Strategic Decision-Making and Board Leadership at an ...

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Strategic Decision-Making and Board Leadership at an Australian Credit Union

Dr. Antoine Hermens

Head of Management Disciplinary Group

School of Business

University of Technology Sydney

[email protected]

Dr. Marie dela Rama

Management Discipline Group,

School of Business

University of Technology Sydney

[email protected]

Gerard Hermens

Institute of Strategic Management

Sydney, Australia

[email protected]

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Abstract

As relatively small financial institutions, Australian credit unions and building societies (or CUBS)

have been particularly exposed to market and regulatory challenges and associated cost pressures. At

the time of the credit crisis, rather than close branches, increase fees and/or reduce member benefits,

a number of credit union CEOs opted for a merger and acquisition (M&A) strategy with other credit

unions. M&A activity can be an effective growth strategy in a competitive environment. Where there

is a perceived divergence of strategic intent, there is reluctance by senior decision makers to commit

to this strategy. This empirical paper looks at the strategic-decision making process by the board of a

large credit union over two time periods – before and after an acquisition.

Keywords: Strategic decision-making, credit unions, board leadership, mergers and acquisition,

director performance

Introduction

The overall global and domestic operating environment for the Australian financial industry over the

past decade has remained turbulent, notwithstanding the effects of the global financial crisis (Bryant,

2012, Xu et al 2011, Yates & Berry 2011). The Australian financial services industry has become

increasingly consolidated over last ten years driven by intense market competition (including from

foreign banking institutions), continuing downward pressure on interest margins, and an increase in

funding and capital costs. (Austrade 2011, Berry et al 2011, Henry 2011, Merrett 2002) Financial

institutions have also been subjected to more demanding regulatory and compliance obligations,

which in turn have required significant investment in new technology, more robust corporate

governance structures and enhanced management expertise. (Ariff et al 2012, Sathye 2001)

Australian residential mortgage market

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The residential mortgage market represents “90% of all bank lending to the household market”

(Austrade 2011: 19) According to the Australian Prudential Regulatory Authority, in 2008 six

Australian banks had 86% of the Australian home-lending market made up of the “big four” (ANZ

Bank, Commonwealth Bank, NAB and Westpac), Macquarie Bank and Suncorp. (APRA 2008: 18).

Similarly, M&A activity in the mortgage broker market has led to an increased share by these large

banks. (Deloitte 2011, Yates & Berry 2011)

In the aftermath of the global financial crisis, banks have aggressively marketed for retail deposits

(especially online), short term debt was retired, move to long term bonds and equities to de-leverage,

and adjust their balance sheets (KPMG 2011). For example, Bankwest and ING have created

additional competition for retail deposits by creating new product options that include reward points,

cash back, no fees and other incentives to create a different form of competitive pressure (Austrade

2011).

As relatively small institutions, credit unions and building societies (or CUBS) have been particularly

exposed to market and regulatory challenges and associated cost pressures. (Garden & Ralston 1999,

Brown & Davis 2008, Hillier at al 2008). These market challenges have been exacerbated by the

global financial crisis (Pais & Stork 2010) which has caused an escalation in voluntary merger activity

throughout the credit union sector “driven by the need to achieve further cost savings through

economies of scale.” (Austrade 2011: 11).

Overall, the mutual sector has emerged from the global financial crisis better than most financial

sectors in Australia with CUBS able to build upon their competitive advantage of providing a

community-based way of banking and alternative to the oligopoly of the big four banks. In particular,

building societies filled in the vacuum left by the large retail banks in niche markets and rural

communities after the latter closed down branches across the country over the last quarter of the

century (Cutcher 2008). According to APRA, CUBS approve “less than 5%” of housing loans (2008:

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18) yet for CUBS, these loans drive their main business activity and fuel their growth (Austrade 2011:

11).

Strategic challenges for CUBS

There are a number of attributable macroeconomic and microeconomic challenges for CUBS which

senior decision makers need to consider. An immediate challenge includes increased compliance costs

emanating from changes by the Basel III agreement, altering capital and liquidity ratios as well as

promoting improved reporting standards. (APRA 2008, Ariff et al 2008). Arguably these changes will

require the investment of additional resources particularly in the administration of treasury functions

and could have an unintended impact on smaller credit unions.

A macroeconomic challenge includes proposed government reforms encouraging the formation of a

fifth banking pillar, the continuing turmoil in global markets and a two speed domestic economy.

(Henry 2011). More immediately, future contraction in the national housing market directly impacts

the sector’s traditional source of lending. The majority of CUBS compete successfully with majors

and regional banks in their particular regions however aggressive pricing in this market segment has

had an impact on margins (Hillier et al 2008).

For boards of CUBS, these challenges are strategic in nature. For board members, managing these

strategic issues are covered by the APRA directive, the Australian Prudential Standard (APS) 5101

which sets out how they can effectively exercise their role and discharge their responsibilities on

behalf of the organisation. APS 510 covers how directors should establish the overall strategy for the

institution; ensure reporting against this strategy; and approve the risk management strategy of the

credit union. To overcome some of these challenges, entering a strategic alliance is seen an attractive

way to secure the future growth of their business.

1 APRA (2006) Prudential Practice Guide http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-

510-Governance.pdf accessed 9th

July 2012

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There has been a great deal of research attention on designing and developing mechanisms to improve

alliance performance and success (e.g. Das, 2005, Das & Teng, 2000b). Most recommendations,

however, offer oversimplified solutions which deserve to be treated with a deal of scepticism (Das &

Teng 2003a), others suggest structural and motivational solutions to achieve alliance stability (Zeng &

Chen 2003). Das (2005) argues that as well intentioned as these recommendations may be, at their

foundation lies the fear of being exploited by one’s partner. Conflict is inevitable in business (Das &

Kumar 2008) and alliances can be viewed as a system of multiple interconnected tensions (Das

&Teng, 2000b) the motivation to choose an alliance strategy is to leverage greater value from the

relationship than the value a firm alone can achieve.

Methodology

This paper explores the following research question: What were the main issues that occupied the

board strategic-decision making process and performance of a credit union, before and after a

strategic alliance, during the period of 2008-2011?

Board decision-making directly impacts an organisation’s tone, culture and strategy. The board is the

highest decision-making body in an organisation and members of the board – the directors - are

ultimately responsible for these decisions (Cadbury 2002). The study sought to find out how the

internal processes within a board directly impacted the external strategy of a company, in this case,

that of participating in an alliance. Thus, the study seeks to be expansive by looking at the external

factors that were involved in entering an alliance, and the internal skill sets of directors that reveal

their competencies.

Access was obtained at a large NSW mutual organisation in the CUBS sector. The M&A strategy of

the organisation and the board performance of its directors were assessed over two periods: Financial

Year (FY) 2008-09 (the pre-acquiring period) and FY 2009-10 (post-acquiring period). The time

period of assessment is significant as we sought to unravel the decision-making process made by key

management personnel in the aftermath of the global financial crisis in 2008 when strategic alliances

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were being discussed but had not been enacted yet, and in 2010 when these alliances had crystallised.

In June 2009 as a result of merger with a smaller CUBS organisation, two new directors joined the

board. In addition, the analysis of individual directors was extrapolated from 98 completed

questionnaires and is based on multi-source feedback (MSF), rather than a 360-degree evaluation.

Overall the questionnaire looked at the organisation’s competitive advantage, value creation, strategic

tensions, value appropriation and director performance. The section of the questionnaire that looked at

director performance had 24 items broken down into four areas to assess the performance of directors

and is provided in Appendix 1. The questionnaire was also complemented by supplementary data such

as informal discussions with other credit union CEOs and directors to provide context to the period of

data collection.

Results

The results are grouped by the following sub-headings: sustainable competitive advantage, value

creation, governing strategic tensions, value appropriation and director performance.

Sustainable Competitive Advantage

The ultimate objective of a merger and acquisition strategy is to create a stronger financial institution

capable of providing a sustainable competitive and cooperative banking service alternative. Of

immediate concern to the decision-makers in this sector were the anticipated commercial impact of

market and regulatory trends, and the interviewees expected these pressures to intensify in the years

ahead hence participation in the alliance was seen as attractive. Merger and acquisition activity was

also seen as complementing other growth strategies and can be an effective growth strategy where the

objective is to position the credit union as a leading provider of internet-based services. Scale

economies achieved by the successful execution of a merger and acquisition strategy may include,

reduced cost to income ratio, increased operating surplus and sustainability, additional capacity to

compete in product offering and pricing and provide access to new markets.

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When exploring potential merger opportunities, directors assessed the following information on their

target credit union: size, its financial strength and financial performance, historic data on growth and

branch locations. Information was sought regarding specific competencies of senior staff and whether

any senior staff or key board members are approaching retirement age or may be considering an

appropriate exit for personal reasons. The existence of any alliance agreements that could impede or

adversely impact opportunities for a merger or acquisition was also investigated. Other issues

explored include any local or government issues that could impact on the feasibility of a merger, any

growth limitations, and specific system data on IT and banking systems.

The data revealed an ideal credit union partner/s has some or all of the following characteristics:

(a) Size: $100m - $500m in assets

(b) Reasonable financial position

(c) Bonded or has come from a bonded background (this refers to the integrity of personnel)

(d) Its own strategic intent to seek scale efficiencies and or access to new markets,

(e) Preferred geographic location - a state capital or Canberra with a preference for the East Coast

(f) A limited branch network.

Credit unions fitting all of these criteria however may not necessarily have a strong competitive

imperative to merge or be acquired by the active partner. In this case, the acquiring organisation

looked at smaller credit unions located in regional cities and or credit unions that were financially

stressed as an alternative and attractive target.

Post- merger, the larger credit union organisations anticipated they would be able to better defray

rising compliance costs, and in doing so, reduce the adverse flow-through impact on member value.

One larger entity had greater bargaining power with key suppliers and was able to access cheaper

sources of funds to meet its loans demands. It achieved its aim of creating a larger credit union,

integrating higher level business skills, risk management resources, and capital that would be

increasingly required to underpin credit unions members’ security into the future.

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Value Creation

A mergers and acquisition strategy was seen as adding particular value to a credit union when:

• additional high quality products can be introduced,

• online and phone distribution channels strengthened,

• broker channels can be leveraged for more effectiveness and or productivity

• IT systems can be improved without requiring significant levels of investment

• back office and support systems were upgraded resulting in greater business efficiencies

• prudential issues can be resolved; and

• CEOs and board members achieved their personal goals as a result

Successful mergers and acquisition strategies however need to be carefully designed including the

development of an approach strategy, including an alliance building campaign and the development of

a clear messaging strategy.

The last bullet point is linked to director performance and, in this sense, an alliance was seen as

adding value holistically to a director’s sense of worth. Thus, the board carefully considered the value

proposition on offer; specifically in what specific manner it would add value to the board, CEO and

the members. The senior executive team needed to clearly understand where the synergies are and

what the ultimate rationale is for the integration. The role of the credit union CEO, directors and board

in these relationships was central to influencing the dynamics of internal tensions and consequently

the joint ventures performance and evolution.

Governing Strategic Tensions

The relationship between strategic intent, M&A conditions, and perceived risk gave rise to tensions

between the partners. Resource allocations and decision-making processes that are focused on

attaining private benefits for one of the individual credit union partners, rather than common benefits

for all the stakeholders, ignited tensions between partners. Alternatively, an emphasis by a credit

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union partner on maintaining their own independent organisational culture promoted a psychological

tension between the partners, i.e. a lack of long-term commitment to an interdependent relationship.

The divergence of strategic intent between credit unions in an equity joint venture was inversely

related to the difference between the level of cooperation and the level of competition between the

partners. Joint venture symmetry was positively related to cooperation and common benefits. This

behavioural phenomenon can be particularly noticeable at the board level and in the joint venture’s

marketing and organisational decisions making process.

Early warning signals of a divergence in a credit union partners’ strategic intent is apparent when

directors express concerns of being exploited. This often leads to an increase in the tension levels as

both partners became more circumspect in their decision-making processes and are inclined to adopt

more formal processes. The more closely aligned the partners’ strategic intent, the less inclined

alliance partners are to exert their coercive power. Generally, the data supported the notion that joint

venture partners were more likely to cooperate with each other if some flexibility (forbearance) was

adopted in processes and systems.

When a credit union joint venture partner exercised more overt power to direct resources or attempted

to influence the relationship, the other credit union partner’s propensity to cooperate decreased.

Similarly, when one partner applied overt power to influence resource allocation or decisions, the

other partner tended to reciprocate by adopting a less flexible decision framework and also applied a

more overt form of influence.

Where credit union partners have the strategic intent of forming a long term relationship they are

more predisposed to cooperate with each other. Informants in the study identified that long term goal

orientation, more rigid processes and systems and cooperation act as convergent forces in an alliance.

Rivalry between alliance partners, on the other hand, and a reluctance to invest or allocate resources

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in long term projects or assets, negatively impacts partners’ collective strengths and performance

(value creation and appropriation).

Effective collaboration requires a shift in management thinking by a credit union’s senior managers,

directors and board – and this was one that was difficult to achieve. Difficulties include conflict in

balancing individual partners and the alliances interests; possible creation of future competitors; skill

depreciation; increased costs; the difficulty in assigning costs; lengthy purchasing decisions; problems

with motivating staff and potential consumer dissatisfaction. The resultant organizational tensions and

conflicts are both embedded and emergent at the alliance and at the individual firm level.

Previous research studies suggest that where alliance partners adopted a balanced perspective to

creating common value, internal (inter partner) alliance tensions did not preclude value creation

(Hermens 2009). The managerial challenge however was to govern these tensions through an

adaptable governance structure with formal and informal elements. Designing a system for the

governance of internal tensions needs to take into account the sources of the tensions, including

partners’ strategic intent, anticipated value appropriation goals, partners’ risk profile and the

complexity of resource contributions.

Value Appropriation

The data reflected that when value is appropriated (contribution) from the alliance increased then the

partner’s long-term focus and commitment to the relationship also increased. Ipso facto, if

contribution decreases, the long-term focus and commitment to the relationship decreased and as

anticipated, the degree of rivalry between partners increased. As alliance contribution to an alliance

partner’s firm decrease, the degree of flexibility (forbearance towards each other) also decreased.

Ipso facto, if contribution increased then flexibility (forbearance towards each other) also increased.

However, firms that reported high levels of value appropriated from the alliance relationship used low

key levels of influence. As alliance partner focus on the long-term increased, they tended to exercise

more influence on marketing decisions. These findings are consistent with studies by Teng and Das

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(2008). These scholars suggest that the management of conflict is dependent on partnering firms

maintaining forbearance (a balanced perspective) through their interactions. Teng and Das (2008)

propose that it is also essential that alliance partners establish appropriate governance structures to

contain conflict and tension.

Director Performance

As a group, directors post-merger (2009-10) rated slightly below those of previous years 2008-09 and

2007. The board overall was slightly more critical of itself in 2009/2010 than previous years

particularly in questions relating to communications and use of skills to provide sound analysis. The

use of strategic information and application of regulatory guidelines were also rated slightly lower.

Improvements however were noted in the extent to which the Board challenges on issues and

maximizes strategic outcomes. Figure 1 below shows the overall assessment of the board as it related

to relationship management, technical competence, value focus and emotional awareness.

(insert Figure 1)

The aim of the governance process is to influence how the objectives of a joint venture are shaped,

how risk is monitored and evaluated, performance is optimized. The process included risk assessment

in terms of allocating resources particularly in the context of investing in joint venture specific assets.

These decisions may induce or generate sub systemic dialectic tensions which ultimately may

reconstitute partners’ relationships with each other and other stakeholders.

Differences in intelligence, training and experience can cause directors to come to very different

conclusions about the complexity and risks of an M&A strategy or transaction. The strategic intent

(purpose) in a credit union merger M&A relationship moderates the effect on the perceived risks and

the tension dynamics between the credit union partners. Where there is a perceived divergence of

strategic intent between the partners, or where there is a perceived risk of being controlled or stifled

there generally was reluctance directors to commit to a merger or acquisition strategy.

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A key challenge that confronted managers responsible for the governance of strategic alliances stem

from how to share the benefits as partners to an alliance have a propensity to act out of self interest

(Sharma, 1998). Private benefits are more easily derived than are common benefits in a dyad alliance

relationship. The economic factors of coordination cost and appropriation costs together with strategic

and behavioural patterns, which are partner specific, are key determinants that influence the ability of

an alliance to generate common benefits (Goerzen, 2007). Close attention should be paid to the

behavioural tensions (equity and working relationship) since they determine the survival of joint

ventures. These findings are consistent with findings by Büchel and Thuy (2001) that the effects of

organizational-level tensions (variables) on strategic management behaviour, strategic intent and

alliance conditions/fit, are greater than those of the environmental level tensions.

Discussion

The mutual sector continues to contract in absolute numbers eventhough overall asset values continue

to grow. For the financial year 2009 /2010 there were 10 mergers between credit unions, however

between July 2010 and October 2011 merger activity slowed to 9. Overall these mergers are occurring

between small entities that are unable to maintain effective business solutions across ever changing

operational, governance, financial and regulatory demands. Directors and their boards seem to favour

the pursuit of voluntary mergers with like-minded credit unions, to achieve greater scale economies,

reduce risk concentrations, and to acquire the financial capacity and management expertise that will

enable them to respond adequately to increasing competition and regulatory pressures. A number of

smaller credit unions attempted first to grow aggressively by focusing on their core business and

membership base, their families and local communities. Ultimately however some of these credit

unions concluded that they were unable to grow at a rate sufficient to maintain their existing cost

base. Rather than being forced to close branches, increasing fees and or reduce member benefits, a

number of credit union CEOs opted for an M&A strategy with other credit unions. These executives

argued that the enhanced scale of operations would substantially strengthen the merged credit union

by ensuring a mutual and cooperative operating structure under which members would continue to

own, control and share in the benefits delivered by their credit union.

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Tensions are most severe when private benefits (the opportunity for a firm to apply knowledge

acquired in the course of the alliance to operations and business opportunities outside the scope of the

alliance) exceed common benefits. Thus the ratio of private to common benefits is a factor that

determines the stability of a strategic alliance venture (Khanna, Gulati and Nohria, 1998). These

competitive tensions lead firms to deviate from what alliance theory may describe as optimal

behaviour patterns. Assessing the source and evaluating dynamics of internal alliance tensions may

provide insights into ways to strengthen alliance value creation processes. Future research could look

at studying the management of strategic tensions as there is a particular sense of urgency as the

mutual sector continues to contract.

Conclusion

This paper looked extensively at the strategic decisions made by the board of a large mutual

organisation in a sector that has been largely under-researched: the member-owned Australian

financial organisation. Uniquely, this research undertook two time periods to study the organisation –

before and after the M&A activity. This paper contributes to further understanding of the intricate link

between strategy, performance and governance and provides an insight into how directors saw their

role as strategic decision makers both on the organisational and professional level.

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Figure 1: Combined Directors’ Items

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Appendix 1: Individual Director Items

Relationship Management

(This performance area rates the effectiveness of communication and interaction when engaging in

board and committee discussions and decision-making)

– ITEM 01: Communicates with directors and executives openly and confidently (1-10)

– ITEM 02: Tends to compromise with directors and executives in order to maintain

relationships (10-1)

– ITEM 03: Uses active listening and asks appropriate questions to identify key issues

regarding organisational performance (1-10)

– ITEM 04: Handles conflict calmly and assertively when negotiating with other directors and

executives (1-10)

– ITEM 05: Avoids influencing directors and executives to accept his/her point of view (10-1)

– ITEM 06: Challenges the substance & impact of strategic and performance issues to promote

the well being of the organisation (1-10)

Technical Competence

(This performance area rates the technical/industry skill sets each person brings to board and

committee discussion and decision making)

– ITEM 07: Attends and contributes to board/committee meetings including preparation of

papers and submissions as required (1-10)

– ITEM 08: Confidently contributes to decision making by utilising technical and industry

relevant skills (1-10)

– ITEM 09: Contributes to decision making by providing thorough analysis of the

organisation’s financial reports (1-10)

– ITEM 10: Responds positively and proactively to strategic problems that are brought to the

attention of the board (1-10)

– ITEM 11: Prefers to focus on issues and detail that she/he is familiar with (10-1)

– ITEM 12: Identifies and acts on organisational risk issues presented in management reports

(1-10)

Value Focus

(This performance area rates the strategic skills that directors apply to board processes and decision

making)

– ITEM 13: Seeks to maximise strategic outcomes through discussion and decision making (1-

10)

– ITEM 14: Utilises information to review and analyse strategic performance (1-10)

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– ITEM 15: Tends to focus on operational detail (10-1)

– ITEM 16: Supports the strategic direction of the board by contributing to strategy

development and execution (1-10)

– ITEM 17: Works effectively with directors and executives to ensure the long term goals and

objectives of the organisation can be achieved (1-10)

– ITEM 18: Illustrates and applies a sound understanding of statutory and legislative

organisational requirements (1-10)

Emotional Awareness

(This performance area rates the contribution the director makes to board interaction and a board

performance culture)

ITEM 19: Creates a positive experience in board and committee discussions (1-10)

ITEM 20: Contributes new ideas to board / committee deliberations (1-10)

ITEM 21: Committed to personal development and improvement as a result of interactions with other

directors (1-10)

ITEM 22: Responds well to feedback on professional performance (1-10)

ITEM 23: Avoids engaging in certain topics of discussions that are uncomfortable (10-1)

ITEM 24: Demonstrates an awareness and control over his/her own emotions (1-10).

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References

APRA (2006) Prudential Practice Guide – APG 510 Governance, 7pp, Sydney: APRA http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-510-Governance.pdf accessed 9th July 2012 APRA (2008) Authorised Deposit-Taking Institutions (ADI) Housing Lending, APRA Insight, Issue One, pp.18-24, Sydney: Australian Prudential Regulatory Authority http://www.apra.gov.au/Insight/Documents/ADI-housing-lending.pdf accessed 9th July 2012 Ariff, M., Farrar, J. & Khalid, A.I. (2011) (eds) Regulatory Failure and the Global Financial Crisis: An Australian Perspective, Cheltenham UK: Edward Elgar Austrade (2011) Australia’s Banking Industry, 76pp, Australian Trade Commission, Canberra: Australian Government Berry, M., Dalton, T. & Nelson, A. (2008) Chapter 8: The impacts of the global financial crisis on housing and mortgage markets in Australia: A view from the vulnerable, pp.131-149 in Forrest, R. & Yip, N-M (eds) Housing Markets and the Global Financial Crisis: The Uneven Impact on Households, Cheltenham UK: Edward Elgar Bryant, L. (2012) An assessment of development funding for new housing post GFC in Queensland, Australia, International Journal of Housing Markets and Analysis, 5 (2): 118-133 Brown, C. & Davis, K. (2008) Capital management in mutual financial institutions, Journal of Banking and Finance, 33 (3): 443-455 Büchel, B. & Thuy, Xuan. (2001), ‘Measuring of joint venture performance from multiple perspectives: An evaluation by local and foreign managers in Vietnam’, Asia Pacific Journal of Management, 18 (1), pp. 101–115. Cadbury, A. (2002) Corporate Governance and Chairmanship, OUP Cutcher, L. (2008) Financing communities: the role of community banks and credit unions in re-establishing branches in Australia; Accounting, Business and Financial History, 18 (3): 323-333 Das, T. K. & Teng, B.S. (1999b), ‘Cognitive biases and strategic decision processes: An integrative perspective’, Journal of Management Studies, 36 (6), pp. 757–778. Das, T. K. & Teng, B.S. (2000a), ‘A resource–based theory of strategic alliances’, Journal of Management, 26 (1), pp. 31–61. Das, T. K. & Teng, B.S. (2000b), ‘Instabilities of strategic alliances: An internal tensions perspective, Organization Science, 11 (1), pp. 77–101. Das, T.K. & Teng, B.S. (2001), ‘A risk perception model of alliance structuring’, Journal of International Management, 7 (1), pp. 1–29. Das, T. K. & Teng, B. (2002). ‘A Social Exchange Theory of Strategic Alliances’. In F. J. Contractor and P. Lorange (Eds.), Cooperative Strategies and Alliances, Elsevier Science, Oxford, UK, pp. 439–460. Das, T. K. & Teng, B.S. (2003a), ‘Partner analysis and alliance performance’, Scandinavian Journal of Management, 19 (3), pp. 279–308.

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Das, S., Teng, B.S & Sengupta, S. (2003b), ‘Strategic alliances: A valuable way to manage intellectual capital?, Journal of Intellectual Capital, 4 (1), pp. 10–19. Das, T. K. (2005), ‘Deceitful behaviors of alliance partners: Potential and prevention’, Management Decision, 43 (5), pp. 706–719. Das, T. K. & Kumar, R. (2008), Interpartner harmony in strategic alliances: Managing commitment and forbearance’, International Journal of Strategic Business Alliances, (forthcoming). Deloitte Australia (2011) Residential Mortgage Lending Roundtable, 22pp http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Industries/Financial%20services/Mortgage%20report/Australian_Mortgage_Report_Lending_Roundtable_2011.pdf accessed 9th July 2012 Garden, K.A. & Ralston, D.E. (1999) The x-efficiency and allocative efficiency effects of credit union mergers, Journal of International Financial Markets, Institutions and Money, 9 (3): 285-301 Henry, K. (2011) The Australian financial system: Emerging from the global financial crisis, Economic Round-Up, 2: 19-32 Hermens, A. (1996), ‘ Strategic alliances’, Retailing Management A Best Practice Approach , Chapter 5, in Merrilees W J. and Miller, A. RMIT Press, Melbourne, pp. 83 –99. Hermens, A. (2001), ‘Exchanging knowledge through strategic alliances’, Creativity and Innovation Management, 10 (4), pp. 189 – 200. Hermens, A. (2002), ‘Managing the Interconnected Organization: An Internal Tension Perspective’ In, Clegg. S. (Ed.) Management and Organization Paradoxes. Volume 9 John Benjamin's Publishers, Amsterdam. Netherlands, pp. 295–310. Hermens, A. (2006), ‘The governance of strategic tensions: Alliance stability and performance’, Presented at the Strategic Management Society Conference Vienna. Hillier, D., Hodgson, A., Stevenson-Clarke, P. & Lhaopadchan, S. (2008) Accounting Window Dressing and Template Regulation: A case study of the Australian credit union industry, Journal of Business Ethics, 83 (3): 579-593 Khanna, T., Gulati, R & Nohria, N. (1998), ‘The dynamics of learning alliances: competition, cooperation, and relative scope’, Strategic Management Journal, 19 (3), pp. 193–210. KPMG (2011) The future of Australian bank funding, 40pp http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/The-future-of-Australian-bank-funding.pdf accessed 9th July 2012 Merrett, D.T. (2002) The internationalization of Australian banks, Journal of International Financial Markets, Institutions and Money, 12 (4/5): 377-397 Pais, A. & Stork, P. (2010) Contagion risk in the Australian banking and property sectors, Journal of Banking and Finance, 35 (3): 681-697 Sathye, M. (2001) X-efficiency in Australian banking: An empirical investigation, Journal of Banking and Finance, 25 (3): 613-630 Xu, Y., Jian, A.L., Fargher, N. & Carson, E. (2011) Audit reports in Australia during the global financial crisis, Australian Accounting Review, 21: 22-31

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Abstract


have been particularly exposed to market and regulatory challenges and associated cost pressures. At

the time of the credit crisis, rather than close branches, increase fees and/or reduce member benefits,

a number of credit union CEOs opted for a merger and acquisition (M&A) strategy with other credit

unions. M&A activity can be an effective growth strategy in a competitive environment. Where there

is a perceived divergence of strategic intent, there is reluctance by senior decision makers to commit

to this strategy. This empirical paper looks at the strategic-decision making process by the board of a

large credit union over two time periods – before and after an acquisition.

Keywords: Strategic leadership, credit unions, board leadership, mergers and acquisition,


Introduction











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2011).


exposed to market and regulatory challenges and associated cost pressures. (Garden & Ralston 1999,











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11).





















1 APRA (2006) Prudential Practice Guide http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-

510-Governance.pdf accessed 9th

July 2012

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Methodology



strategic alliance, during the period of 2008-2011?







their competencies.






of 56 ANZAM 2012

5










data collection.

Results














of 56ANZAM 2012

6


























of 56 ANZAM 2012

7

Value Creation

A mergers and acquisition strategy was seen as adding particular value to a credit union when:























of 56ANZAM 2012

8
























of 56 ANZAM 2012

9









Previous research studies suggest that where alliance partners adopted a balanced perspective to

creating common value, internal (inter partner) alliance tensions did not preclude value creation

(Hermens 2009). The managerial challenge however was to govern these tensions through an

adaptable governance structure with formal and informal elements. Designing a system for the

governance of internal tensions needs to take into account the sources of the tensions, including

partners’ strategic intent, anticipated value appropriation goals, partners’ risk profile and the

complexity of resource contributions.

Value Appropriation










of 56ANZAM 2012

10













(insert Figure 1)












of 56 ANZAM 2012

11


from how to share the benefits as partners to an alliance have a propensity to act out of self interest









Discussion

The mutual sector continues to contract in absolute numbers eventhough overall asset values continue

to grow. For the financial year 2009 /2010 there were 10 mergers between credit unions, however

between July 2010 and October 2011 merger activity slowed to 9. Overall these mergers are occurring

between small entities that are unable to maintain effective business solutions across ever changing

operational, governance, financial and regulatory demands. Directors and their boards seem to favour

the pursuit of voluntary mergers with like-minded credit unions, to achieve greater scale economies,

reduce risk concentrations, and to acquire the financial capacity and management expertise that will

enable them to respond adequately to increasing competition and regulatory pressures. A number of

smaller credit unions attempted first to grow aggressively by focusing on their core business and

membership base, their families and local communities. Ultimately however some of these credit

unions concluded that they were unable to grow at a rate sufficient to maintain their existing cost

base. Rather than being forced to close branches, increasing fees and or reduce member benefits, a

number of credit union CEOs opted for an M&A strategy with other credit unions. These executives

argued that the enhanced scale of operations would substantially strengthen the merged credit union

by ensuring a mutual and cooperative operating structure under which members would continue to

own, control and share in the benefits delivered by their credit union.

of 56ANZAM 2012

12










Conclusion



financial organisation. Uniquely, this research undertook two time periods to study the organisation –

before and after the M&A activity. This paper contributes to further understanding of the intricate link

between strategy, performance and governance and provides an insight into how directors saw their

role as strategic decision makers both on the organisational and professional level.

of 56 ANZAM 2012

13

Figure 1: Combined Directors’ Items

of 56ANZAM 2012

14











executives (1-10)

















(1-10)

Value Focus


making)


10)


of 56 ANZAM 2012

15








Emotional Awareness






directors (1-10)




of 56ANZAM 2012

16

References

APRA (2006) Prudential Practice Guide – APG 510 Governance, 7pp, Sydney: APRA http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-510-Governance.pdf accessed 9th July 2012 APRA (2008) Authorised Deposit-Taking Institutions (ADI) Housing Lending, APRA Insight, Issue One, pp.18-24, Sydney: Australian Prudential Regulatory Authority http://www.apra.gov.au/Insight/Documents/ADI-housing-lending.pdf accessed 9th July 2012 Ariff, M., Farrar, J. & Khalid, A.I. (2011) (eds) Regulatory Failure and the Global Financial Crisis: An Australian Perspective, Cheltenham UK: Edward Elgar Austrade (2011) Australia’s Banking Industry, 76pp, Australian Trade Commission, Canberra: Australian Government Berry, M., Dalton, T. & Nelson, A. (2008) Chapter 8: The impacts of the global financial crisis on housing and mortgage markets in Australia: A view from the vulnerable, pp.131-149 in Forrest, R. & Yip, N-M (eds) Housing Markets and the Global Financial Crisis: The Uneven Impact on Households, Cheltenham UK: Edward Elgar Bryant, L. (2012) An assessment of development funding for new housing post GFC in Queensland, Australia, International Journal of Housing Markets and Analysis, 5 (2): 118-133 Brown, C. & Davis, K. (2008) Capital management in mutual financial institutions, Journal of Banking and Finance, 33 (3): 443-455 Büchel, B. & Thuy, Xuan. (2001), ‘Measuring of joint venture performance from multiple perspectives: An evaluation by local and foreign managers in Vietnam’, Asia Pacific Journal of Management, 18 (1), pp. 101–115. Cadbury, A. (2002) Corporate Governance and Chairmanship, OUP Cutcher, L. (2008) Financing communities: the role of community banks and credit unions in re-establishing branches in Australia; Accounting, Business and Financial History, 18 (3): 323-333 Das, T. K. & Teng, B.S. (1999b), ‘Cognitive biases and strategic decision processes: An integrative perspective’, Journal of Management Studies, 36 (6), pp. 757–778. Das, T. K. & Teng, B.S. (2000a), ‘A resource–based theory of strategic alliances’, Journal of Management, 26 (1), pp. 31–61. Das, T. K. & Teng, B.S. (2000b), ‘Instabilities of strategic alliances: An internal tensions perspective, Organization Science, 11 (1), pp. 77–101. Das, T.K. & Teng, B.S. (2001), ‘A risk perception model of alliance structuring’, Journal of International Management, 7 (1), pp. 1–29. Das, T. K. & Teng, B. (2002). ‘A Social Exchange Theory of Strategic Alliances’. In F. J. Contractor and P. Lorange (Eds.), Cooperative Strategies and Alliances, Elsevier Science, Oxford, UK, pp. 439–460. Das, T. K. & Teng, B.S. (2003a), ‘Partner analysis and alliance performance’, Scandinavian Journal of Management, 19 (3), pp. 279–308.

of 56 ANZAM 2012

17

Das, S., Teng, B.S & Sengupta, S. (2003b), ‘Strategic alliances: A valuable way to manage intellectual capital?, Journal of Intellectual Capital, 4 (1), pp. 10–19. Das, T. K. (2005), ‘Deceitful behaviors of alliance partners: Potential and prevention’, Management Decision, 43 (5), pp. 706–719. Das, T. K. & Kumar, R. (2008), Interpartner harmony in strategic alliances: Managing commitment and forbearance’, International Journal of Strategic Business Alliances, (forthcoming). Deloitte Australia (2011) Residential Mortgage Lending Roundtable, 22pp http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Industries/Financial%20services/Mortgage%20report/Australian_Mortgage_Report_Lending_Roundtable_2011.pdf accessed 9th July 2012 Garden, K.A. & Ralston, D.E. (1999) The x-efficiency and allocative efficiency effects of credit union mergers, Journal of International Financial Markets, Institutions and Money, 9 (3): 285-301 Henry, K. (2011) The Australian financial system: Emerging from the global financial crisis, Economic Round-Up, 2: 19-32 Hermens, A. (1996), ‘ Strategic alliances’, Retailing Management A Best Practice Approach , Chapter 5, in Merrilees W J. and Miller, A. RMIT Press, Melbourne, pp. 83 –99. Hermens, A. (2001), ‘Exchanging knowledge through strategic alliances’, Creativity and Innovation Management, 10 (4), pp. 189 – 200. Hermens, A. (2002), ‘Managing the Interconnected Organization: An Internal Tension Perspective’ In, Clegg. S. (Ed.) Management and Organization Paradoxes. Volume 9 John Benjamin's Publishers, Amsterdam. Netherlands, pp. 295–310. Hermens, A. (2006), ‘The governance of strategic tensions: Alliance stability and performance’, Presented at the Strategic Management Society Conference Vienna. Hillier, D., Hodgson, A., Stevenson-Clarke, P. & Lhaopadchan, S. (2008) Accounting Window Dressing and Template Regulation: A case study of the Australian credit union industry, Journal of Business Ethics, 83 (3): 579-593 Khanna, T., Gulati, R & Nohria, N. (1998), ‘The dynamics of learning alliances: competition, cooperation, and relative scope’, Strategic Management Journal, 19 (3), pp. 193–210. KPMG (2011) The future of Australian bank funding, 40pp http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/The-future-of-Australian-bank-funding.pdf accessed 9th July 2012 Merrett, D.T. (2002) The internationalization of Australian banks, Journal of International Financial Markets, Institutions and Money, 12 (4/5): 377-397 Pais, A. & Stork, P. (2010) Contagion risk in the Australian banking and property sectors, Journal of Banking and Finance, 35 (3): 681-697 Sathye, M. (2001) X-efficiency in Australian banking: An empirical investigation, Journal of Banking and Finance, 25 (3): 613-630 Xu, Y., Jian, A.L., Fargher, N. & Carson, E. (2011) Audit reports in Australia during the global financial crisis, Australian Accounting Review, 21: 22-31

of 56ANZAM 2012

18

Yates, J. & Berry, M. (2011) Housing and Mortgage Markets in Turbulent Times: Is Australia different? Housing Studies, 26 (7/8), Zeng, M. & Chen, X.P (2003), ‘Achieving cooperation in multiparty alliances: A social dilemma approach to partnership management’, The Academy of Management Review, 28 (4), pp. 587–605.

of 56 ANZAM 2012

Abstract


have been particularly exposed to market and regulatory challenges and associated cost pressures.

Rather than being forced to close branches, increase fees and or reduce member benefits, a number of

credit union CEOs opted for a merger and acquisition (M&A) strategy with other credit unions. M&A

activity can be an effective growth strategy in a competitive environment. Where there is a perceived

divergence of strategic intent, there is reluctance by senior decision makers to commit to a merger or

acquisition strategy. This empirical paper looks at the strategic issues that faced a large member-

owned organisation and the performance of its board over two time periods – before and after an

acquisition.

Keywords: Strategic leadership, credit unions, board leadership, mergers and acquisition,


Introduction











of 56ANZAM 2012












2011).


exposed to market and regulatory challenges and associated cost pressures (Garden & Ralston 1999,











of 56 ANZAM 2012


11).





















1 APRA (2006) Prudential Practice Guide http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-510-

Governance.pdf accessed 9th

July 2012

of 56ANZAM 2012










Methodology



strategic alliance, during the periods of 2008 –2009 and 2009 - 2010?







their competencies.





of 56 ANZAM 2012











data collection.

Results












of 56ANZAM 2012

























of 56 ANZAM 2012




Value Creation

A merger and acquisition strategy was seen as adding particular value to a credit union when:


















of 56ANZAM 2012























of 56 ANZAM 2012















Previous research studies (Hermens 2009) suggest that where alliance partners adopted a balanced

perspective to creating common value, internal (inter partner) alliance tensions did not preclude value

creation. The managerial challenge however was to govern these tensions through an adaptable

governance structure with formal and informal elements. Designing a system for the governance of

internal tensions needs to take into account the sources of the tensions, including partners’ strategic

intent, anticipated value appropriation goals, partners’ risk profile and the complexity of resource

contributions.

Value Appropriation



of 56ANZAM 2012




















(insert Figure 1)






of 56 ANZAM 2012








from how to share the benefits as partners to an alliance have a propensity to act out of self-interest









Discussion

The mutual sector continues to contract in absolute numbers, even though overall asset values

continue to grow. For the financial year 2009 /2010 there were 10 mergers between credit unions,

however between July 2010 and October 2011 merger activity slowed to 9. Overall these mergers are

occurring between small entities that are unable to maintain effective business solutions across ever

changing operational, governance, financial and regulatory demands. Directors and their boards seem

to favour the pursuit of voluntary mergers with like-minded credit unions, to achieve greater scale

economies, reduce risk concentrations, and to acquire the financial capacity and management

of 56ANZAM 2012

expertise that will enable them to respond adequately to increasing competition and regulatory

pressures. A number of smaller credit unions attempted first to grow aggressively by focusing on their

core business and membership base, their families and local communities. Ultimately however some

of these credit unions concluded that they were unable to grow at a rate sufficient to maintain their

existing cost base. Rather than being forced to close branches, increasing fees and or reduce member

benefits, a number of credit union CEOs opted for an M&A strategy with other credit unions. These

executives argued that the enhanced scale of operations would substantially strengthen the merged

credit union by ensuring a mutual and cooperative operating structure under which members would

continue to own, control and share in the benefits delivered by their credit union.

Key drivers that contextualise the strategic-decision making process of the board include, a) the

effectiveness of communication and interaction among the directors of the board; b) the technical /

industry skills each director brings to the board; c) the strategic insights that each director can apply to

board processes and decision making; d) emotional intelligence of members of the board i.e.

contribution a director makes to board governance. These drivers also give rise to tensions between

individual directors of an organisation involved in a M&A or an alliance










of 56 ANZAM 2012

Conclusion



financial organisation. Boards performing effectively and how an organisation performs are central to

corporate governance research (Mason, Kirkbride and Bryde, 2007). Uniquely, this research

undertook two time periods to study the organisation – before and after the M&A activity. Whereas it

has been generally assumed that variation in organisational performance are largely the result of

processes rather than people (see, Mollick, 2012) this study’s findings suggest that the variation in

board performance by directors of member owned financial organisations are influenced by the

perceptions of capabilities and synergies between individual directors rather than predominantly by

the governance process of the Board. This paper contributes to further understanding of the intricate

link between strategy, performance and governance and provides an insight into how directors saw

their role as strategic decision makers both on the organisational and professional level.

of 56ANZAM 2012

of 56 ANZAM 2012











executives (1-10)

















(1-10)

Value Focus


making)


10)

of 56ANZAM 2012









Emotional Awareness






directors (1-10)




of 56 ANZAM 2012

References

APRA (2006) Prudential Practice Guide – APG 510 Governance, 7pp, Sydney: APRA http://www.apra.gov.au/adi/PrudentialFramework/Documents/APG-510-Governance.pdf accessed 9th July 2012 APRA (2008) Authorised Deposit-Taking Institutions (ADI) Housing Lending, APRA Insight, Issue One, pp.18-24, Sydney: Australian Prudential Regulatory Authority http://www.apra.gov.au/Insight/Documents/ADI-housing-lending.pdf accessed 9th July 2012 Ariff, M., Farrar, J. & Khalid, A.I. (2011) (eds) Regulatory Failure and the Global Financial Crisis: An Australian Perspective, Cheltenham UK: Edward Elgar Austrade (2011) Australia’s Banking Industry, 76pp, Australian Trade Commission, Canberra: Australian Government Berry, M., Dalton, T. & Nelson, A. (2008) Chapter 8: The impacts of the global financial crisis on housing and mortgage markets in Australia: A view from the vulnerable, pp.131-149 in Forrest, R. & Yip, N-M (eds) Housing Markets and the Global Financial Crisis: The Uneven Impact on Households, Cheltenham UK: Edward Elgar Bryant, L. (2012) An assessment of development funding for new housing post GFC in Queensland, Australia, International Journal of Housing Markets and Analysis, 5 (2): 118-133 Brown, C. & Davis, K. (2008) Capital management in mutual financial institutions, Journal of Banking and Finance, 33 (3): 443-455 Büchel, B. & Thuy, Xuan. (2001), ‘Measuring of joint venture performance from multiple perspectives: An evaluation by local and foreign managers in Vietnam’, Asia Pacific Journal of Management, 18 (1), pp. 101–115. Cadbury, A. (2002) Corporate Governance and Chairmanship, OUP Cutcher, L. (2008) Financing communities: the role of community banks and credit unions in re-establishing branches in Australia; Accounting, Business and Financial History, 18 (3): 323-333 Das, T. K. & Teng, B.S. (1999b), ‘Cognitive biases and strategic decision processes: An integrative perspective’, Journal of Management Studies, 36 (6), pp. 757–778. Das, T. K. & Teng, B.S. (2000a), ‘A resource–based theory of strategic alliances’, Journal of Management, 26 (1), pp. 31–61. Das, T. K. & Teng, B.S. (2000b), ‘Instabilities of strategic alliances: An internal tensions perspective, Organization Science, 11 (1), pp. 77–101. Das, T.K. & Teng, B.S. (2001), ‘A risk perception model of alliance structuring’, Journal of International Management, 7 (1), pp. 1–29. Das, T. K. & Teng, B. (2002). ‘A Social Exchange Theory of Strategic Alliances’. In F. J. Contractor and P. Lorange (Eds.), Cooperative Strategies and Alliances, Elsevier Science, Oxford, UK, pp. 439–460.

of 56ANZAM 2012

Das, T. K. & Teng, B.S. (2003a), ‘Partner analysis and alliance performance’, Scandinavian Journal of Management, 19 (3), pp. 279–308. Das, S., Teng, B.S & Sengupta, S. (2003b), ‘Strategic alliances: A valuable way to manage intellectual capital?, Journal of Intellectual Capital, 4 (1), pp. 10–19. Das, T. K. (2005), ‘Deceitful behaviors of alliance partners: Potential and prevention’, Management Decision, 43 (5), pp. 706–719. Das, T. K. & Kumar, R. (2008), Interpartner harmony in strategic alliances: Managing commitment and forbearance’, International Journal of Strategic Business Alliances, (forthcoming). Deloitte Australia (2011) Residential Mortgage Lending Roundtable, 22pp http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Industries/Financial%20services/Mortgage%20report/Australian_Mortgage_Report_Lending_Roundtable_2011.pdf accessed 9th July 2012 Garden, K.A. & Ralston, D.E. (1999) The x-efficiency and allocative efficiency effects of credit union mergers, Journal of International Financial Markets, Institutions and Money, 9 (3): 285-301 Henry, K. (2011) The Australian financial system: Emerging from the global financial crisis, Economic Round-Up, 2: 19-32 Hermens, A. (1996), ‘ Strategic alliances’, Retailing Management A Best Practice Approach , Chapter 5, in Merrilees W J. and Miller, A. RMIT Press, Melbourne, pp. 83 –99. Hermens, A. (2001), ‘Exchanging knowledge through strategic alliances’, Creativity and Innovation Management, 10 (4), pp. 189 – 200. Hermens, A. (2002), ‘Managing the Interconnected Organization: An Internal Tension Perspective’ In, Clegg. S. (Ed.) Management and Organization Paradoxes. Volume 9 John Benjamin's Publishers, Amsterdam. Netherlands, pp. 295–310. Hermens, A. (2006), ‘The governance of strategic tensions: Alliance stability and performance’, Presented at the Strategic Management Society Conference Vienna. Hillier, D., Hodgson, A., Stevenson-Clarke, P. & Lhaopadchan, S. (2008) Accounting Window Dressing and Template Regulation: A case study of the Australian credit union industry, Journal of Business Ethics, 83 (3): 579-593 Khanna, T., Gulati, R & Nohria, N. (1998), ‘The dynamics of learning alliances: competition, cooperation, and relative scope’, Strategic Management Journal, 19 (3), pp. 193–210. KPMG (2011) The future of Australian bank funding, 40pp http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/The-future-of-Australian-bank-funding.pdf accessed 9th July 2012 Mason, C., Kirkbride, J. and Bryde, D., (2007) “From stakeholders to institutions: the changing face of social enterprise governance theory”, Management Decision 45(2): 284-301 Merrett, D.T. (2002) The internationalization of Australian banks, Journal of International Financial Markets, Institutions and Money, 12 (4/5): 377-397

of 56 ANZAM 2012

Pais, A. & Stork, P. (2010) Contagion risk in the Australian banking and property sectors, Journal of Banking and Finance, 35 (3): 681-697 Sathye, M. (2001) X-efficiency in Australian banking: An empirical investigation, Journal of Banking and Finance, 25 (3): 613-630 Xu, Y., Jian, A.L., Fargher, N. & Carson, E. (2011) Audit reports in Australia during the global financial crisis, Australian Accounting Review, 21: 22-31 Yates, J. & Berry, M. (2011) Housing and Mortgage Markets in Turbulent Times: Is Australia different? Housing Studies, 26 (7/8), Zeng, M. & Chen, X.P (2003), ‘Achieving cooperation in multiparty alliances: A social dilemma approach to partnership management’, The Academy of Management Review, 28 (4), pp. 587–605.

of 56ANZAM 2012

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