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Time to Democratise Building Societies

April 12, 2016

First published Feb 2014.

In theory building societies should surely be one component of a sustainable banking sector. In practice although they are ‘owned’ by members, the board always succeeds in getting all its nominees elected, and so members have no control. Banks which are plcs at least have to worry about the share price. Building society boards have been completely unaccountable. The Building Societies Members Association (BSMA) – www.building-societies-members.org.uk – exists to challenge this state of affairs. Help their campaign to get one or more member nominated directors elected.

Building Society legislation is not fit for purpose. Any changes are made on the advice of the Building Societies Assocation, which represents directors rather than members.

Someone has asked me exactly how it is that the building society boards manage to ensure that only their nominees get elected. It works like this:

The building society board will decide who they want to fill any vacancies that arise. They will nominate exactly as many candidates as there are vacancies. Members have the right to nominate their own candidates. However this fact is not advertised; to discover this members would have to search through the website for a copy of the rules, or contact the secretary to ask for a copy. Furthermore each such candidate needs to be nominated by 250 people, and the society will not contact members asking for nominators, so it is quite a task to contact the 250. Also if a second member wished to stand he or she has to find a different set of 250 nominators. In spite of that there have been member nominated candidates in the past.

If there are no member nominated candidates, members are invited to votes ‘yes’ or ‘no’ for each of the board nominated candidates. Unsurprisingly the ‘yes’ vote always wins; members are given no useful information on which to judge the individual candidates. If you want accountability always vote No to the elction of each board nominated candidate.

If there are member nominated candidates, then the multiple X vote is used to elect the requisite number of directors. Suppose there are four vacancies to fill and, in addition to the board’s nominees, there is one member nominated candidate. Each member is entitled to cast up to four votes but does not have to use all four of them – though the wording on the voting paper can suggest otherwise. If a member wants the the member nominated candidate to be elected and decides to cast all four votes then he or she has to decide which of the board candidates to leave out. Different members will make different choices and so votes cast for the member nominated candidate will be largely cancelled out.

In this situation if every member votes for the member nominated candidate then he or she will be elected. Suppose 10,000 members between them cast 40,000 votes. Then the member nominated candidate attracts 10,000 votes leaving 30,000 to go to the other four. That is 7,500 each if they are equally distributed. If however only 8,000 members vote for the member nominated candidate, then the others attract 32,000 votes between them, which if equally distributed is 8,000 each.

It follows therefore that if every member uses all their votes it is likely that in order to elect the member nominated candidate, then approaching 80% of voting members will have to vote for him or her. However if members can be persuaded to vote only for the member nominated candidate then the desired result becomes more possible.

Possible remedies for the unsatisfactory situation include:

  • Elect directors by preferential voting (Single Transferable Vote). At the moment the legislation prevents this and it is not in the interest of the main political parties to change this.
  • Provide that at least one place on the board is reserved for a member nominated candidate. Again this would require legislation but the main political parties might not be quite so vehemently opposed.
  • Adopt the Swedish practice of including stakeholders other than board members on the nominations committee.
  • Adopt a similar practice in relation to the remuneration committee.

Board members’ total remuneration packages are unacceptably high. If you want to challenge this always vote to reject the report of the remumeration committee (itself made up iof board members.)

Note that these suggestions are the author’s and not necessarily those of BSMA.

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