Credit Union Governance and Survival of the Cooperative Form
Kevin Thomas Davis
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
Journal of Financial Services Research, Vol. 19, No. 2/3, April 2001
Credit unions are cooperative financial institutions that typically operate on a one-member/one-vote governance rule. This paper demonstrates that such a governance rule may enhance the survival of such organizational forms in the face of adverse incentives created by accumulated financial surpluses and identifies factors that may prompt conversion to a joint-stock form. The analysis is based on noting that current members collectively have "inherited" accumulated surpluses of the cooperative from past members. Older members have an incentive to extract maximum personal private benefit from that inheritance by voting to convert from a cooperative to a joint stock company, even though such an outcome may be socially suboptimal. A simple overlapping generations model is used to develop a "sustainability constraint," which must be met if conversion is not to occur and examine how a one-member/one-vote governance rule contributes to the survival of the institution in a cooperative form.
Keywords: credit unions, conversion, governance, cooperatives
Date posted: October 1, 2001
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