The Problem With Credit Unions.

It should be stated with utter clarity from the outset, we like credit unions. We think credit unions are both essential, and noble institutions. Still far too many people are disenfranchised from mainstream banking and lack access to affordable lending. For this reason, credit unions are invaluable, and should be both applauded and supported.

But (you knew there was a but coming right?) that doesn’t mean a noble institutions[s] can’t have issues. Issues that should be resolved. And credit unions are no exception.

In order to understand the issue we’re referring to, it’s important to understand the ownership structure of credit unions. Credit unions are owned by their members. There are no shareholders (in the conventional sense) and no individual can ‘own’ any more of a credit union than another member. All major decisions are made at the annual general meeting (AGM) and whether you have £1 or £10k in savings at the credit union, one member gets one vote.

The theory behind this is plain. Whilst the credit union is run, on a day to day basis, by a board of directors and senior management team, no major decisions can be taken without the approval of the members at large. This, again in theory, keeps the credit union tied to the community it serves and stops any small controlling interest ruling unilaterally. An example being the election, or re-election, of all board members and the level of dividend paid out to members each financial year.

AGM’s involve numerous votes and whilst a board and management can recommend a course of action, the decisions come down to the members present. The concept that members ultimately both own credit union and wield direct control over it is both a key selling point of credit unions and one they are very keen to promote at every opportunity.

So, what is the issue we’re referring to then?

The issue is that at almost all credit union AGM’s have historically very low levels of attendance. That is to say, low levels of attendance beyond the board, staff, family members of staff and close friends who have been long time supporters. As a result, there is effectively zero accountability for most UK credit union boards when it comes to what are supposed to be the important decisions that they make. Therefore all decisions, good and bad are all supported and approved at AGM’s.

Let’s look at some numbers for a moment. Almost all credit unions insist that all board members, staff and volunteers become voting members. Credit unions in the UK vary in size enormously. So let’s consider a medium sized credit union. It is likely to have 8–10 board members, a staff roll of somewhere between 6–18 people and maybe 5–10 volunteers. That means roughly 30 people on average who are all likely, or in fact probably obliged, to attend the AGM. These people will sometimes bring spouses to the event, who are often also members. There are then likely to be a few long-time supporters who come to every AGM to show that support and meet their friends on the board. We’ll say, for the sake of argument that roughly 10 or so supporters come to an AGM. You now have a block of between 40–50 people who will all vote in support of any motion proposed by the board. Therefore, for any motion not to carry there needs to effectively be the best part of 100 regular members at the event. This is because it is unlikely that these unconnected members would all vote unanimously in one direction on any single issue. So you need a sizable sampling of regular members to make a “No” vote ever even slightly possible.

Based on our experience. virtually no credit unions in the UK has held an AGM in recent years where there have been 100+ attendees beyond the board, staff, long-time supporters etc. For every credit union where this is the case this means there is effectively no accountability whatsoever for board and senior management decisions.

To cite a specific example, we are aware of a Midlands based credit union that has held over 50 votes in the past decade of AGM’s. Whilst we can’t comment conclusively on AGM attendance, it has never been less then 35 and never more than 70. Therefore, all attendees multiplied by the number of votes means there have been over 2000 votes cast in that time period. (It is realistically more than that but we cannot say with any level of accuracy). Of those 2000+ votes cast in over 50 voting issues, the total number of “No” votes (that is individual “no” votes, not votes where the outcome was “no”) was 1. Yes, that’s right 1!

That is the equivalent of 0.05% of votes being against the credit union management proposals. Or an approval rating of 99.95% in favour. Let’s be frank here, Kim Jong Ill would look at voting results like that and think they look a bit fishy! Whilst we remain willing to consider the possibility that credit unions management is just well supported, no democratic voting system delivering results like that, again and again over a prolonged period is working.

But the fact is there is no incentive for credit unions to do anything about this. It should be noted that most (if not all) credit unions advertise the AGM very visibly. Most credit unions have it written into their by-laws that they must tell all members in multiple ways. There is undoubtedly a high level of apathy amongst credit unions membership’s in general as many members simply want to access the financial services and have no interest in getting involved in the running of the organisation. There is no suggestion that any UK credit unions are hiding their AGM or in any way putting up obstacles to their members attending. However, it remains a fact that this clear issue of low attendance and the resulting votes that are absurdly lop-sided works in the senior management’s favour. Why would you want to change at situation where you are never likely to ever face any serious oversight, or heaven forbid, be overruled on anything? Whilst you continue to make sure everyone knows they can come, you have no real desire to make sure that they do.

This is a real problem. Because this means that badly run credit unions are left to carry on being badly run. This is not to suggest credit union leaders aren’t to be commended. It’s just an arithmetic fact that some credit union board members are not up to the task and some people hired to run a credit union won’t be the best person for the job. If we could gather all credit union board members in one room, we’d like to think they would be willing to concede that theoretically some of them were weaker than others in their role. But these badly run credit unions effectively have no mechanism to do anything about this. So the weak board members are re-elected and the decisions made by the untalented senior management are approved and re-enforced. The only way these people can be stopped is if they themselves one day say “You know what? I’m not up to this, I need to step down and let someone who knows what they’re doing take over!”. You hopefully don’t need us to point out the problem with needing that to happen.

Credit unions boards would probably also be keen to point out that boards often have what’s referred to as ‘Supervisory Committees’. These are supposed to be board members who’s primary role is to stand up for the rights and interests of the members in general. To be a sort of watchful eye over the decisions of the board, to be their conscience. But again, whilst the principle of sound, the practise is flawed in the extreme. Let’s return to that anonymous Midlands based credit union. That credit union serves people on low incomes, quite often from deprived areas. Members are often single parents with low levels of educational qualifications and female members outnumber men by a noticeable margin. It is also worth noting that the community this credit union serves is highly ethnically diverse.

The credit union in question has a supervisory committee. It consists of three men, all white. All well over 50. None of whom have ever lived on a low income. All educated to degree level at least. All married and either retired fully or semi-retired. These are the people standing up for low-income, single parents. People often with no schooling beyond the age of 16 and living in highly diverse communities. There could not be more of a disconnect. Who are these board members more likely to fall in line with? The members we have described, or the other board members who are their friends. Who play at the same golf club, drive the same type of Audi and who’s wives socialise regularly in the ample back garden of the six-bedroom detached house they live in? Well, it’s hard to say isn’t it.

What can we do about this? Well, not much if truth be told. Any serious shift in the way credit unions are run would require the clear support of the board and senior management that so plainly benefit from the status quo. Likewise, the apathy of members generally nationwide is a significant hurdle to overcome. So it’s hard to see how something can be done about this without some sort of drastic action. We would make the following suggestions though:

• Board members should not be allowed to vote on the election or re-election of their own board.
• Certain (key) decisions should only be able to be voted upon in the circumstance where members who do not work for the credit union outnumber those who do by a ratio of at least 2/1.
• Any ‘quorum’ should consists of assembled members excluding board members and paid staff.
• Any credit union that does not register at least 1% “no” votes over a period of time should be subjected to external review from a body with power of oversight.
• Credit unions should have term-limits imposed for key board positions.

It is worth, at this point, re-stating out support for credit unions in general. They are good things, run by people who are (on the whole) good people. The World is a better place with credit unions in it. However, it would be supreme arrogance to assume everyone who runs a credit union in the UK is both qualified and competent enough to do it. Likewise, it would be worrying for any credit union to claim that every single thing they have ever proposed was, in hindsight, the right thing to do. Therefore any credit union should be extremely concerned if their decision making effectively has zero oversight.

It is a simple statement to say that the people running credit unions should want, in their heart of hearts, the best for their credit union. It seems impossible for anyone to truly believe that increased oversight and better levels of accountability can be anything but a good thing for any sector. It requires those running credit unions to be selfless and think of the good of their institution over what makes their life easier. One cannot truly believe that a 99.95% approval rating means you are absolutely getting everything right instead of the plain conclusion that votes at the AGM are a mere ‘rubber stamp’ excercise.

The onus to resolve this is clearly on the credit unions themselves. Only time will tell if their leadership will have the courage to do the right thing.