Operating Ratios Are Not Guiding Principles

Let’s not adopt the priorities and practices of those whose objective is our demise.

October 12, 2012

Capital, assets, return on assets (ROA), efficiency, or even asset quality will not ensure the long-term success of the credit union movement.

These key indicators certainly can measure a credit union’s financial performance, but they aren’t what make a credit union successful.

We must take a deeper look at ourselves to determine the causes of success.

While successful enterprises record positive results in most, if not all, of those areas, these measures on their own are lagging indicators. The key is whether the institution over the years nurtures the practices that generate those results and embeds these practices in its culture and in every decision it makes.

A marketing promotion versus well- designed products and processes or a focus on goals instead of members’ best interests might bring quicker and more impressive short-term results. But organizations can easily compromise and even seriously harm their reputation and future growth by doing so.

Sam Walton’s 10 Rules for Business Success

Sam Walton, founder of Walmart, codified his winning formula for business in his book, “Running a Successful Company: Ten Rules that Worked for Me.” The 10 rules are:

1. Commit to your business. Believe in it more than anybody else.

2. Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations.

3. Motivate your partners. Money and ownership alone aren’t enough. Constantly think of new and more interesting ways to motivate and challenge your partners.

4. Communicate everything you possibly can to your partners. The more they know, the more they’ll understand. The more they understand, the more they’ll care. Once they care, there’s no stopping them.

5. Appreciate everything your associates do for the business. A paycheck and a stock option will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them.

6. Celebrate your success. Find some humor in your failures. Don’t take yourself so seriously. Loosen up. Show enthusiasm—always.

7. Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines—the ones who actually talk to the customer—are the only ones who really know what’s going on out there. You’d better find out what they know.

8. Exceed your customer’s expectations. If you do, they’ll come back over and over. Give them what they want—and a little more. Let them know you appreciate them. Make good on all your mistakes, and don’t make excuses—apologize.

9. Control your expenses better than your competition. This is where you can always find the competitive advantage. For 25 years running—long before Walmart was known as the nation’s largest retailer —we’ve ranked first in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation.

10. Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there’s a good chance you can find your niche by going in exactly the opposite direction. 

Committing to the credit union philosophy of “not for profit, not for charity, but for service” and living our motto of America’s Credit Unions—“where people are worth more than money”—may not stand up to a chief financial officer’s sharp focus on short-term results.

But the former is what will ensure the movement’s future and bring the financial superiority we’ve enjoyed over the decades. Not because our goal was bottom-line results, but because dedicating ourselves to improving the quality of our members’ lives will retain their loyalty, support, and participation.

Let’s be careful not to adopt the priorities and practices of those whose objective is our demise. Adopting their priorities not only hurts our members, but all of us—individually and collectively as an entire credit union movement.

Building on the successes of the past won’t be easy. We face many challenges, including:

While these might seem overwhelming, we find several periods in just the past 30 years where the outlook appeared to be equally challenging. But credit unions survived—and thrived.

We must learn from the past, but avoid looking only in the rearview mirror. Recognize that lowering reserves and allowance for loan losses during good times isn’t the best way to serve our members.

Nor is it beneficial to do the reverse and overreact when conditions worsen. We also must resist the temptation to follow our competitors and loosen lending practices during booms and tighten loan qualifications when things turn, even if members contend we’re not serving them well at the time.

Sam Walton’s Rule No. 10—Swim Upstream—holds much truth.

Sometimes the more we learn from the “experts,” the less we remember of our roots and the more we become just like everyone else. That method has never been what made credit unions successful.

It’s true that often it seems some of the approaches and practices are forced upon us. But author Stephen Covey may have put his finger on the answer: “When you think the problem is out there, that is the problem,” he writes in “The 7 Habits of Highly Effective People.”

Our movement didn’t achieve its successes because we were victims. But we can make a significant difference by working together, supporting each other, and most important, speaking with one voice—even when it requires that we compromise and put the interests of the whole ahead of our own immediate priorities. 

The fact is, we must focus on what will secure a strong credit union movement. No matter how big we grow individually, our real strength is in our movement as a whole.

Our strength is in working together even if the issue isn’t at the top of our list. Most of all, we can’t forget that it’s about our members, especially when they need us the most, rather than our asset size, our capital ratio, or our ROA.

It’s about our mission and having a higher cause. If we stray, there will be a price to pay. But if we base decisions and actions on our guiding principles, we’ll achieve financial soundness and fulfill our founding leaders’ dreams.

RUDY HANLEY is the CEO of SchoolsFirst Federal Credit Union.