Another cooperative bank demutualisation

Vivian Woodell of the Phone Co-op has drawn my attention to a news report of the proposed stock market flotation and demutualisation of a small cooperative bank in Melrose, Massachusetts (here). You’ll see that Vivian has also added his own comment on the webpage, making the point that “the fundamental purpose of a shareholder-driven business is to make money for shareholders, whereas the purpose of a co-operative is to serve its members”.

Capital has been identified by the International Co-operative Alliance as a key issue for the global cooperative movement to debate, and the ICA’s absolutely right.  We have lost too many cooperatives (especially financial and agricultural cooperatives) over the years to the private sector because traditional equity capital seemed to be the only new source of capital on offer.  We need some innovative solutions for capital for coops, including taking a new look at the opportunities for member-provided investment capital.

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The lurking danger of demutualisation

Vivian Woodell, the chief executive of the Phone Coop, has sent me an email link to a recent article in The Australian.  It begins, “The nation’s second-biggest wheat exporter, CBH Group, is facing calls to abandon its co-operative model amid rising investor interest in the agribusiness sector, with estimates that corporatisation could unlock $5 billion in value for more than 4000 growers.”

In fact, I understand indirectly from the Australian cooperative movement that this story comes from a Murdoch-owned newspaper trying to stir things up.  It’s good to know that there are many who believe CBH should stay resolutely cooperative.

Nevertheless, demutualisation – which has caused such problems in Britain over the past twenty years –  remains a worldwide threat to the cooperative movement, and one which needs to be tackled head-on.  This is yet another reason for the importance of discussing new capital instruments for coops.

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.