Bill Jamieson: Co-op Bank must make big changes

The Co-op Bank attracted savers with a promise of accountability but has let customers down. Picture: Getty Images

‘Manifestly dysfunctional”; “a business calamity”; a “corrosive” culture; “they can’t tell the difference between a credit and a debit”: It is hard to conceive a more damning report than that presented by the former City Minister Lord Myners on the Co-operative Group.

Coinciding with its release yesterday was a £400 fine imposed at Leeds Magistrates’ Court on the disgraced former Co-op Bank boss Paul Flowers: a rotten cherry on a crumbling cake. He had pleaded guilty to charges of possessing cocaine and other drugs. Last year he stood down from the Co-op following concerns about expenses.

What is as shocking about the unfolding debacle at the Co-op is not only the near-collapse of its bank after the discovery of a £1.5 billion hole in its balance sheet, but the tone of exasperation and despair over the group’s governance that tinges almost every page of the Myners report. The group, he says, is effectively in the hands of an unaccountable cabal, making a nonsense of its democratic “member-run” pretensions.

This will make highly uncomfortable reading for the group’s eight million members and 90,000 employees – as if earlier news of a £2.5bn loss last year, the worst in its history – was not enough. But it is deeply worrying, too, for all those who looked to the Co-op as a progressive alternative to the plc company model.

Amid growing public cynicism over the behaviour and governance of quoted companies – particularly in the wake of the banking crisis which struck down RBS and HBOS – there was a resurgence of interest in mutually owned organisations and companies which offered a genuine alternative – both in organisation and in culture – to the big beasts of the stock market.

The Co-op seemed to offer that alternative. This sense of member ownership has helped to build the group over its 150-year history and to sustain a network of more than 4,500 shops – the fifth-largest food retailer in the UK – and a range of pharmacy, funeral, electrical, travel and legal businesses. The Co-op reached deep into Scottish life: my parents were members and I can recall our membership number to this day. It took pride, not in seeking to be like everything else in the high street, but in being different.

It is the chasm between the outward persona of a democratic and accountable “mutual” and the reality of an organisation effectively out of control that makes this report such depressing reading.

The Myners report is a catalogue of failings across both the governance structure of the organisation and its very culture – one he describes as “corrosive”. “Radical decisions on governance structure”, he urges, “need to be taken very soon – and with resolution – if the Co-op, as my mother knew it, is to be saved.”

This crisis cannot be said to have come entirely out of the blue. In the early 1990s, the share of the grocery market enjoyed by predecessor organisation the Co-operative Wholesale Society (CWS) had declined and the viability of its business model was in doubt. In 1997 entrepreneur Andrew Regan made a hostile £1.2bn bid. This was engulfed in allegations of fraud and commercial leaks. It was rejected and two senior CWS executives were dismissed and imprisoned for fraud – and not before some embarrassing revelations about the secretive boardroom structure and eyebrow-raising salaries.

The episode was thought to have provided a catalyst for rejuvenation. A Co-operative Commission, set up by Tony Blair and chaired by John Monks, made major recommendations for the co-operative movement, including the organisation and marketing of the retail societies. But here we are, back at the starting gate.

The latest report comes just days after the group was sharply criticised in a review by Sir Christopher Kelly into the near-collapse of its banking arm. This almost collapsed last year and had to be rescued by bondholders in a move that saw the group’s stake reduced from 100 per cent to 30 per cent.

How has all this come about – in the very organisation that many regarded as being a bulwark against very similar failings evident in the conventional plc model?

Arguably the most problematic feature is the failure of the group to sustain a corporate culture that might have prevented it from the excesses of its plc counterparts. For despite the mutual structure, the banking arm succumbed to exactly the headlong pursuit of acquisition that played a major role in the unravelling of Scotland’s biggest banks. This is a sobering conclusion and one which exposes the limitations of reliance solely on rules-based reform. Culture must also change.

The Co-op’s convoluted organisation structure played a large part. It has 48 area committees which each have between ten and 12 members. These elect members of seven regional boards who in turn elect 15 members of a board that can be as large as 23 members. There are also boards for the food business, the bank and specialist businesses.

This multi-layered latticework of group and regional boards and area committees not only slows down decision-making, it also marginalises the competent. “The group’s bottom-up, competitive election process”, says Myners, “provides no rigour for assessing the commercial capability levels of candidates as there is no meaningful competency bar in place. Similarly, it provides no scope to balance the capabilities and fill skills gaps”. The group’s board was “still stuck in denial over this near ruinous failure of governance”.

He recommends a smaller board, made up of members with similar skills and experience to those at competing companies – such as Tesco and Sainsbury’s in food and Nationwide in lending.

But reform will not be easy. Around 100 eligible members will have an opportunity to vote at the annual meeting on 17 May on a resolution which the Co-op says provides a framework for governance reform. But the board is not obliged to act on these recommendations. And a previous suggestion for reform ran into resistance from traditionalists.

Somehow the Co-op has to come up with a structure that allows professional personnel expertise to grow and flourish, while still meeting obligations of accountability and transparency. And that means more than a recent Co-op member meeting where questions to the board featured demands to stock Fairtrade bananas and “eggs laid by ‘happy chickens’”.

How can we have a mutually owned business model but also one professionally run and commercially successful? How can such models avoid the corrosive culture that struck at plc banks?

It is not enough that we simply have more banks or more food retailers. We need different forms of market address, governorship and structure for there to be genuine choice and competition. In the immediate aftermath of the banking crisis we looked to mutual companies and organisations like the Co-op to offer alternatives to the plc model.

This is where the crisis that has overwhelmed the Co-op has wider ramifications stretching well beyond its immediate membership. A pluralist economy needs to offer real choice and genuine diversity. It is all the poorer without it.