Evading Accountability: AGM reporting

Why is the standard for credit union financial reporting to Annual General Meetings so much lower than other corporate entities? Other financial institutions? Credit unions in other provinces?

Earlier this year, I filed a complaint to the BC Financial Services Authority (‘BCFSA’) regarding the financial statements placed before a credit union annual general meeting. In that case, the credit union had placed ‘condensed financial statements’ before the membership meeting for acceptance. The condensed financial statements are a 4-page summary of the complete audited financial statements. The complete statements usually run to 40 or more pages. In response to this complaint, and to a subsequent letter to the Superintendent of Financial Institutions about the same practice at another credit union AGM, I was told that the credit union “is compliant with the requirements set out in the legislation.”

While I think the BCFSA reading of the legislation may be incorrect, I will put that thought to one side for now and address it in the next section.

In all corporate entities, the annual general meeting of shareholders (or members) is the key means by which those shareholders can hold the board of directors to account. It is for this reason that annual general meetings are a fundamental part of all corporate legislation. Legislation sets out the minimum reporting requirements for these meetings.

The BC Business Corporations Act, the BC Strata Property Act, the BC Societies Act, and BC Cooperative Associations Act all have provisions regarding the reporting out to annual general meetings. Similarly, Federal legislation, like the Bank Act, set out minimum standards.  Most importantly, none of this legislation makes provision for the use of condensed financial statements. Further, under company legislation in BC, all shareholders must unanimously agree to waive an audit; this provision emphasizes the importance of complete audited financial statements.

To be clear, the condensed statements provide far less information. The condensed statements provide no details on key issues, which are reported in the notes to the full statements. This includes information on credit risks (e.g. expected losses/delinquency), interest rate risks, operating costs & risks, asset acquisitions & dispositions, and related party transactions.  One can easily deduce that presenting the condensed statements at an AGM reduces the number and scope of questions.  

The larger principle is that shareholders must be provided adequate information to allow them to protect their interests, as investors and/or as members of a community. The information provided forms the basis upon which shareholders ask questions, support changes to corporate bylaws, elect directors, and, beyond the AGM itself, choose whether to invest or divest.

The broader public policy question is why the BC legislation allows a $28B credit union to report to an AGM using condensed financial statements when much more is required of a strata corporation, the Vancouver Art Gallery or the YWCA? 

The Law  

Section 74.1 of the Credit Union Incorporation Act says, “The directors of a credit union must place before each annual general meeting (a) financial statements prepared under section 129 of the Financial Institutions Act …”  Section 129 of the Financial Institutions Act says, “A financial institution must prepare its financial statements in accordance with generally accepted accounting principles and with the regulations.”

I disagree with the BCFSA on this point. In my view, condensed financial statements are not fully in accordance with generally accepted accounting principles, as set out by the Standards Accounting Board.  Readers with accounting backgrounds may better understand this to mean IFRS standards.  The auditor’s report on these ‘condensed’ or ‘summary’ statements note that IFRS standards are not met.

When the Financial Institutions Act and the Credit Union Incorporation Act were brought into force in 1989, the option to use condensed financial statements was selectively introduced for credit unions.  I worked in government at the time.  Specifically, credit unions were allowed to ‘substitute’ condensed financial statements for full financial statements that are to be mailed out to members at least 10 days before an AGM (FIA s.128(4)).  This ‘substitution’ was sought by credit unions to reduce mailing costs.  However, this ‘substitution’ was permitted only if copies of full financial statements were available at the credit union branches. Now, essentially all credit unions mail out condensed financial statements to their members.

Some credit unions are choosing to ‘substitute’ condensed financial statements for full financial statements at AGMs as well.  BCFSA believes the law permits this. In correspondence they did not explain how they came to this conclusion.   

To be clear, in the FIA, no similar option for the use of condensed financial statements is granted to other financial institutions, like insurers or trust companies.  These companies’ AGMs must see full financial statements.

The Interests

Whose interests are best served by not placing the full financial statements before the annual general meeting?  

It is clear to me that those accounting for their performance at an AGM, directors and management, have a substantial interest in how and what information is shared.  These are the parties responsible for ‘managing’ the business, and their interests are in neither being embarrassed nor deposed. It is for this very reason that minimum standards are set out in legislation to protect shareholders. 

Governance accountability is the issue. And this is a growing concern as credit unions in BC are becoming larger and more complex.  Information flows to shareholders are being constrained and shareholder engagement is weakening.  For example, a decade ago, I managed a smaller credit union and AGM attendance was 2-3% of the membership.  By my count, the number of members at the Vancity online AGM this year was @ 1/1000^th of the total membership.  

Since credit union ownership is widely distributed, shareholding requirements are small, and deposits are insured, there is little reason for members to actively pay attention to the business.  And, on the other side, directors and management have little to gain from sharing more information that might lead to questions being asked.

This leads to a conundrum for legislators and the regulator.  The legislation relies on ‘owners’ of financial institutions to put good directors in place and to limit the risk-taking of managers.  But at scale, co-operative ownership may not always be up to this task.  It is for these reasons that the legislated minimum standards for reporting must be high enough to encourage shareholder participation and questions.    

Legislative Changes

Whether or not the BCFSA have got it wrong, changes to the law may be needed. I suggest BC remove the option to ‘substitute’ condensed financial statements for mailouts to members.  Let’s have the full financial statements posted online instead. Doing so would also remove the temptation to ‘substitute’ condensed financial statements for presentation at the AGM. 

The legislative provision to allow credit unions to ‘substitute’ condensed financial statements for mailouts to members made sense 35 years ago.  But it no longer does. The world has moved online.

The full financial statements can and should be online.  Many credit unions already post the full financial statements on their websites as good practice.  It is time to make this a legislative requirement.

My proposal would bring BC in harmony with what is required in Ontario. Here is section 177 (4) of the Ontario Credit Unions and Caisses Populaires Act:

The public policy objective is to ensure that credit union members either have, or have easy access to, the year-end audited financial statements well in advance of the AGM.  I propose FIA s.39.48 be amended to require credit unions to post their audited financial statements online, and to either mail out complete financial statements to members or to mail out a notice to all members which includes the link to the online version.  (The related subsections of FIA s.128 should be repealed).   

Ownership

The minimum standards for reports to an AGM are only one concern.  The broader concern is the vibrancy and effectiveness of co-operative ownership & governance, especially in large credit unions.  The directors and managers must be accountable, but the accountability mechanisms are being undermined and the role of the member-owners is being diminished.  With consolidation, this may be the biggest issue confronting the credit union system.  I hope to expand on this subject in other posts.