Coalition Study Suggests Co-op Conversion Solutions Across Industries

WASHINGTON – A coalition of consumer and cooperative organizations has commissioned a study which recommends credit unions and cooperatives of all sorts adopt some similar basic strategies to fend off attempts to convert them to a stock or investor model of ownership. The coalition members included the Consumer Federation of America, CUNA, CUNA Mutual Group, National Cooperative Bank, National Cooperative Business Association, and the National Rural Electric Cooperative Association. Drafted in late 2003, before the controversy began at the $619 million Columbia Credit Union, the study advised that increasing emphasis on high quality member services and member education in all the nation’s cooperatives would be key to helping fend off conversions. In the autumn of 2003, Columbia held a very sharply contested vote on the prospect of abandoning its credit union conversion in favor of becoming a bank. Although conversion backers narrowly won the vote, a later NCUA investigation into the ballot resulted in the agency disqualifying it. The credit union leadership has since said it would no longer pursue charter conversion. Recommendations For All The report surveyed the conversion phenomenon among credit unions, food cooperatives, housing cooperatives, mutual insurance companies, rural electric and telephone cooperatives and agricultural cooperatives. The report found that conversions are still a “minor phenomenon” for most cooperative industries but still require “sector-wide” attention. While greater ability to resolve financial challenges, access greater capital and provide more liquidity have all been cited as reasons for conversion across all the sectors, the study found that conversions usually do not originate with members. “Conversion, when it occurs, is rarely driven by members or by any real or perceived benefits to membership,” the report noted. “Instead, conversion appears to be driven more frequently by co-op staff, leadership, or outside consultants and service providers who stand to gain from the conversion.” The study found that, across all industries, when a co-op’s members are aware of the ownership of their cooperatives and are pleased with the services the co-op provides, then they are less likely to vote for a conversion. Similarly, co-ops which are well connected to their surrounding communities are less likely to be targets of conversion efforts from outside organizations. The coalition report recommended the industries form a roundtable of leaders who would develop a campaign of action across all the industries to help strengthen them competitively and make the less vulnerable to conversion. The roundtable would consider legislative and regulatory remedies that would include measures to prevent coop leaders from benefiting personally from the conversion and ease legislative and regulatory capital restrictions. Other measures recommended would develop campaigns among co-op members to make them more aware of the benefits of being member-owners and strengthen leadership training for officers and directors of cooperatives. The coalition reported that mergers have been the primary engine driving the decrease in the number of credit unions. In 1990, there were 14,500 credit unions in the U.S. and that dropped to 10,200 in 2002, about a 30% reduction on account of mergers. During the same period, the report noted, there were fewer than 30 credit union conversions. Significantly the study placed secondary capital needs and financial incentives to convert relatively low on the list of reasons credit unions convert to mutual banks. Conversion advocates have often pointed to secondary capital needs as a reason for conversion while conversion detractors have pointed to financial incentives as a key reason. Ahead of secondary sources of capital and financial incentives the report put field of membership restrictions, lending restrictions, and capital reserve requirements. To counter conversion pressures the report suggested that credit unions continue to focus on high quality member services and education. “Survey data consistently show higher satisfaction among credit union members than among bank customers,” the report noted. “Education and advertising that communicates member ownership and control and the commitment of the credit union to the local community also enhance loyalty. A satisfied, knowledgeable membership is unlikely to vote their credit union out of existence.” In addition to the more familiar recommendations to ease restrictive rules and regulations, the report also noted that CUSO’s could play a key role in helping credit unions pool their resources and abilities to attain even higher degrees of member service and satisfaction. “Credit unions with overlapping service areas with a community should be encouraged and assisted in exploring joint activities through CUSOs that benefit their membership and as alternatives to conversion,” the report added. -