Charting the way forward for Britain’s coop movement

If you’re interested, my report of last week’s conference Ways forward for the co-op movement is now up on The Guardian’s website (here) and awaiting your comments. (Or of course you can also respond here on my blog).

Picking up on one of the points I took from the event, I think there is an urgent need for the UK cooperative movement to learn from (larger) coops abroad about how they handle their corporate governance and member engagement. I don’t necessarily think that large businesses can’t be run cooperatively, but it would be extremely helpful to know which coops have developed the best practice here. My own – very initial – thought on this is that there are a number of Canadian and French coop insurers which would be worth a close look.

Governance and democracy in the Co-operative Group

Friday’s conference in Manchester, Ways forward for the Co-op Movement, was well attended and valuable, I thought.  I have just filed a piece about it for the Guardian’s Social Enterprise pages, and will draw your attention to it when it appears.  Well done to Co-operative Business Consultants for organising the day.

There was much discussion at Manchester of ways to improve the Co-operative Group’s governance and internal democracy including a number of quite radical ideas. It’s perhaps worth mentioning, therefore, that last Thursday (the day before the conference) saw the terms of reference published for the corporate governance enquiry which the Group itself has commissioned,  chaired by Lord Myners. You’ll find the press statement here.

Myners will be looking first at the Board structure, before moving on to consider ways to strengthen links with members.  Some people at Manchester thought that this is a back-to-front way of doing things:  shouldn’t you begin with member democracy, they asked?  So Myners’ eventual recommendations may well be contested territory.

My prediction on what is likely to emerge from Myners includes (a) a smaller Group Board (generally considered a good idea) and (b) much more use of non-elected non-executive directors, an altogether more controversial proposal.

I have argued before that,  following the Bank crisis last year, we’ve seen a growing attack (led by some MPs and some newspapers) on the very idea of cooperatives as member-controlled businesses.  Potentially the coop movement could be at risk of losing not just its Bank but the very core of its being.  The  Myners enquiry is as important as that.

Voting for member democracy

A ballot paper arrives:  there are seven members standing for three places on the Board of Directors of the Phone Co-op.  Good cooperative corporate governance requires among other things active member democracy, and the Phone Co-op almost always obliges in this respect.

(Yes, all right, six of the seven are men, and better gender balance would be helpful.  But just at the moment I want to focus on good things happening in the cooperative sector).

One hedge fund takes the money… as another one arrives

Today’s Financial Times reports that one of the US hedge funds involved in the Co-operative Bank restructure, Aurelius, has already sold almost all its stake in the Bank (don’t get too excited, it’s gone to another hedge fund, Perry Capital).  The cooperative world has frequently talked of the short-termism of the capital markets and here, it would seem, is a text-book example.

The FT dedicates a whole page to the recent story of the Bank and the Co-operative Group, a generally very fair feature which assesses what has been happening and why.  The paper also reminders its readers of recent difficulties among other cooperatives, including (as I’ve reported here) Rabobank.  FT journalist Patrick Jenkins quotes a Moody’s analyst Carola Schuler who puts current problems at cooperatives down to two core causes, corporate governance and capital allocation.

Actually, I think, Moody’s analysis is absolutely right.  The FT doesn’t go on to add (but I will) that both issues have already been identified as key issues in the International Co-operative Alliance’s current strategic work agenda.

Heart attack: how the UK coop movement’s most important institution could be at risk

Remember the name Andrew Regan?  Let me remind you that he was the City-backed entrepreneur who in 1997 attempted to take over CWS (what is now the Co-operative Group) at the height of the carpet-bagging frenzy over building society demutualisations.  Aided by information fed to him illicitly by two coop senior managers (both later imprisoned) Regan might very nearly have pulled off his coup.  But the cooperative movement got its act together and fought back.  The end result, if you like, was Coop 1, City 0.

There will be those in the City and Wall Street who are discussing now whether this is the moment for the rematch.  Weak companies attract predators and the Co-op Group is undoubtedly weakened by recent events.  I talked recently in a blog about those ideological enemies of the cooperative business model who are gloating at the Group’s current misfortunes, but here I am not so much concerned about the gloaters as about those dispassionate (and more dangerous) money-merchants, those who will be looking without emotion at the Co-op Group’s balance sheet and seeing a business – or rather a conglomerate of businesses – which they believe could be made to be much more profit-generating.  They will see a business generally underperforming and not necessarily well managed, with excess fat which can be stripped away.  (For ‘excess fat’ read, among other things, all those idealistic member-relations people and those innumerable area meetings for members and those worthy grants to organisations like Co-operatives UK and the Co-operative College).

In other words, don’t believe for a moment that private equity and hedge funds will stop at the Co-op Bank.  The Group is potentially an even bigger prize.

What might the tactics be?  The Co-op Group’s complicated internal structure makes a building society-style demutualisation via a hand-out of ‘free’ shares to members very difficult if not impossible to achieve (although I fear that most of the seven million individual members of the Group would just at the moment seize such an offer if it were ever to be tabled).

Rather I think we can anticipate a long game being played. I think we can expect some of the Group’s businesses (funerals…  pharmacy… farming…) to be targeted.  Remember that there is a precedent: the Group has already sold majority ownership of the Co-operative Travel business and brand to Thomas Cook.  (Actually, it may make strategic sense to separate some of these businesses from the core retailing business.  But if that is to happen I would want to see the movement campaigning for the new businesses to be structured for the long-term as new autonomous cooperatives, not as short-term cash cows for private equity.)

But the core retailing business will be being sized up, too.  The Bank disaster will leave a long wake stretching several years hence, and the Group could be further weakened not only if its trading performance stays poor but also by Bank-related litigation.

So what is the response?  Firstly, I’d suggest, there is a need to look to ways to strengthen member engagement and stronger levels of accountability within the Co-op Group.  The governance structures may need to change but the aim must be to become more cooperative and democratic, rather than the opposite. Let’s borrow from Garibaldi and the Italians and campaign for our own cooperative Risorgimento.

And secondly, I’d suggest, there needs to be urgent work to develop major new financial instruments for larger cooperatives, accessing pools of capital which, whilst still expecting a return on investment, would be more sympa to the whole idea of values-driven cooperative enterprise.  If there is a need once again for significant capital in the UK cooperative movement, the instruments and the capital must next time be ready and waiting.

The low-down from inside the Co-op Bank

For those interested in the British cooperative movement, the must-see website at the moment is that of the Treasury select committee.  This is where you can access the transcripts (and the video recordings) of the interviews that the select committee is conducting with key past senior managers of the Co-operative Bank and Co-operative Group.

The draft transcription of the encounter last Tuesday with the Bank’s former CEO Barry Tootell has now appeared on the select committee’s website, and together with the interviews with Peter Marks (ex CEO, Co-op Group) and Neville Richardson (Barry Tootell’s predecessor at the Bank) provide a real insight into life at the top at the Co-operative Bank in the past five years.

I have to say that I think Barry Tootell performed very well and I find his account of the merger with the Britannia Building Society convincing.  We now know that the Britannia bequeathed a shed-load of bad debts to the Co-op, but I’m prepared to accept that at the time the Co-op did do the appropriate degree of due diligence.

There’s an interesting comment from Barry Tootell when he was asked for his impressions of the Bank when he first was employed there in 2007.  He replied: ”It was a business that had historically operated with a high degree of competency. I was quite impressed in joining the Co-operative that not only did they have a culture within the business that was hugely collaborative and very , very open and non-political and a great place to work, but also with very high calibre people recruited into some of the key roles. I was quite pleased when I joined the business that they were not — it is a slightly disrespectful view — sleepy and backward looking as I might have thought they were.”

Although the Bank has its own Board of Directors (with five ‘professional’ non-executives) The Co-operative Group, the Bank’s parent, operates with a twenty-member Board directly elected by the Group’s members.  I detect implicit criticism of this arrangement (a cornerstone of cooperative corporate governance)  from some members of the select committee, and it’s interesting that Barry Tootell did not take the easy way out and collude with their criticisms.  Instead he said: “I think we have genuinely benefited from the diverse opinions that we see in our boardroom. We have the represented views of the broader membership of the Group sitting in our boardroom and playing a part in the debate that we have as directors. Whether that be bringing the ethical card to bear or whether that be representing the broader view pf the membership, it is a helpful check and balance to some of the decision-making we have undertaken. I do not think we have fallen short by having that broader democratic representation in our boardroom.”

As I’ve suggested in a previous blog, I have a real concern that the Co-operative Group will respond to its present woes by moving away from member representation in its management.  There may be a battle ahead here.

The Co-op Bank and the Select Committee hearings: could the coop’s democratic governance be the next thing to be lost?

I have been watching television this morning.  More precisely, I have been watching the video feed from the Treasury select committee where former Co-op Group and Co-op Bank senior managers are one by one being hauled up to explain to the MPs what they think went wrong at the bank.  Today it was the turn of former Bank CEO Barry Tootell to face the questions.  Tomorrow the Bank’s former Chair Paul Flowers has his turn.  It cannot be something he is looking forward to.

The videos of past sessions remain available at the website and provide the best evidence yet available of exactly what was happening at the Co-op Bank in recent years. It is definitely worth looking at last week’s encounter with Peter Marks, the Co-op Group’s recently retired CEO, for example, characterised by some acerbic interventions from committee chairman Andrew Tyrie.

One of the lines of questioning pursued today by the select committee was whether the Group’s and the Bank’s corporate governance was up to the job. There was more than a hint (particularly from the Conservative members) that the Co-op’s democratic structures and the role these structures give to elected lay Directors must have contributed to the Co-op Bank’s problems.  To his credit, Barry Tootell today robustly defended the Board composition at the Bank, defending the role of the non-executive directors whom, he said, had both helped and challenged him when he was CEO.  Peter Marks by contrast took a very different position last week, implicitly criticising the Co-op Group’s elected Board and arguing for corporate governance reform (one of the few times he and the select committee seemed in agreement).

It strikes me that it would be compounding a tragedy if, as well as effectively losing the Co-operative Bank, the present crisis was to lead the cooperative movement to weaken its democratic corporate governance structures. The City and its friends have in the past sneered at the role of lay directors (“a plasterer”, “a Methodist preacher”) at the Co-op Bank.  There is, however, no evidence that more ‘traditional’ boards at, say, RBS or HBOS managed their jobs any better.

How to get the balance right in cooperatives between elected non-executive directors and those non-executive directors brought in because of their professional expertise is an important question which I think urgently needs more discussion.  Without this, there will be a risk of a gradual slide towards cooperative boards increasingly made up of the usual type of professional non-exec.  It happened in the building society world many decades ago, and I don’t think it helped building societies remember their responsibilities to their members.