I recently joined the Board of a Credit Union. One of the reasons I joined is the similarity I see in their approach to serving their customers and how NOTL Hydro tries to serve its customers. There are a lot of similar values. A Credit Union can compare and contrast themselves with the large Schedule A banks while a municipally owned utility can compare and contrast themselves with the investor owned utilities.
When discussing values, it is important to understand that values can be different and that there is not necessarily a “right” and a “wrong” value. Rather, there is a right value for that organization. What is important is that the organization understand its values and that these permeate all aspects of the organization. Values are driven by who an organization serves and why.
In the case of a Credit Union, the organization is serving its customers who are also its owners as members. In the case of a local distribution company (LDC) that is owned by the municipality it serves (like NOTL Hydro), the organization is serving is customers who are also its owners as members of that municipality. There are some key differences. Credit Union customers choose to be members, they can get their financial services elsewhere, and they directly vote for their Board of Directors. LDC customers do not have a choice, the LDC is a local monopoly, and the Board of Directors is voted for by the local municipal Council. Residents of the municipality do get to vote for their Councilors but the Board of Directors is only one very small factor into what goes into choosing which Councilor to vote for.
Profit Maximization
Credit Unions do not aim to maximize their profits. Instead, they aim to maximize the value they give their members. However, to do this they still need to make a reasonable profit in order to be financially viable. They also need to still be efficient as this is a competitive business. This is the same approach that NOTL Hydro takes. NOTL Hydro has never tried to maximize its rate base in order to maximize its potential profits; that only leads to higher rates for our customers. NOTL Hydro, like all LDCs, still needs to make a reasonable profit in order to fund investments in its system.
The Chartered banks and investor owned LDCs take a different approach. Their goal is to maximize profits. This is not a negative; just a different value based on their ownership. The economic value they create enhances our personal investments. This emphasis on profitability can also lead to efficiencies and innovation.
One of the dangers of not trying to maximize profits is it can lead to laziness, inefficient operations and no innovation. This is especially a danger for LDCs as they are local monopolies so do not even have the competitive pressures a Credit Union will have. There are no shortages of examples of this (think of many government operations). The good news is that this can be avoided but it takes diligent governance.
There are a number of other LDCs that I work closely with that have the same values and objectives as NOTL Hydro. Their goal is to create value for their customer. There are also other LDCs that say they have these values but then also try to maximize their rate base. A clarity of purpose is missing in these organizations.
Capital Constraints
One of the biggest challenges of a customer-owned organization is the limitation of capital. In the case of municipally owned LDCs, capital must usually be internally generated as the municipal owner is usually unlikely to inject more capital and bringing in new shareholders would mean a dilution of the 100% municipal ownership. Credit Unions are able to go to their members for capital but this is limited.
The net result is a significant limitation of investment opportunities. Any investments must be small enough to be affordable and are usually conservative in nature as the impact of losses would be significant. This all puts a limit on growth so the values tend to be internally focused. There are LDCs and other customer-owned organisations that have succeeded in making successful investments but there are also at least as many who have failed.
Investor-owned organisations do not have this limitation as they can always bring in new investors to expand their capital base. Their values will often be more growth focused as a result of this.
Service Levels
Member-owned organisations tend to provide a higher level of service. This is part of the “value” they deliver their customers/owners which goes beyond return on investment. Examples of these services include easier access to assistance (open door policy), customer education and support that is not based on customer size or profitability.
Investor-owned organisations tend to view service as a cost so structure themselves to provide it in a manner that best serves their profit objectives. Larger and more important customers will get excellent service, think of the wealth centres of the big banks, while smaller customers may have to deal with on-line service and ATMs. The size of the big banks means they can create excellent on-line services which may suit some customers just fine. For others looking for a more personalised service, a Credit Union may be a better option.
Community Focus
Member-owned organisations tend to have a bigger focus on their communities. For municipally owned LDCs, the community will be the municipalities they serve. Credit Unions tend to exist to serve a specific community which can be geographic or based on the demographics of their membership. Community focus means that services or support is provided that goes above and beyond what the normal marketing driven initiatives of an investor-owned organization would provide.
Summary
As mentioned at the start of this blog, there are no right or wrong values. One set is not better than the other. However, what is important is that the values be consistent across the entire operations of the organization and that they be consistent over time. It is also very useful if the values of the organization reflect the objectives of their owners whether they are investor or member based.