Disengagement – the absent owners

As credit unions merge we have a new problem. Members disengage.

A recent article neatly packaged the current management perspective for credit unions. ‘Customer retention’ was the primary concern with a focus on “immediacy, relevance, and trust”. Credit unions are encouraged to adapt their “systems and delivery models to meet those expectations”. This ‘marketing analysis’ would be similar at a bank.

The concept of ‘membership’ is lost. Has the co-operative ownership model been ‘out grown’? A member’s role as an owner in a co-operative enterprise is not being promoted and is disappearing.

THE ARCHITECTURE PROBLEM

The co-operative ownership structure means ‘one-member one-vote’.  No matter how many shares you own, you get one vote.  This is a democratic model.  But at scale, the cooperative ownership model has three key problems: dilution, dispersion, and disengagement.  

Dilution: The co-op ownership model was developed for smaller entities. Being one member among 500 enables one to participate in meetings and to have influence as a part-owner. That influence is distinctly different when you are one in 500,000. Participation becomes daunting. Diluted ownership also makes it difficult to organize with other shareholders just because of the scale.

In a conventional company, a small number of investors may own a majority of the shares, and so be able to compel a board to take some action. In a one member-one vote model this cannot happen. In a large credit union it is next to impossible to mobilize even a significant block of shareholders.

Dispersion: In large credit unions, ownership is dispersed among many communities & groups. A large credit union can span the province. Credit union members have little in common other than patronizing the same credit union. Vancity branches range from Chilliwack, to Vancouver’s West End, to Victoria and Alert Bay.

This contrasts with the traditional credit union. Traditionally, members had a bond outside of the credit union itself. This bond was a workplace, a church, a town, or an ethnic heritage. These ‘bonds’ of association brought with them parallel community structures that nurtured ‘community’ ownership of the credit union project.  Community meetings, newsletters, and other opportunities allowed member-owners to confer about their related credit union project. However, the large credit unions are dispersed and have no parallel community structures. There is no ‘community’ to which the credit union is ‘accountable’.

Again, organizing shareholders becomes very difficult.

Disengagement: Dilution and dispersion result in member disengagement and non-participation. Vancity provides one example.  The most recent Vancity AGM had approximately 500 attendees of approximately 570,000 members. Even then, a disproportionate number of those attending were Vancity staff.   To be clear, there was 1 member in attendance at the AGM for each 1100 members.  At Community Savings Credit Union’s most recent AGM that ratio was @1-50 (CSCU with @10,000 members).  At CCEC’s final AGM the ratio was @1-40 (CCEC was a small credit union with @3000 members when wound up in 2022).  Proportionately, as consolidation continues, fewer members are paying attention and taking ownership seriously.

These three factors are compounded by the fact that credit union members have only modest shareholdings. No shareholder has a significant ‘stake’, or investment, for them to monitor. And deposits are 100% guaranteed by provincial government deposit insurance.

OWNERSHIP

The interests of owners are distinct from the interests of directors and managers. In economics there is much written about the ‘principal-agent’ problem.   In this context member-shareholders are the ‘principal’. They delegate authority to the directors & executive managers (the ‘agent’) to manage the business affairs of the credit union.  However, the interests of the ‘principal’ and the ‘agent’ can and do diverge.  The owners have a responsibility to scrutinize the performance of the board/executive. It is up to owners to ensure their interests are being well served.

However, credit union owners are not vigilant. Member-owners do not attend AGM’s. They give little thought to the future of their ownership stake. And this void has given directors and executive managers an expanded role, and expanded powers. Credit union member-owners are unlikely to intervene if directors and managers pursue their own interests, take on excessive risks, or fail to perform well.

• Director elections are ‘non-events’. At Vancity in 2025, only @30,000 members out of 570,000 chose to vote in elections (@5% of the membership).

• Incumbency is the another indicator. Incumbent directors are now almost assured to be re-elected. The existing directors supervise the nomination process and endorse their preferred candidates. At Vancity, for example, only ‘endorsed candidates’ have been elected for twenty years. Nomination and election practices, campaign restrictions, and potential campaign costs, also dissuade outsiders from seeking director seats.

• Similarly, procedural obstacles prevent member-owners from initiating ‘member proposals’ or special resolutions. To place a resolution before an AGM it must be supported by @1% of the membership. But as one Vancity member noted a few years ago year, collecting @5800 signatures was too much to take on.

• Additionally, opposition to a merger is almost impossible to mount. Only the proponent has the names of the members and access to the resources of the credit union.

What we now have is an illusion of ‘co-operative democratic ownership’. In fact, it is political theater. Large credit unions are self-sustaining enterprises largely driven by the interests of executive managers, staff, and directors. The owners play a marginal role only.

I must emphasize, this is not because all managers, staff and directors are intentionally choosing this path of self-interest. Most are good people, but the ownership/governance structures are simply deficient. Directors would be hard pressed to ‘re-engage’ member-owners.

RISK TRANSFER

At a foundational level, the regulation of a financial institution relies on shareholders. Shareholders are the primary stakeholders. It is up to shareholders to hold directors & managers to account. Shareholders can and do constrain risk-taking. But with credit union consolidation and member disengagement, these mechanisms are not functioning.

The above leads to a BC Financial Services Authority (BCFSA) consultation now underway on credit union governance risks. The BCFSA background paper and draft guideline make no mention of credit union member disengagement. The BCFSA appears to assume each board is primarily responsible for recruitment of new directors. The consultation documents make no reference to risks arising when owners are not playing the role they ought to be. There appears to be a blind spot.

In the absence of engaged credit union owners, the deposit insurer, the regulator and government are exposed. The regulator has stepped in over the last two decades. Functionally, boards are now more accountable to regulators than to their member-owners. BCFSA has introduced more regulatory guidelines, more comprehensive reporting, and other measures.

I could argue that the provincial government is now the de facto owner. The only pressure placed on boards to perform comes from the regulator. And an exceptional share of the risks if an institution fails are borne by government agencies.

This transfer of ‘ownership risk’ has grown with consolidation. What is to be done? In short, there are three possible approaches:

1. Re-invigorate the democratic ownership model within larger credit unions. I do not see this as likely or, if pursued, it is unlikely to be successful. The basic architecture does not support it.
2. Reduce the level of deposit insurance. Currently, BC credit union depositors bear very little risk arising from poor credit union management. Reduced deposit insurance coverage would give some depositors a greater incentive to engage as owners.
3. Amalgamate all BC credit unions into one new provincial entity – a corporation that is owned, entirely or in part, by the provincial government. The Alberta Treasury Branch provides a model for such an entity. Alternatively, a hybrid ownership model may be created with some directors elected by depositors.

For consideration.