘insiders’ were essentially denying member-owners a choice. Effectively, member-owners were no longer given the option to ‘kick the bums out’.
Indeed, many large credit unions have implemented rules to restrict who may run for office, how campaigns can be mounted, what information can be shared with the membership, and who qualifies for an endorsement. All these measures limit healthy democratic competition, debate and member engagement. The constraints are rationalised as protecting the organisation.
They do not protect the organisation. These measures principally insulate sitting directors and executive management from criticism and challenges. In the end, they also lead to a less diverse set of directors.
In effect, basic rights of ownership are being ceded to the insiders.
And there is more. In credit union rules, and progressively in the Credit Union Incorporation Act, other member-owner rights are being limited. The rights of members to call a members’ meeting, to bring matters before a members’ meeting, to bring forward a special resolution, or to recall a director are all being undermined. For example, at Coast Capital a member sponsored resolution or special resolution must be filed with the Board at least 90 days prior to an Annual General Meeting and only considered if the Board agrees that is should be.
It is hard to think of other democratic entities or corporate entities where these basic citizenship and ownership rights have been so undermined. Within municipalities and school districts there is healthy appreciation of democratic accountability, and open elections. In publicly traded companies significant shareholders are often instrumental in leadership changes – but of course in credit unions, with widely dispersed ownership, such things are nearly impossible – and then add the other barriers that are put in place. In banks, publicly traded shares provide a secondary means by which owners communicate with directors.
The erosion of member-ownership in credit unions presents a governance and risk management problem. Within conventional corporate models a functioning owner accountability mechanism will constrain risk taking by the board and executive management. Without a vigilant ownership group in a credit union, a greater reliance is placed upon the regulator. This has to be a concern at FICOM and was likely a big reason for them to produce a Governance Guideline years ago.
The FICOM Guideline proposed greater transparency in reporting out to members, which was good. However, well short of what may be needed to truly revitalise ownership interests.
So what we have is a substantially disaffected membership and a steadily declining number of directors being elected, as mergers continue. It is noteworthy that not one of the 16 directors of the Credit Union Association of Canada is an elected director at a credit union. The system is no longer ‘consumer’ driven.
Member-ownership is the fundamental piece of the co-operative model. The absence of an engaged membership makes the organisations vulnerable; to insider abuse, excess risk taking, complacency and, consequently, an over-reliance upon regulators.
I appreciate that some will argue that market growth and member satisfaction may serve as a proxy for democratic engagement. I have heard the ‘dollar votes’ argument. But that is only half of a healthy accountability system, and it may actually encourage imprudent risk-taking.
Many smaller credit unions can still function well with the traditional co-operative ownership model, but the larger ‘near bank’ and ‘bank’ credit unions present a big challenge. In the absence of an active ‘owner’, government, the deposit insurer, and other financial sector players are exposed.