‘Risk’ Capital at Community Savings

Really, this is for Community Savings Credit Union members.

For reasons that are not fully shared, my credit union wants to adopt a new hybrid capital structure, with 5 new classes of ‘investment shares’. Members of Community Savings are being asked to log into a special general meeting May 15th, to consider a new set of credit union ‘Rules’ (essentially bylaws).

The package of changes include some that may be called ‘housekeeping’, but the significant change is the introduction of ‘investment shares’. The draft new Rules would give the board broad powers to issue investment shares on terms they may choose. The reasoning, however, is non-specific, “…to allow CSCU to offer investment shares to certain members for the purpose of providing capital funding for projects that benefit our members, including investments to broaden our reach to our communities to support increasing credit union membership, launching new growth initiatives, investing further in technology and infrastructure, and other projects designed to improve the member service we provide.”

Credit unions conventionally raise share capital from their members, as a ‘consumer co-op’.  This ‘risk’ capital is usually comprised of member ‘equity shares’ and the retained earnings of the credit union; and will equal 5%+ of total assets. If the credit union is reasonably profitable earnings can provide capital to support growth of the business. This CSCU proposal is implicitly saying that current earnings and anticipated earnings at CSCU are not sufficient. I note that earnings in the last two years have been low. At September 30, 2023 CSCU reported no member ‘equity shares’ and @$39 million in accumulated equity. CSCU’s current shares are deemed to be liabilities (or ‘non-equity shares’) and are not categorized as ‘equity capital’ (see note 12 on the year-end financials).

The proposal opens the door to a significant change but no background information is provided. CSCU is not putting forward (a) a defined need, (b) any reasons why this approach to raising capital is chosen over others, or (c) a plan for implementation which members could evaluate. As a member, it is almost impossible to assess the proposal since the ‘problem’ is not defined.


These ‘investment shares’ are in addition to the ‘membership shares’. Most of the rights of ownership are attached to membership shares.  Current shareholders will retain the ‘membership’ voting rights when it comes to routine business – annual meetings, elections, etc.  However, if these changes are approved by CSCU members at this meeting, some future corporate changes may require the approval of these other classes of shareholders.  Similar structures have hung up mergers in other credit unions. I note that these draft rules give the board the right to redeem these shares, which may partly address an impasse with a class of shareholders.

Additionally, these shares are given preferred share status. If there is a corporate reorganization or financial rationalization in the future these investment shareholders would have a first claim on the net assets of the company (@$39M in retained earnings and contributed capital). These net assets are the ‘social wealth’ that has accumulated in CSCU over its history. Current members will be conceding their claims on this ‘social wealth’ to these prospective investors. But these nuances of a hybrid capital structure are not discussed in the CSCU notice.

There is no elaboration on whether existing members will be given an option to buy ‘investment shares’.

The case for these proposals should be put to shareholders more completely. Why the urgency?  This might have been considered at the next AGM.  Why five classes of investment shares?  What is the business strategy behind the proposals?   How do we mitigate downside risks?


As proposed, the new Rules would grant the board discretionary powers to enter into contractual arrangements with up to five new shareholder groups.  Notably, there is no cap on the number of investment shares that may be issued. The dividend rate on investment shares will be set out upon issuance, and dividends payable will be take priority over dividends on membership shares.   

No dividends have been paid on ‘membership shares’ by CSCU for at least a couple of years as earnings were too low. Improved earnings will be necessary to pay dividend on these new classes of shares. It would appear that future dividends are unlikely on ‘membership shares’.   But shouldn’t member-owners be getting dividends?  The directors should disclose the prospective board policy on dividends if CSCU adopts these new classes of investment shares. Specifically, will membership shares be getting dividends?   

Conflicts of Interest

The introduction of new ‘investors’ with significant interest in the performance of the business may also bring potential conflicts of interest.  If an investor, or group of investors, is entering into these arrangements on an understanding that some related activities are being undertaken or ‘capitalized’, there is a need to ensure that the interests of CSCU are not being compromised.  And, by extrapolation, there is a need to ensure the interests of CSCU’s core member-owners are not compromised. But no information is provided on the board’s intentions.

What is the proposed disclosure by the board to member-owners regarding the terms, conditions, and relations with these new classes of investors?

The big question remains, “WHY?”  There is no business case for these new ‘investment shares’. The shareholder’s meeting is a deliberative assembly, to use Roberts Rules language.  The proposal does not invite deliberation.  The board has proposed that the board’s powers be significantly expanded without a real justification.  What is need for capital?  And why is this the best way to build our capital base? And what is the plan?

As the special general meeting is online, CSCU members will not have opportunity for a free exchange of views and debate. Paul Finch makes the argument against online meetings well in a recent Globe and Mail oped. I post this to encourage some reflection and highlight some of the trade-offs and risks arising with the proposal.

2 thoughts on “‘Risk’ Capital at Community Savings

  1. Excellent points and this creates a huge problem as it really deconstructs the cooperative nature of credit unions. When capital funding does not have an explicit purpose its misuse will always be blamed on those that out of ignorance voted for it.
    With fewer and fewer credit unions in the province and the recent financial results of a few larger ones what does a cooperatively minded individual have as a choice if something like this becomes a norm?

  2. Ross G, hope that you are well. Curious to read your blog post. I am no longer a member of CSCU and offer no comments other than generic regulatory observations.
    Your post lists several simple, thoughtful questions that strike me as entirely reasonable. That you – an industry veteran, thought leader and former CEO – has such questions about their own credit union does not bode well for less informed members. I applaud your efforts to encourage credit union members to actively engage in matters that impact their credit union.
    Cooperative principle #2 is “democratic member control”. Credit union rule changes vary a great deal in their technical complexity; topic familiarity; expected impact; potential risks and more. Credit union proposals should arguably apply commensurate protocols to their members to ensure informed, engaged and democratic. This may include credit union providing their members with proposal specifics; relevant background explanation; member/executive rationale; impact to credit union; perhaps a FAQ; and other pertinent information to members in a simple, written document. Information may be circulated appropriately in advance of a well-advertised meeting. Complex proposals may also include a consultation and/or education prior to the member vote.
    Best practices are often helpful. Membership participation may be boosted through online and/or postal voting options; use of pre-scheduled events (e.g. AGMs); and ample timeline warning. Member owner input may be encouraged through use of a motion for each thematic component of the proposed changes, so that members can approve or decline each topic rather than face an all-or-nothing omnibus proposal.
    BCFSA oversees rule changes at BC credit unions. I would hope that their protocols prevent any credit union from protecting member interests and from discouraging any hoodwinkers.
    Keep asking questions. All the best.

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