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How can co-operatives get governance right?

Lord Myners, the architect behind the Co-operative Group’s governance reform, presented his views on the organisation’s crisis to a group of academics.

A conference, Is mutuality the answer to the ownerless corporation?, organised by the London Business School, looked at the role of governance and ownership in business. Paul Coombes, chair of LBS’s Centre for Corporate Governance, said: “This is about what is the purpose of the corporation and the merits of different ownership forms.”

In what he described as a public debate on ownership, sparked by the financial crisis and the growth of the Occupy movement, he commented: “There is considerable concern about the drawbacks and excesses of investor-owned corporations and unacceptable management, plus the concerns of consequences of that for important societal values.”

Lord Myners discussed his Co-operative Group findings, but stressed: “Failures in governance are far from being the exclusive preserve of the Co-op Group. Plcs and state-owned enterprises also fail in terms of governance.”

A root problem is that “nobody owns enough to care enough” of a co-operative to be invested in its future, said Lord Myners. “At the Co-op, the board had difficulty understanding large and complex organisations and was slow in decision making.

“The board should be able to systematically add value and provide strong governance. It was not possible for a single member to attend an AGM. This lacuna had been allowed to exist for many decades without anyone saying ‘it doesn’t sound very mutual, not very co-operative’.”

He also said he was pleased that the Group has started to put through changes. “The members council has got off to a good start, but a competent board of directors is essential. However much you believe in co-operation and mutuality, good intentions are simply not enough, the board needs skills.”

Paul Coombes said: “Mutuals and co-operatives don’t live in a separate universe where the rules of economics don’t apply, they have to compete with the others. They may be successful, but they are less prevalent when competing with other forms of business.

Mr Coombes added that the problems are visible in the movement’s history from the 1940s when its pricing edge was being eroded by supermarket chains and co-operatives started to merge with each other.

“Growing scale and complexity was a problem that the co-op movement found hard to deal with because the costs of ownership were very contorted,” he said. The “tragedy” of the movement started here through complex “hierarchical” membership levels and “when a co-op got into trouble” other co-ops rescued them and took on their problems. “The result,” said Mr Coombes, “was underinvestment and over distribution”.

To strengthen the governance and oversight of co-operatives, Lord Myners suggested that regulation of the sector should be strengthened. “The FCA is the registrar for co-operatives, but it doesn’t serve any useful purpose. The FCA takes no continuing responsibility of the sector unless the mutual is a financial mutual, which is then not taken seriously.”

He added that no arm of government currently offers protection for members of co-ops, and that this is needed.

Simon Wong, an adviser to the Myners Review, commented: “Member control sounds quite appealing, but it’s more complicated in practice. First of all, which members are you attracting, which are the ones who will get involved in governance? You need stewards who are interested in the ins and outs of the business, and have the skills and experience.

“With the Co-op it was surprising in our findings how few people wanted to talk about the business.”

Mr Wong said the most successful co-operatives focus on the “nitty gritty” and make the values about the business. “Look at John Lewis,” he said. “It’s all about the business, the social mission of John Lewis is to create a successful business.”

Problems around competence also arise when a co-operative becomes large and complex, according to Mr Wong. He said directors need to “keep up with management” and in doing so, “if you have a top tier management, you need the same of directors”.

“Incompetence gives rise to delays in decision making,” he said. Co-operative Group directors made decisions “with a bitter taste in their mouth” and “often felt they’d been bullied, which poisoned the relationship with management”.

Ultimately “stewards and trustees will feel increasingly frustrated,” he said. “The solution is to appoint professional directors selected solely based on their experiences and skills.”

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