July 24, 2006


  • As one stapled to the status quo you no doubt believe the "most informed possible decision" is to reject a conversion, regardless of the benefits. Using your flawed averages thinking and the "sky is always blue at a credit union philosophy", one could just cash out and move his business to another credit union - until those members in your view fail to make the "most informed possible decision" and vote to liquidate. Look, best practice if a credit union faces undue constraints is to face reality - look into the future and flee the status quo. It is also the American way. Why fear conversions - go with the flow and prosper.
  • From the author: Thanks for sharing your thoughts. If you reread the article, I believe you will not find a call to reject conversion proposals on principle. The point is rather that members (i.e. owners) of converting credit unions are entitled to fair value in exchange for their ownership interests. Picking up on your theme, the American way is characterized by transparency, fairness and democracy. If members have had the opportunity to estimate, demand and obtain fair economic value for what they own, in a process that embraces these qualities, then convert and prosper. As for the methodology used to estimate membership value, feel free to make suggestions on alternative approaches. Cheers.
    Melanie El-Sabaawi
  • A very insightful article followed up by an excellent response from the author. Cheers to you!
  • A member’s “ownership interest” is pure fiction if the credit union trade associations, complicit regulator and you succeed in stopping conversions. The members you claim as the “owners” which are “entitled” to certain things have taken no risk in the credit union risk / reward equation. Their ownership is un-perfected. Why do they deserve a windfall? Why are they “entitled” to anything, other than good service which they bargain for as any customer does and continues to do after conversion? In contrast, after converting to a mutual and issuing stock whether through the mutual holding company or full stock conversion, the member is faced with risk along with possible rewards if he steps up to the challenge and exercises his subscription right by buying stock in the IPO. Participation, action, and risk are all part or true cooperative ownership of a business enterprise. So requiring members to step up and exercise their subscription rights and take risk is perfectly consistent. Your formula (along with its myopic input assumptions) for valuing a “fictional ownership interest” just perpetuates the myth. Once in stock or mutual holding company form the marketplace can put a value on the enterprise using sound market driven assumptions. By the way, just admit that you are against any conversion instead of hiding behind pious platitudes in an effort to discredit those that go down the conversion path.
  • Great article. We have been talking about lifetime value for our members recently. About 1/3 of our membership leaves our branch network in Germany every three years for another military base in the US. One of our challenges is communicating the value of SCU to keep members with the credit union as they move throughout their career. It is useful to see how you describe lifetime value.
  • A genuinely fair conversion proposal would not go through the interim step of MSB, but directly from CU to stock-owned. Further: a. At absolute minimum, 50% of the net equity of the converting CU would be given to existing CU members in the form of stock shares not redeemable for at least 2 years (to prevent a mass sell-off of shares). An example of how this might work: each member automatically receives 10 shares, plus 1 additional share for each year of membership tenure. A three-year member would receive 13 shares, a twenty-five year member would receive 35 shares. b. Additionally, at conversion at least 20% of total members' equity should be paid out as a bonus dividend. The bonus dividend should be paid BOTH on total share deposits AND as a partial rebate on year-to-date interest paid on loans. c. The CU's board should host at least one town-hall meeting with members to outline the proposal and outline the basis for same; AND d. A "debate" should be hosted if there is significant interest, presided over by a respected and disinterested party (i.e. a non-credit union member who is a mediator or judge) to publicly argue about the merits of the conversion e. The credit union's CEO, executives, and directors should be barred from participating in the IPO and barred from purchasing or being granted the new CU's stock for at least one year after the IPO.
    Ron from Seattle