Saturday, 17 May 2014

A tale of two reviews

The last few weeks for the Co-Op could perhaps be called “a tale of two reviews”. Firstly, there was Sir Christopher Kelly’s report into the disastrous takeover of Britannia Building Society by the Co-Op Bank. Secondly, there was Lord Myners’ review of governance in the Co-Op Group.

Sir Christopher Kelly’s report tells a shocking story of deceit, corruption and utter incompetence in both the Co-Op and Britannia, both before and after the merger. The true state of Britannia’s balance sheet appears to have been deliberately concealed from those tasked with doing due diligence, and there were financial shenanigans designed to create the illusion of value when in reality value was being destroyed.  Britannia was by no means a sound business prior to the merger: it had extensive subprime mortgage exposure and a highly leveraged (and it now transpires, overvalued) commercial property book. But what I find more worrying is the evidence that AFTER the merger the enlarged Bank was not in control of its loan book. In the 2011 accounts, nearly a third of its loan portfolio was described as “unrated” for risk. Put bluntly, the Co-Op Bank under Neville Richardson had no idea what risks it was carrying on its balance sheet, let alone how to manage them.  

Nor was this the only problem. The scale of compensation for PPI mis-selling at the Co-Op Bank is, proportionately to the size of its balance sheet, nearly as large as Lloyds Banking Group's. And the Co-Op Bank is the only bank to have been censured by the regulator for breaking the Consumer Credit Act by misleading people about the terms of their mortgages.

The failure of financial and risk management at the Co-Op Bank exposes a deeper malaise. What happened at the Bank was a failure of Co-Operative values. A bank that deceives its owners and mistreats its customers is not an ethical bank, however many ethical investments it makes. The Co-Operative Group lost control of its bank long before the hedge funds moved in.  

Sir Christopher makes it clear in his report that attempts by Group Board members to evade responsibility for the Britannia merger and its consequences are unacceptable. “We didn’t know, we were kept in the dark” is no defence.  Admittedly, professional boards in other financial institutions have been equally incompetent: but that is no reason to excuse what happened here. It is a sad reflection on the state of the Co-Op Group Board that those responsible for the disastrous Britannia merger and the subsequent mismanagement of the Bank could so comprehensively deceive them, to the detriment of the Co-Operative businesses and members.

And this brings me to the Myners Review.

Lord Myners’ review goes far beyond the troubles of the Bank. It examines the state of the Co-Op Group as a whole. And for me, it made incredibly sad reading.  The Co-Op Group is a shadow of what it was when I was a child, when it was the market leader in retail and at the heart of the communities it served. Despite successive attempts at reform, it has failed to respond to the challenges of an increasingly competitive retail environment. It is in long, slow, possibly terminal, decline.

It is clear that the Co-Op Group must undergo radical reform if it is to survive, and I have no doubt that Myners’ recommendations were done with the best of intentions. But he presented his argument so badly that instead of bringing together co-operators and executives in a shared commitment to reform, he set people’s backs up and generated opposition and even outright hostility.

And yet I think he was on the right track. 

The heart of the Co-Op Group is its values and principles (this table is from Myners' report):



These are not solely the province of elected representatives. They should be deeply embedded in the business culture and permeate throughout the organisation, from top executives down to those who serve on shop counters. 

There are two that I particularly want to highlight:

ETHICAL VALUES: Caring for others – we regularly fund charities and local community groups from the profits of our businesses

PRINCIPLES: Member economic participation – all profits are controlled democratically by members and for their benefit.

Both of these discuss how the profits created by the Co-Op Group should be used. But the existence of profits is simply assumed. I don’t know how many times I have heard people say to me, when discussing the future of the Co-Op Group, “It’s not about profits”. Many co-operators feel more at home with the values of the public sector and the third sector, where service, not profit-making, is the primary objective. 

But the Co-Op Group is a commercial business and its job is to make profits. Indeed it MUST make profits. Without them, the social purposes of the co-perators cannot be achieved. In order to redistribute profits, you must first make them.

It was clear to me from Myners’ report that lay directors are often more comfortable discussing how profits should be used than how they should be earned. This reflects a fundamental separation at the heart of the Co-Op. On one side there are what we might call the Value Generators – the Board, Executive and staff of the Co-Op Group – whose job it is to earn profits. On the other side are what we might call the Value Distributors – the co-operators – who have wider social interests and responsibilities. 




























At the moment these two don't trust each other. Co-operators talk endlessly about the need to "control" the executive: the executive, it seems, is trying to sideline the co-operators. This rift is deeply damaging. 

Both sides are essential. Both are bound by the same set of co-operative principles. And both have shared objectives. They just have different jobs.

What Myners has attempted to do is reflect this separation in his new Board structure. On the Value Generation side, he has suggested a professional Board which has the knowledge and expertise to run the business on commercial lines while respecting co-operative principles & values. On the Value Distribution side, he has proposed a National Membership Council (NMC), made up of elected Co-Operative members. The new structure would free up lay directors to concentrate on their real interests and enable the Board to concentrate on running the business.

However, he has failed to explain adequately what the relationship between these two bodies should be. And this has unfortunately led to lay directors feeling that they are being “excluded” or “downgraded”. Nothing could be further from the truth.  The Board is accountable to the membership not only for its adherence to Co-Operative principles, but also for the financial performance of the Co-Op Group as a whole.  So the NMC is not a “subordinate Board”, and lay directors have not been “downgraded”. On the contrary, it is if anything an “upgrading”.

If the direction of accountability were clear, then I think Myners' model would be workable - it is, after all, similar to twin governance structures used in many successful co-operatives in other countries. But by itself, it does nothing to heal the hurt and mistrust at the heart of this business. And it is this, above all, that threatens the survival of the Co-Op Group. Unless co-operation is restored between elected members and the executive, I fear it is doomed. 

A shorter version of the above was given as a speech at the Cooperatives Renewal conference on 16th May 2014.

Related reading:

Final Report - Sir Christopher Kelly (pdf)
Report of the Independent Governance Review - Lord Myners (pdf)
Myners Plus - Cooperatives UK
Not Myners Plus but Myners Minus - Lord Myners

16 comments:

  1. Superb blogpost Frances - this chimes with my experience/observations of when trust between ministers and civil servants break down. In particular this happens when a new minister comes in with little understanding of how large organisations function, little familiarity of working with people who are constitutionally bound to be party-politically neutral in their professional work and a contempt based on the previous party-political bosses they worked for. Heard how this happened in 1997 under 'New Labour' from some long-time civil servants and saw it happen in the post-2010 cuts, when many civil servants (myself included) jumped first rather than be pushed.

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  2. gastro george17 May 2014 20:19

    The Myners report suffers, AFAICS, because it diagnoses the problem as being an executive that was out of control, and then prescribes giving more power to the executive,

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    1. I disagree, actually. The Myners report clearly identifies incompetence in both the executive AND the Board as being the primary problem. It proposes having a Board that actually knows what it is doing and is properly accountable to the membership. Personally I think that is a considerable improvement.

      I also object to the common view that the executive must be "controlled". In a co-operative, the executive must co-operate and be co-operated with. Anything else is contrary to the co-operative model. It is the failure of co-operation on both sides, and the consequent destruction of co-operative values and principles, that is the real problem.

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    2. gastro george17 May 2014 22:54

      My apologies Frances, I was being more than a bit glib. I should have said that part of the problem has been the media's response to the report, which has focussed on the need for more executive power - and essentially suggesting that the Co-op needed to turn away from co-operative principles towards a more "normal" business model. Whether that's a correct interpretation of the Myners report, I can't say.

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    3. It is unfortunately rather easy to interpret Myners' report in that way. Whether that is what Myners intended I'm not sure. He takes for granted that everyone understands corporate business models, but in the co-operative world many people don't. Consequently some of Myners' proposals are seen as "corporate" or "plc" when they actually are not. His proposal is nothing like a plc model, actually - it's much closer to the twin governance models used in some successful co-operatives in other countries. I think many people in the UK co-operatives movement didn't appreciate this until the conference yesterday, when our Italian friend explained how twin governance models work in Italy. That was the turning point. After that, I think many people felt much better about Myners' model.

      But I don't think Myners really went to the heart of the matter. He noted the poor relationship between the Board and the Executive, but failed to challenge the fundamental denial of co-operative values that is embodied in the distrust between co-operators and managers. He should have been FAR more critical of both the Board AND the executive - not of their actions, but of their attitude. And he also doesn't adequately address the disengagement of ordinary members. Giving them a vote at the AGM isn't going to turn 7m loyalty card holders into active co-operators. The Co-Op Group has an awful lot of work to do.

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    4. gastro george18 May 2014 17:55

      Myners doesn't help by feeding the media: http://www.theguardian.com/business/2014/may/18/co-op-group-needs-to-reform-faster-lord-myners

      Reforms are needed but, IMHO, they shouldn't be rushed, as the correct balance of powers is vital.

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  3. Frances, I'm not sure I agree with your distinction between first making profits and then redistributing them to meet social goals (and I think that's where the 2001 Co-operative Commission tripped up too). Making profits is essential (and requires a competent Board to achieve that), but the businesses must have an underlying social purpose or else what's the point? Indeed, Lord Myners himself rightly comments (7.9) that unless the "businesses address unmet needs" or are "run in a radically different way from commercially owned competitors" then you might as well sell the lot and create a tax-exempt charitable foundation instead. The response from Co-operatives UK to Myners makes a similar point: "The splitting of the social from the economic allows boards and managers to assert the primacy of economic over social goals, so that social goals then have to be put on hold until after the co-operative makes a profit. The whole idea is too simplistic, suggesting trade-offs where there should be synergies. It is the needs of the members that gives the co-operative direction, tying the economic and social together, and that makes its governance possible."

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    1. Martin,

      If you read my piece again you will see that my point was more subtle than that.

      The values and principles of the Co-Op Group - which include its social purpose - define and drive how the business works and therefore how the profits are both earned and put to use. The whole business - members (activists), staff and management - should be working in accordance with co-operative values & principles.

      I have not suggested that social goals should be "put on hold" - although that might be a reasonable thing to do at the moment, given the precarious financial financial position of the Co-Op Group. Rather, I have suggested that due regard should be given to the need to make profits, and the Board should be accountable to the membership not only for its demonstrated commitment to Co-Operative values & principles (including its social purpose), but also for its financial performance. How you can construe this as meaning that I want to sideline the social purpose of the Co-Op Group is beyond me. I simply want to remind everyone that making money is as important as spending it.

      I do not like the attitude of Co-Operatives UK. If boards and managers assert the primacy of economic over social goals, it is because the financial position of the business is compromised - as it unquestionably is at present. It would be a highly irresponsible Board that committed to social projects with no clear idea how it would generate the money to pay for them, or indeed of their future returns (since positive feedback loops are of course possible - I allowed for this in the diagram). But this is what has been happening. It is disingenuous of Co-operatives UK to ignore this. And it is utterly wrong of them to suggest that the objectives of boards and managers are not aligned with the needs of members. That is the damaging rift of which I spoke. Co-operators really have to stop talking of "controlling" managers to prevent them going off the rails. Talking in that way is itself a fundamental denial of co-operative principles. The managers who run the business should be regarded as fellow co-operators, not untrustworthy servants. And any managers who are not 100% committed to co-operative principles should not be working for the Co-Op Group. This is actually one of Myners' proposals which everyone seems to have overlooked, but which I think is really, really important.

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    2. Frances, apologies if I have misconstrued you, and I certainly didn't mean to imply you had suggested social goals should be put on hold - my point was to agree with Co-operatives UK (rather than disagreeing with you!) that there should not be a separation between the economic and social. To put it bluntly, unless Co-operative food retailing meets some distinctive social need of the members (which is questionable), then is there any point in pursuing it?

      I agree with you that it is not the primary job of the Board to 'control' managers or even to 'hold them to account'. In my view a Board should primarily add value to how the business operates. However, at the moment (and for many years past), it is very doubtful if anything like a majority of managers are '100% committed to co-operative principles'. I speak from experience: shortly before I left the Group in early 2004, my line manager told me that I was almost the last person at any kind of senior level who really believed in the principles.

      But as we can't very well sack those managers who are not committed to the principles, what do we do meanwhile? I guess at least part of the solution is to reintroduce a thoroughgoing grounding in the principles for all employees (and especially managers) - which was in fact something that was introduced when Graham Melmoth was CEO, but only lasted a few years.

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    3. Martin,

      I don't disagree at all about the need for a distinctive social agenda at the Co-Op. My point was actually that the rift between executive and co-operators makes it very difficult for there to be common goals. I share your concern about food retailing, by the way - I'm really not sure that the Co-Op has a sufficiently distinctive offering to be able to overcome member apathy.

      I completely agree that at present, Co-Operative values & principles are not widely upheld at the Co-Op Group. Indeed that was one of the major points I made in my post - admittedly about the Bank, but the same applies to the whole Group, really. But I am very concerned that the widespread belief among co-operators that management (in particular) will never be committed to co-operative principles and therefore cannot ever be trusted undermines the entire enterprise. As someone put it at the conference on Friday, if you treat people like crooks, they tend to behave like crooks.

      Yes, training in and reinforcement of the principles at all levels of the Group is absolutely essential. I'm surprised it isn't already being done. Though actually you CAN dismiss people who refuse to commit to the principles, or who demonstrate through their behaviour that they are not committed. Some commercial banks have done exactly that, with considerably less justification than the Co-Op - after all, in the Co-Op's case it is existing values & principles that are being flouted, whereas commercial banks are trying to enforce values & principles they didn't previously have. However, it would be much better if people who were uncomfortable with the values & principles were encouraged to seek employment elsewhere rather than dismissed.

      I share your concern about food retailing, by the way. I'm not convinced that the Co-Op has a sufficiently distinctive offering to overcome member apathy and competition from commercial providers. And I'm worried that selling off so much of the business leaves the Group dangerously dependent on a struggling retail business. I'm not sure this is the best strategy, though it is difficult to see what other options there are, given the emotional commitment that co-operators seem to have made to retailing.

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    4. Oops, repeated myself! Oh well....

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  4. Frances surely all Co-ops UK are responding to is the fact that in this situation the Group's managers and workers are not the 'co-operators' because they don't (at least in principle) own and control the business. They therefore, and rightly, have a different take on the question of 'who benefits'?

    It's the opposite of a workers' co-op but there's one similarity: to provide decent jobs, a workers' coop has to provide goods and services people will pay for. And a consumer co-op can't serve its members without a motivated workforce. It's not a question of 'believing in the principles'. Co-op ethics and values are more an outcome of co-operation than a recipe or creed. It's what people do that matters, not what they proclaim a belief in. If I was a store manager (let alone a shelf stacker), I'd be justifiably sick of the pious talk, even if I felt obliged to pay lip service.

    Culture eats governance for breakfast, and I think the Group's real problems are its gigantism, centralism, loss of autonomy and above all the irrelevance of its product and service offerings to most of its 'members'. Fixing these may well be beyond us. But I think all Co-ops UK is doing is trying to help the Group clear the immediate ground of fresh constitutional landmines, so that if and when brave people start on the real work, they don't get their legs blown off.

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    1. Sion,

      If I thought that the attitude displayed by Co-Operatives UK in this and other communications only reflected the current problems, I would not have been so severe. But I have found a dismissive attitude to managers and workers to be unfortunately pervasive among co-operators. There seems to be a widespread view that managers (in particular) will never share co-operative values and therefore can never be trusted. Hence the continual calls for the executive to be "controlled". It's fundamentally unhealthy and I will continue to challenge this attitude whenever I encounter it.

      I think enforcing co-operative values and principles when managers and workers are not themselves co-operators presents a considerable challenge. Myners suggests making active membership a condition of employment, at least for senior executives. An alternative would be to adopt a hybrid workers/consumer co-operative model. There may be other options. But I am absolutely certain that continuing to regard managers and workers as untrustworthy because they are not co-operators is both unethical and unworkable. If the managers and workers are dancing to a different tune, then the Co-Op Group is a co-operative only in name.

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  5. It worries me when you keep banging on about the Co-op's "values". Somehow I can hear a future Labour Government saying that Co-op values are so crucial for society that taxpayer money should be used to prop up the Co-op.

    I also remember the Co-op as a child, and I am afraid that people are starting to reminisce about a Golden Age of the Co-op that never really existed. My impression of the Co-op from the beginning was of dingy stores run by people with an attitude that said "I am working here, not serving here." and competing on the basis that the "Peoples'" store was allowed to have higher prices, narrow choice and poorer service because "Co-op" was a value that over-rode normal commercial considerations.

    There should always be the freedom for people to create Co-ops if they want, just as there should be the freedom for Venezuelans to choose Bolivarian values over fresh food, but as a nation, shouldn't we be getting over that Fifties contamination of economic efficiency with socialist principles?

    Hm, the good old Post Office with its eighteen month waiting periods for a phone, versus BT with its phone stores. Which should I choose? That's a toughie.

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    1. gastro george21 May 2014 16:12

      "Hm, the good old Post Office with its eighteen month waiting periods for a phone, versus BT with its phone stores. Which should I choose? That's a toughie."

      That's a hoary old cliche, Jon. You might as well compare the Post Office to the 19th century telegraph system. Technological progress is a marvellous thing.

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    2. gastro george22 May 2014 10:35

      BTW, you obviously haven't heard of the 3, 4, 6 month delays in getting OpenReach to put in connections. Very old PO.

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