Corporate versus Co-operative: a boardroom battle

Nowadays, whenever there is a report of trouble at t'Co-Op, everyone assumes the problem is the bank (again). So it is perhaps not surprising that people are once again asking whether their money is safe, and people like the BBC's Paul Lewis (and me) are reminding them about the FSCS compensation scheme. Let me deal with this now. The FSCS compensation scheme insures 100% of all bank deposits up to a limit of £85,000 per person (not per account). That is more than enough to cover the vast majority of Co-Op Bank retail depositors. If anyone has more than that in Britannia, Smile and Co-Op Bank accounts combined, they know what to do.

But the current mess isn't about the Co-Op Bank. That is in no worse shape than it was last week, or last month, or even last year. This is about the governance of the Co-Op Group - the sprawling conglomerate that encompasses supermarkets, farms, pharmacies, funeral parlours and health care as well as financial services. Managing such a diverse empire would be a challenge for any CEO, and recent problems in the financial services division coupled with poor performance in the over-extended retail division have created quite a headache for the Co-Op's executive management. In a couple of weeks time, the Co-Op Group is expected to report the worst results in its 170-year history. The last thing it needs is a dysfunctional Board. But, it seems, that is exactly what it has.

Euan Sutherland's resignation came two days after details of his pay deal were leaked to the Observer, causing a storm about boardroom "fat cats" taking over the Co-Op. I admit I found it hard to see how the pay was justified, particularly the bonus and retention payment: we would normally expect discretionary payments like these to be a reward for good performance and a share in profitability, not an up-front payment to persuade a chief executive to stay on in a failing firm. Particularly damning was the revelation that John Lewis Partnership, a successful workers' cooperative, pays its CEO considerably less than the Co-Op was planning to pay Sutherland. This made the Co-Op chair's argument that Sutherland's pay was "at the mid-range of comparable organisations" look somewhat weak.

However, it was not only pay details that were leaked, and in some ways the other leaks were more damaging. Boardroom decisions such as the sale of the farms and possibly the pharmacies were reaching the press prior to formal announcement being made. The source of these leaks could only be the Board itself. Sutherland claimed on Facebook that there were individuals on the Board who were determined to undermine him. I don't know whether their intent was personal, but it does look very much as if someone was out to prevent change at the Co-Op and was prepared to use underhand methods to achieve their ends. If this is the case, then Sutherland's observation that the Co-Op was "ungovernable" is accurate. It is impossible for a CEO to do their job if their decisions are constantly being undermined by dirty tricks.

Sutherland says he had been thinking about resigning for quite some time. I can't say I blame him: he has had a bruising ten months. But the reasons are not personal.

The offer of resignation occurred after a difficult Board meeting in which far-reaching changes to the Board structure were agreed, subject to the approval of the membership. It appears that Lord Myners, the independent director who is conducting a review into governance of the Co-Op, is recommending a two-tier Board - a corporate-style board with executive and non-executive directors, and a secondary board containing "members and colleagues", which would hold the primary board to account on ethical and mutual principles. This second board would contain the present elected representatives of the Co-Op membership. It is this structure that Sutherland and Myners persuaded the present Board to adopt. And this decision too was immediately leaked to the press, thereby undermining the democratic process within the Co-Op itself. I think it was this leak, rather than the pay details, that finally confirmed Sutherland's decision. He resigned the following day.

As Sutherland explained to Robert Peston, his resignation was a judicious sacrifice:
His hope therefore is that by resigning and highlighting that the group is a long way from mended (it still needs to reassure the banks that it is reducing large debts of £1.5bn, it has promised the Bank of England to inject £260m into Co-op Bank), the change to management structure he believes necessary will now happen.
"My hope is that from the resignation will come healthy reform," he said.
What form that "reform" will take is the question. Myners' proposal for a two-tier board is unpopular with the Co-Op's regional boards and elected representatives. The co-operatives movement itself is not unaware of the need for change: there is a "grass-roots" movement to push back against Myners' recommendations with ideas of its own, some of which are eminently sensible and should be taken seriously. But there is a very long-established layer of the cooperative equivalent of "middle management" which has a vested interest in keeping things exactly as they are. The comments of an unidentified "source" reported in the Guardian are typical:
"What we have here is a clash of cultures between plc people and the Co-op people. Euan is a plc animal and he is used to responses on a timescale and of a type that the Co-op isn't used to. We have tried this in the past, to bring people in from outside at a senior level, and it has never worked. Because they have not grown through the culture they try to make the beast dance in a way that the beast doesn't want to dance."
I have heard similar comments from my contacts in the co-operative movement. There is a widespread view that the Co-Op is "different" and that a corporate-style governance model is not appropriate. Even though they are hardly a typical corporate governance model, Myners' proposals will be very hard to implement against such widespread opposition, and it may be that they will end up being substantially amended.

But Sutherland falling on his sword does not really change anything as far as governance reform goes. I fear that those who were intent on forcing Sutherland out in order to derail reform have misunderstood the situation. It is not the CEO's job to restructure the Board: that responsibility falls to the Chair. And the Co-Op Chair, Ursula Lidbetter, has made it clear that she too is in favour of reform:
"Euan's resignation must now act as a catalyst for the real and necessary change which the group must go through".
The question is whether a relatively inexperienced chair can push through reforms in the face of what appears to be determined opposition at Board level - and whether she has the authority to remove from the Board those whose behaviour has caused such chaos at the Co-Op. 

So far she has acted sensibly: she told ITV's Richard Edgar that she was investigating the source of the leaks and would "deal with it". She also said that she would not seek to replace Sutherland until the governance changes have been agreed: the CFO, Richard Pennycook - a sound pair of hands acquired from the supermarket Morrison's - will act as CEO for the present. This is a pragmatic decision. Sutherland's remarks amount to a warning to potential successors not to touch the Co-Op with a barge pole until reforms have been made. Recruiting a replacement at the moment would be well-nigh impossible.  

But despite a strong start from Lidbetter, I'm afraid I am not hopeful. Sutherland's observation that the Co-Op is run too much for the benefit of its activists and not enough for the benefit of its members and customers rings true to me. And if he is correct, then his resignation may give those who benefit from the current arrangement cause to celebrate - indeed it seems some already do. From the Guardian, again:
Jim Lee, former secretary of the Scottish Co-operative party and an influential member of the Co-op movement, said: "I'm pleased that Euan Sutherland has gone. I know that there has to be change but I think he imagined we would agree to a traditional business model being imposed on the Co-op. That was never going to happen."
If vested interests can force out a strong and experienced CEO, then an inexperienced chair should be a pushover. In which case the forces opposing change are those really in charge, and the Co-Op will continue to muddle along in a mediocre way, failing its customers and - ultimately - the members that it says it serves. It's a tragedy.

Related reading - the Co-Op Bank saga:

Comments

  1. Ursula Lidbetter's a lifelong co-op person. She's CEO of Lincolnshire Co-op (turnover £288M) and has been on the Board of the Co-op Group for many years. She's also very well regarded by the very people who will need to be persuaded to accept Myners' recommendations.

    Secondly, the notion that the Board must be the source of the leak seems to be as yet unproven; there's also a secretariat who are senior managers in their own right who will be aware of the information. Given it would be gross misconduct to be found to have done so, the balance of probabilities is that its someone on the board, but by no means proven.

    There was always deep, deep scepticism about Myners' process. The secretariat chosen to advise it excluded people with serious academic understanding of international efforts to reform co-operatives, eschewing them in favour of academic advisers schooled in applying plc-style structures.

    It didn't, for example, include a serious strategic review of how the Group's current size and scale related to member benefit, and its approach to de-merging was limited to what cash could be freed up. Then, there's the U-turn on the Insurance business, which having marched everyone up the hill about was suddenly reversed with the Board being informed about it, rather than making the call.

    A very important issue was the 'Have Your Say' issue, which screamed an effort to garner opinion to justify decisions already taken or prejudged, rather than a genuine way to engage the ordinary members who are so disconnected to the actual governance.

    The survey was hackneyed, poorly implemented and the board, having been promised sign-off were then bounced into it, with the questions not in the end seen by them. All this made those closer to the process more sceptical, and, having been burned by the experience of Peter Marks where they failed to challenge execs enough (and were roundly castigated from pillar to post for not doing) seemingly resolved to not be poodles this time.

    Sutherland shot his bolt with the pay stuff. This is real touchstone stuff, and Will Hutton's comment piece on the subject acted as a cri du coeur. Sutherland was very foolish to leave himself open to the attack, and enabled the governance opponents to make cause with the people who found his salary (and bar bill) simply untenable in an organisation where managers have consistently rebuffed efforts to implement a living wage policy whilst inflating their own pay to 240 times the lowest paid.

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  2. The real challenge is to reflect the co-operative ownership status through governance mechanisms that genuinely engage people, not the 3% of members who vote at present. Part of that is the ridiculously closed nature of the electoral process and its absurdly long time horizons (see here for more: http://daveboyle.net/coops/response-myners-review/)

    But even here, a constituency ready to follow him - the vast majority of elected members kept in the dark and pretty powerless - were sidelined because of the way they did the review. Myners was looking at the Board first, then the wider democratic structures. But if you've sorted your board out, then the answers to the second part are pretty finalised too. So either the second act was a farce, or already scripted.

    What Sutherland forgot - and what all those analysts who don't ever spend any time to get to grips with the subject - is that the co-op group, like most co-ops, is as much a political community as a business enterprise. Its novelty comes from the double helix of how these are bound together.

    Sutherland's approach to reform was to get a clever chap like Myners to be his Royal Commission/Consultant type, then the AGM would be brought into line with a judicious leak of some portentious info to Peston about how the Banks owed money by the Group for (stupid) Somerfield deal would take rejection as some totemic symbol of bad faith, and put the Group into Receivership. He didn't want to craft a policy which was based on genuine listening, genuine reform which was calibrated to actually do better democracy. That would have been clever, sound, necessary and popular. He knew this too, having been brought in as a IPNED himself to help the Somerfield integration, so he can't say he was ignorant of the culture. He was a man in a hurry, for sure, but the first rule of athletics is to pick your event, and sprinters don't make good distance runners.

    Where he was strong was in being a good communicator with staff. The previous executives were 20th century people who didn't do engagement. Lots of staff liked him, not least because he was...different, shall we say, to his predecessor. Whoever the group pick needs to be someone with that vital ability to genuinely lead and engage and encourage the group's staff in a way that has been sadly lacking.

    And the democratically-elected parts of the Group need to not see the recent developments as a victory for democracy, but a space where those who genuinely want democracy to connect with members and to add value to the group's activities need to recognise that the ossified, degraded and frankly barely legitimate structures inherited from, seemingly, the medieval Catholic Church, are in need of reform. The Board need to pick a Pope Francis - a humble man who's fidelity to the core tenets that unite the political community leads them to trust that person as they lead the journey to the long-overdue reform.

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    Replies
    1. Dave, I agree with much of what you say. But I really can't agree with the last sentence. The Board does not need a "humble man whose fidelity to the core tenets that unite the political community leads them to trust that person". They need someone who can run a business that is in desperate trouble.

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    2. The co-op is a basket case, what purpose does it serve that cannot be fulfilled faster and cheaper elsewhere.

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  3. It is in desperate trouble, and no-one would disagree unless they were quite bonkers. But there is a genuine issue about whether an approach in which, like the Vietnam general, it became necessary to destroy the village in order to save it, is worth the bother.

    The asset base of the Co-operative Group has been built up over generations and placing it at the behest of the current senior executives to try and save an ship which many think too ungainly to be seaworthy is the height of folly. Better managed demerger, using co-operative societies in ruder health to take on businesses that make strategic sense to them, and enabling new co-operatives to be formed based on those assets where they've outlived their useful purpose in their current incarnation.

    There's a deeper question that co-operatives have to engage in, which is their 'why' (in the sense that Simon Sinek uses it). Co-ops make most sense to consumers the more they can utilise their collective power to correct market failures and where the importance of the business to them and their lives makes exiting their relationship either difficult or tragically ruinous. The politics of food which underpinned the co-operative movement all those years ago are now very different. I can make a case for a co-operative funeral business, a pharmacy and so on, but I struggle with food.

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    Replies
    1. Dave,

      Now this I can wholeheartedly agree with. Deconglomeratise, and give up on the supermarkets.

      Delete
  4. The Co-op Group needs a co-operative CEO - someone who understands the nature of co-operatives and what makes them different from investor-led enterprises. They exist! Look at Midcounties, The Phone Co-op and Ursula Lidbetter's Lincolnshire Co-operative.

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  5. I think even the notion of 'the right person to fill the CEO role' is questionable. East of England Society run with a collectively accountable executive team. Bob Cannell and other business thinkers have been critiquing self-serving business school nonsense about systems theory in businesses and the myth of the executive manager for years.

    The Group needs to both devolve and repurpose in a way that's probably unprecedented in UK corporate history, and unthinkable for mainstream business - but it's all totally possible.

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  6. Wasn't aware of EoE structure until now Sion. Really interesting:

    http://www.eastofengland.coop/about-us/our-executive-team

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  7. Maybe the Co-Op should try to sell it's food franchise and farms to Waitrose - the Co-Op Food brand might work as a second tier brand for John Lewis.

    @Business_Write

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  8. Textbook diseconomies of scale where an organisation has become so large that the feedback mechanisms needed for decision-making have imploded?

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  9. Yes, I think so. All the examples of co-operative good governance that I have seen (here and elsewhere) are much smaller organisations. The layered management structure I described in the post is very typical of organisations that have grown too large, and it is a considerable impediment to decision-making and responsiveness. I'd break the Co-Op Group up, personally. And I would sell the supermarkets. I know there is considerable emotional attachment to them, but I'm with Dave on this - I can't see that the co-operative model offers anything sufficiently distinctive to make them a viable business proposition in the longer-term, given how cut-throat competition is in that sector.

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  10. The Co-op Group Board agreeing to relinquish strategy and decision making to the Executive is like the UK Prime Minister handing power to the Civil Servants. ie not democratic and not theirs to hand over
    To me, this structure means we no longer have a co-operative and should relinquish the co-op name along with co-op democratic control structure.
    The new proposal sounds to me like the NHS Foundation Trust governance, with an Exec + NEDs Board and mainly elected Council of Governors to add some hint of democratic scrutiny. I am a Staff-elected NHS FT Governor and I can assure everyone - a co-op it ain't !
    The ideas around splitting tCG into more manageable chunks - it whatever form - sounds a better way forward to me. In fact, what about a wholesale co-op plus regional retail co-ops?....mmmm....sounds familiar.

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  12. Maybe Dr Marnish could help the Co-op and Mr Sutherland to give things another whirl

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  13. So now Lord Myners has some trenchant and unkind words to say in his published review, including “The Co-operative Group suffers from acute systemic weaknesses in its governance framework that over many years have gravely damaged the organisation.”

    How long before some one or other Co-Opista refers to Myners as "the enemy within"? LOL

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  15. Sods ----- Law.
    March.---- 2014.

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    Two yorkshiremen both running their own small family businesses trying to resolve the problem by taking all the correct legal procedures to recover their monies.

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    any documents/evidence.------ in fact they wrote to us advising us to go to the Citizen's Advice Bureau.(CAB.)
    Richard Alderman the SFO boss ---- who responded to our letter was the same man who would not investigate the “ Madoff” scandal or the “Libor” fiasco.
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    Our M.P. approached our local Chief Constable to investigate----- he was called---- Sir Norman Bettison--- Chief Constable of West Yorkshire Police ---- a force that made “ Dad's Army” look like the S.A.S. They were inept – corrupt ---malicious --- from top to bottom. We were criminally dealt with by the Forces Solicitor---- the Head of the Economic Crime Unit ----and the Chief Constable ----- so there.

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    We even sought justice through the Courts --- culminating in a visit to the Court of Appeal-London.--- On leaving the Courts of Appeal that day our barrister a “rising star” informed us --- that if that was Justice then you can keep it. He quit the law and moved to Canada ----- so there.

    A few years later we learned that one of the judges in our case at the Court of Appeal was related to a senior executive of the Pictet Bank -----so there.

    Pictet & Cie .Bank --- voted private bank of the year 2013.
    Ivan Pictet ---- Voted banker of the year 2012. ---- the senior partner --- lied on numerous occasions and had documents destroyed --- also said genuine documents were forgeries. ----- so there.

    Ivan Pictet in Oct. 2013 ---- Given the Legion of Honour --- but saying that ---- honours were given to Hitler --- Eichmann --- Mussolini ---Franco --- he's in fitting company. ----so there.

    MONTY RAPHAEL.Q.C. -- Peters & Peters.London. They were the banks lawyers.
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