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The credit union industry may not realize it yet, but the lid has been knocked off of Pandora’s Box. Through a gaping flaw in credit union governance rules, a miniscule fraction of a credit union’s membership can hijack the institution and thwart the will of the majority. The larger the credit union, the greater the risk for this abuse. And when a large credit union becomes a victim of these extremist hijinks, it constitutes a serious systemic safety and soundness threat that should be of concern to every federally insured credit union, credit union regulator, and elected official. A glaring example of such abuse has just occurred in Michigan. A handful of former employees and officials, supplemented by the support of some ill-informed members, outside agitator funding and the state credit union league, have leveraged an anachronistic loophole in the standard federal credit union bylaws. This minority disrupted a lawful membership vote on the plan to convert to a mutual savings bank charter that was already in progress at DFCU Financial. Should a mere handful of motivated extremists be able to pack the meeting room with supporters and impose an ill-advised agenda on the credit union contrary to the wishes of the deliberately silenced majority? Unlike a motivated extremist, the rank and file member is more than happy to participate in a convenient mail ballot, and is much less likely to disrupt his or her regular schedule and family commitments to attend an inconvenient in-person meeting. In distinguishing what makes credit unions unique from other financial institutions, there are some storytellers in the credit union industry who like to spin the fantasy of participative cooperatives. They paint an image of vast numbers of members openly gathering in giant town meetings to make important decisions for the institution while reaping the collective rewards of ownership. The actual practice in the industry is much different from this spin. Fewer than 100 members attend most annual meetings. Rarely do in-person meetings involve even 1% of a credit union’s members. Whenever an in-person meeting is mandated, the vast majority of members are defacto disenfranchised. The special membership meeting loophole enables any group with sufficient funding and the will to impose their opinions on others to become, at best, a costly nuisance and, at worst, a dangerously disruptive force. In effect, a tiny minority can outright hijack the credit union from the majority of members. Why should the credit union industry care, especially if this tactic can be used to derail a conversion to the mutual savings bank charter, which a few in the industry find abhorrent? Here’s why: Now that Pandora’s Box has been opened, it is extremely likely that others with agendas (including misguided credit union league officials) that they want to impose on credit unions will use the tactic. The proverbial sword cuts both ways. These days it is extremely easy for anyone to join many large credit unions, especially those with multi-county community charters, multiple select employee groups numbering in the thousands, or what credit union critics like to call “wide open memberships.” Let’s speculate for a minute. What’s to keep disgruntled bankers from joining a large credit union, funding a petition drive to force a special meeting mandating the credit union convert to a tax-paying mutual savings bank charter, then packing the in-person meeting with supporters to vote for the resolution and force the step? Or perhaps a few members might engage in similar tactics to force a voluntary liquidation in order to cash out a credit union’s assets, knowing they are not distributed equally to each member, but pro rata based on the size of their deposits. It is even possible that an aggressive credit union could force another credit union to merge by using this “grassroots” tactic. The list of potential abusers of this governance loophole is a lengthy one. Senior citizens, retirees and aging baby boomers may be quite happy to see their credit union liquidated just to get their hands on a few thousand dollars of the credit union’s equity rather than settle for low CD rates. Emboldened by the ease with which it can be done, what’s stopping them from joining another nearby credit union and doing it again, and again? Perhaps what’s most frightening is the plethora of out-of-the-mainstream organizations anxious to impose their own political and socio-economic agendas on others in the interest of righting some perceived wrong, be it environmental degradation, social inequity, illegal immigration or any number of confusions or conceits. They would love to hijack a financial institution to serve as a platform to proselytize their radical agenda. Isn’t this already being done? The disruption effort in Michigan is apparently succeeding. The governance loophole has become common knowledge. Will it become a proven credit union takeover tactic? Everyone within the credit union industry who understands the broader significance of this governance flaw should scrutinize what went on in Michigan. While the nave and shortsighted cheer, the long-term public policy ramifications for the industry are enormous and the continued value of the credit union charter is in serious jeopardy. What good is a federally insured depository institution charter that can be manipulated to undemocratic ends with the inherent systemic risk? The federal credit union bylaws, and also many state chartered credit union governance rules, need to be modernized to reflect today’s higher stakes. Billion dollar institutions need to be protected from frivolous or malicious intent. It’s imperative that the minimum number of members required to force a special membership meeting for any reason be a sufficiently large absolute percentage of the total membership to ensure fair representation. And rather than mandating in-person special meetings, alternative balloting procedures that provide for increased member participation should be allowed. If the credit union industry wants to preserve the ongoing desirability of the charter, it won’t fail to correct this governance loophole. With the lid to Pandora’s Box now dangerously ajar due to the flaw in the bylaws, insidious forces have already been unleashed.

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