KENT, Wash.—When it comes to mergers, the real risk to the credit union community is from CEOs holding on and not merging out the institution when it is time to do so, according to one analyst.
Glenn Christensen of CEO Advisory Services, said he is concerned that many leaders of small credit unions want to remain at the helm too long, steering their CUs away from a merger that would deliver greater economies of scale and the long-term means to grow and compete.
Noting there has been discussion recently in the industry regarding a growing issue of large credit unions scooping up smaller shops by enticing leaders of the acquired organization with hefty payouts—which CUToday.info has extensively reported—Christensen emphasized that many small CU leaders are not choosing to merge soon enough and are simply draining capital as performance fades.
“That situation happens much more often than any supposed instance of CEOs ‘selling out,’” said Christensen. “The CEO holds on until the very end and the credit union begins to see membership losses, a decline in profitability, capital drained—but they don’t want to retire.”
Detrimental To CU
When that scenario occurs, it becomes difficult to find a merger partner when the credit union finally decides to throw in the towel, said Christensen.
“This situation is very detrimental to the credit union, its members and to the movement,” said Christensen. “No one wins. This situation is much more common than the other way around. I very rarely see CEOs getting excessively compensated from a merger. That is much more the exception than the rule.”
But merger practices have apparently caught the attention of NCUA, with Acting Board Chairman Mark McWatters at CUNA’s recent Governmental Affairs Conference addressing merger disclosures as part of a 15-point list of regulatory issues the agency is working on. At GAC, McWatters stated that the agency may require that “all merger solicitation documents provide, without limitation, a discussion of any management awards and compensation agreements in plain language and delivered in a reasonable time prior to the scheduled merger vote.’”
Christensen said that a certain amount of transparency of payouts to leaders is required with credit union mergers today. He said NCUA rules stipulate that if senior management or board members receive more than a 15% bonus (or a $10,000 bonus) as result of the merger, either in a continuing salary or some form of payout, that the amount must be disclosed to the membership.
“Now can a smart attorney find a way around that? I am not sure,” said Christensen.
Christensen argued, too, that what some may consider a large payout to a CEO is actually fair compensation for the leader leaving the job and retiring sooner than scheduled.
“Let’s say the CEO is 62 and has set 65 as his retirement date; that merger won’t happen unless that CEO is given some ability to retire if he does so sooner than expected,” said Christensen. “At that age he won’t find another job. I see more mergers turned down because the CEO was only going to get six months’ separation. You won’t get a merger to happen that way.”
What's Missing?
What’s often missing in many of the stories swirling around in credit unions today about mergers, asserted Christensen, is the long-term benefits for the credit union, the membership and staff. Christensen said that even at well-performing small credit unions the future will be more difficult if the CU is not reinvesting in growth, stating that long term the partnership with the large credit union is the right decision. He also said staff benefit by having a wider career path and the chance to receive higher wages.
“I have seen it many times before, the CEO of the small credit union wants to do everything he can to keep the credit union profitable,” said Christensen. “But that often means holding back raises for the staff, and not investing capital into more technology and things that will help the CU prosper longer term—they are just holding on.”
Christensen stressed the importance of all credit unions having change of control agreements in place.
“I have been telling boards for a long time, it’s important to talk about CEO compensation in the event of a merger,” said Christensen. “Have a change of control agreement that spells out clearly how the CEO would be compensated in the event of a merger. That way you create an air of openness and take away some of this fear CEOs have regarding mergers. It’s a tough issue, but one that needs to be addressed.”