If you design a boxing ring, then what you get is a fight…

With Lord Myners resigning from his Board position this morning, it continues to be a tough time for The Co-operative Group – among the worst in its long history. Yet for all that, our research shows considerable goodwill at a public level with people hoping that the business can pull together.

By and large people are aware that this is just one co-operative and the wider mutual model is one that still carries a high degree of trust. There are over six thousand independent co-operatives across the UK, with a turnover of £36 billion. Only 6% of UK adults say, in polling research, that what has happened will change their view of co-operatives in general.

The financial results now due for the Co-operative Bank, like all audited accounts, will look back, but, however its final capital call is resolved, the bank itself is looking to the future. It may be a slow recovery path but it will remain distinctive in terms of its ethical position and will of course retain close connections with the wider co-operative sector.

As with The Co-operative Bank, The Co-operative Group has indicated that it will cut core costs in order to compete more effectively and this is a critical part of a wider business recovery plan which is now firmly in train. Any successful business needs effective governance, with change where needed, but in the short term, it is the performance and financial state of the Group’s businesses that matters most.

What we are seeing within The Co-operative Group are the pains of change in a much more public setting than you would in any other business. When you are owned by seven million people, what you do will always be of public interest. Business, in this case, has become a spectator sport. Ultimately that transparency is a good thing, for public trust, but of course what happens is framed in part by that public and media coverage. If you design a boxing ring, then what you get is a fight.

In reality, we have much more agreement than disagreement on the next steps. The principle of reform is accepted, so there is indeed now a consensus for change. But how to change is not yet agreed and that’s not unreasonable. There are pressures to move fast, but I have always said that there can also be unintended consequences when you move to something entirely new in governance terms, which is what the proposals of the independent review led by Lord Myners represent. The way to manage overall risk for The Co-operative Group is to test, refine and get the governance right.

Lord Myners, who will still complete his independent review of governance this month, proposes a ‘twin peaks’ model, with an expert Board, focused on commercial performance, and a wider Membership Council, focused on social goals. He wants to bring The Co-operative Group into line with the practice of other consumer co-operatives of having direct elections to the Board from the full membership. But he has not published the full proposals in anything but outline form, so it is not unreasonable for there to be debate on how something like this could work in practice.

It is true that this may yet spill over into conflict or into gridlock, if we move into megaphone debate, with critics taking aim at each other, saying that this is the end of the business or the end of its mutual values. The Co-operative Group will survive if it successfully navigates both challenges.

The traditions of co-operative action, which are about listening and dialogue, ought to help.

What I am confident will emerge over the next period is a strategy for a transitional process of getting the business from where it is to where it wants to be. It doesn’t need every single actor signed up, but it does need sufficient consensus – failure to take people along on this journey could simply create a new set of problems down the line.

It remains a relatively simple step, once Lord Myners has reported, and if the leadership is there to start this, for dialogue among the key representatives to lead to a governance reform package that is timely, best of class and fit for purpose for a modern mutual.

Is there any gain in pain? Reflections on the Co-operative Group in the news

It has been an extraordinary period for the UK’s largest co-operative over recent months and weeks. Commercial challenges, financial losses, capital constraints are not uncommon in business. But what has turned this into a very modern celebrity business crisis has been internal conflict, played out in such a public setting.

When I was young, I was told ‘if you can’t say anything nice, don’t say anything’ and it is fair to say that those words have come to mind more often recently, as the leaks, briefings and comment spill over. As I wrote in the Huffington Post recently, it is an odd form of corporate self-harming, as many of those involved and reviews conducted are or were paid for by the Co-operative Group itself – so that’s either honesty (one of the co-operative values) or an overly masochistic view that there’s no gain without pain.

At the same time, of course I accept that this is a legitimate public topic. There is a need for radical change, to raise standards, cut costs, borrow less and then invest more, innovate again. And when a business is owned by millions of members, then there is going to be public interest in what those changes are.

Although this story is far from complete, with results and reviews to come and capital calls to cushion the Co-operative Bank, I do at least get a sense behind the scenes of an emerging consensus over the need for change. Far more of the talk is about the right kind of change – how, in other words, rather than whether. If so, that in itself is a corner turned.

I am interested too in how those most closely involved have also instinctively rallied round to support each other. I am astonished by the resilience and character showed by staff at the Co-operative Group, with the awful drama they have faced. I am proud of co-operative members who pop up at random in the media, unscripted, unpaid for, but with a passion and hope for the Co-operative that is the signal of something still special that has been tested but not broken. And of course there is the reminder in my daily work and contact with our own members that this is just one co-operative and there are six thousand that are trading well, ahead of the economy at large.

This idea of resilience is an entirely contemporary and compelling business issue. Companies that go from good to great, and that last are resilient. The great strength of the Co-operative Group is precisely that it has faced real crises a number of times over its long life. The corporate raiders, for example, have tried before, are trying and will try again.

Each time, the Co-operative Group has emerged stronger, more agile as a result of the experience. Each time, it has drawn strength by becoming more distinctively co-operative rather than less. No-one can take the same outcome for granted – it has to be earned. But for all the foibles, its character and values as a mutual business have always been a source of renewal.

Some years ago, I contributed a chapter on co-operative character to a book by the think tank Demos, focusing on individuals rather than enterprises. In more recent work, nicely supported by the employee-owned, mutual business Arup, Demos now defines resilience as “the capacity of an individual, community or system to adapt in order to sustain an acceptable level of function, structure, and identity.” The subtle point is that survival is not about continuity, but about the change that enables that continuity.

Robert Owen, the pioneer of co-operation, was also fascinated by the idea of character. Penning the first of his “Essays On The Formation Of Character” in 1812, Owen saw character as a set of habits, behaviours and beliefs that were formed by the environment in which people operated. Character was not fixed. It emerged from people’s circumstances, but could in turn shape or reinforce the context and community that people lived in.

On January 1st, 1816, Owen opened the New Institution for the Formation of Character — two buildings financed out of company profits for learning and leisure, including the world’s first workplace nursery, or creche. As soon as children were able to walk, they were taken into the creche and, at the age of three, they entered the infant school. The teachers were specifically instructed to be kind and encouraging to instil self-confidence.

Is there any gain in pain? Probably not. But if pain is a symptom of a great business bringing itself to a point of change and the chance of renewal, then pain for now, it just has to be.

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Foraging for innovation – lows and highs of a co-operative life

It has been a roller-coaster of a few days.

The CEO of the Co-operative Group has bowed out after a weekend in which his pay and bonus was front page news. What he was paid to do though wasn’t, he felt, achievable. Every step of this poker game seems to have been leaked to the press, which is a rare return to the worst days of the demutualisation attempt by Andew Regan – when one executive went to jail for leaking confidential information.

There will need to be change and renewal at the Co-operative Group and the hopeful signal is that of a clear strategy and purpose underway, to be championed by the capable new (interim) CEO, Richard Pennycook, and his team. This is a very challenging time, but it helps to remember that this is not the first time the business has been tested and it has always emerged as a stronger, more agile, resilient enterprise.

The highlight of today, in contrast, was something deeply co-operative, which was a visit to Glasgow’s Greencity Wholefoods. Babs, pictured here with me below, confesses that “my first love is warehousing”, which is a perfect fit for one of the 40+ members of a wholesaling worker co-operative.

While the Co-operative remains an ethical retailer, because of its ownership structure, Greencity, which only stocks from ethical suppliers, has had to delist some of the former ethical business wonder kids that, with investor ownership, have grown by being sold off to big business – Rachel’s Dairy, Ben and Jerry’s. As a result, they are on a constant search for product innovation, particularly from Scottish suppliers.

One of these, Babs shows me, is Sea Buckthorn Juice. It is labelled as ‘wild and Scottish’ – “just like us” she laughs. Sea Buckthorn is a shrub that you find on the coastlines. The product is gathered by a collaborative enterprise of foragers. Its bright orange berries are full of vitamin C and E, omega oils and minerals. Low carbon, sharp tasting… It is quite something.

Enterprises such as Greencity give me plenty of hope for the co-operative model. It is never so easy in business to organise around ethical values at scale, but if there is a right way to do it, it is to turn those values into a source of innovation – or to return to those values as a source of renewal.

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Co-operatives and executive pay

There have been debates on how much to pay managers and wider staff in the co-operative sector right from the early days.

As perhaps with any issue of economic fairness, there have tended to be two schools of thought. The first is that there might be a universal standard of fairness, that a co-operative can embrace. The second is that what matters is ‘process fairness’, in which executive pay is considered openly and appropriately by members, reflecting the democratic governance model of member-owned coops.

An example of a universal approach may be, for example, that you get out what you put in. The training co-op Zebra Collective has a flat management and pay structure, and pay is decided according to how much training and how much administration staff members do. Or it may be an egalitarian principle of equal pay. At SUMA, the wholefood co-operative, all staff are paid an equal salary and share from success in an equal way through dividends. Others, like Co-opportunity, have equal basic pay but pay a large divided based on a series of weighted factors which differ between individuals.

With the Spanish worker co-operative Mondragon, winner recently of an FT global business award, there has long been a ratio set between top and bottom pay. The original ratio was up to 1:6 and was chosen as a way of encouraging managers to raise pay if they needed a pay rise themselves. In the 1980s, the ratio grew to 1:15 – as too many managers were being lured away by higher pay elsewhere. Fairness, after all, in a competitive market sits alongside the test of effectiveness. Alongside this, pay at Mondragon is set according to measures which include productivity and absenteeism and measures of how well staff members get on with other people (constituting 20 per cent of the pay decision).

There tends to be something of a difference, though, between worker-owned co-operatives on the one hand and consumer-owned and enterprise-owned co-operatives on the other. The member benefit for one is about fulfilling work, including earnings, while for the other it is about the gains of trade – and executive pay, including valuing the role of executive leadership, is part of a primarily commercial set of judgements on how to achieve that.

So, there is no single right answer. What matters is that there is an open conversation with members on these issues – executives are paid with members’ money and what is paid to them to get the job done, whether too much or too little, is ultimately down to members. These are not issues hidden away from sight – in fact, there has been healthy and lively debate within the member governance of The Co-operative Group in recent years around issues of pay and co-operative values, from exploring the living wage through to details in the accounts on who among senior staff was paid what when they left. Debate like this can be a sign of strength.

But when you run a democratic model, process matters. The last period has seen what from the outside has sometimes looked like a trickle of media comment that reflects one group of decision-makers criticising another and vice-versa. That is no way to operate, let alone co-operate.

In Mondragon Co-operative, salaries are called anticipos, because they are intended to be seen as advances on future wealth creation. That must be right. Rather than talk about executive pay in the distorted frame given to us by mainstream business, of ‘compensation’ and ‘entitlements’, the focus should be on what will deliver success for members, in line with their values, over time.

Flooded with debt? How community finance can help

We are, as an economy, flooded with debt.

The rebranding of ‘debt’ as ‘credit’ ranks is now recognised as something of an economic folly. It sidestepped a very British tradition of self-help and responsibility. While debt still mounts, the marketing of credit papers over the reality – that widening economic inequalities make access to consumer choice far less open than before.

Today, I have been in Bristol with an exemplar of social innovation, which is the field of UK community development finance. It is a young sector, but energetic and one of the few options that appears to have bite in relation to needs such as enterprise finance, housing repair and capital for renewable energy.

The state of the sector is set out in the report 2013: Inside Community Finance – 53 community finance organisations serving over 50,000 customers. The model, diverse as it is, reflects some radical ideas.

1. Finance can be a way of bringing people together. Before it became Triodos, the Bristol based bank was, in the UK, Mercury Provident – a cooperative society. It chose the name because it saw in the messenger god a model of how banks should work – light, fleet of foot and transparent in connecting up savers and borrowers.

2. Finance can be a way to build business advantage. The example of community shares, that we support with advice through the Community Shares Unit with Locality and DCLG, and the microgenius community shares platform focuses on equity. The reason this works so well is that for local assets, is that when people are able to invest, they also want to participate in the life and success of the venture. That can mean customer loyalty, workforce engagement of a kind that outcompetes other options – sometimes the co-operative model is the only business model that could work.

3. Finance can be a business for everyone. Over one million people are now served by credit unions. Being involved in a credit union, a co-operative financial institution, is more than putting money in or taking it out. It means being a member, being involved in the running of a community bank. Not surprisingly, getting involved is a great way of building financial literacy and business skills.

But like all social innovations, there is the challenge of how to scale up, without selling out. The three suggestions that I offered to the 200 practitioners (including Unity Trust Bank, London Rebuilding Society, Co-operative and Community Finance) gathered in Bristol for the Community Development Finance Association conference were:

1. Accountability – the most effective mutual finance models worldwide are those that care about quality before they are required to by the regulators: the self regulation of the Desjardins Caisses in Quebec, the peer auditing of co-operative banks in Germany.

2. Values – the attraction of growth through access to mainstream markets led the world of micro-finance into rogue and shallow practices under the guise of being the next Grameen. We are not so pure that we can’t work with and learn from others, but you need strong values and strong purpose to counter the lure of gold.

3. Capital. Community finance initiatives need the blend of capital sources that can reflect that accountability and values. Here, our national policy framework for community finance has it all wrong. Why can mainstream UK banks can get capital at well under 1% for lending to small businesses and community development finance initiatives are being charged 3% – 4% from Big Society Capital? That is not the fault of Big Society Capital, but it is the policy framework that designed that in. As my colleague, Pat Conaty puts it, if you grow on the back of impatient capital, you become an impatient source of finance, just like the rest.

All this is not rocket science. This, after all, was how capitalism was supposed to work. You made money out of business, not money out of money. Stock markets were mutuals. Community finance is recreating what banking once was, because there are forms of banking that are worth saving.

In a world flooded by debt, it is good to be reminded, in the right hands, what a wonderful tool for social change money can be.

No Flowers, Please – what has happened to the reputation of co-operatives and mutuals in the UK?

The challenges of The Co-operative Bank and the furore around the role of the former chair, made co-operatives – businesses that are member-owned – an unhappy national news story in late 2013.

Three months on and I feel that I can breathe again. But what difference did these high profile troubles make to the wider co-operative sector and the long-term reputation of our business model?

The Huffington Post carries an article I have written, which draws on our member feedback and market research. Of course, it is still early days, and much now depends on whether the troubles that flared up, with their welter of regulatory and official inquiries to follow, are put behind us – that there is, in short, no new scandal.

Overall, though, co-operatives have a resilient brand, there is still considerable public trust and sympathy and what held for one co-op, in banking, and not unlike other banks, is not seen to hold for others.

It is still a time of co-operative opportunity. Today, for example, I am visiting Midcounties Co-operative that is pioneering innovations in the energy market and in childcare – both sectors in which commercial good practice can be emblematic of a more hopeful future for all. They are a great example of the thousands of creative and enterprising co-operatives and mutuals across the UK.

The short report that I have written that this draws on is up now, and called After the Storm.

Governance in co-operatives

The vocabulary of organisations, in books, business schools and workplaces, tends to be a language of hierarchy. Governance then refers to the direction of a business – the ultimate ‘buck stops here’. A different model is to understand governance in ecological terms, as a system of feedback, which allows businesses to correct course where needed. 

Whichever one you prefer, good governance has to combine the qualities of direction and of listening.

The weakness of vertical hierarchies for example is that information becomes filtered and more removed from reality the higher it gets. The executive directors see it from their vantage point in the business. The non-executives are independent, but, removed from the running of the business, often also unaware. The weakness of horizontal collectives can be a tendency to information overload, restricting action when it is simplicity rather than complexity that is needed. 

The governance of co-operatives and mutuals is fascinating because across our different forms of business, you can see both at work, with all the respective strengths and weaknesses.

The claim to greatness of the co-operative model is the idea that ownership rests with those who are most closely involved in the life of a business. These members bring knowledge, commitment and, arguably, an alignment of interests with long-term performance rather than short-term gain. In reality, the nature of membership varies across different types of co-operative, with different ways of being involved. Some lose sight of it altogether. But, for all the diversity of practice, the two characteristics that are shared by all outstanding co-operatives are member engagement and good governance. 

Without these, and in the absence of some of the accountability mechanisms around public companies with traded shares, such as financial analysts, institutional investors and the scope for take-overs, the strength of the co-operative model becomes instead its weakness.

Co-operatives UK operates a number of quality standards, to guide co-operatives in relation to good governance. These include the Code of Governance for Consumer Co-operative Societies, the Worker Co-operative Code of Governance and a standard currently under development for agricultural co-operatives. In other countries, such as the Netherlands, there are similar codes, while in Germany, they are the basis of extensive peer review and self-regulation.

The UK Code of Governance for Consumer Co-operative Societies is a self-regulation quality standard intended to ensure that consumer retail co-operative businesses are well run and meet their members’ needs. The code was first launched by Co-operatives UK (then the Co-operative Union) in 1996. This code has now been comprehensively revised, after a period of open consultation in the co-operative sector. The code sits alongside the usual legal requirements set out in law or, from time to time, by the Financial Conduct Authority. 

The co-operative code is based on the UK Corporate Governance Code, with considerable overlap, for a good reason. Good governance is in many respects about the same underlying principles – such as the accountability of a Board to the owners, the role that a Board has in directing but not managing activity, the duty a Board has in relation to due diligence, risk management and so on.

The main difference is that a co-operative board has to act in accordance with the co-operative values and principles, whereas the board of an investor-owned business simply has to provide responsible leadership.

There is therefore a stronger emphasis in co-operatives on active participation. Members are encouraged to play a part in governance, whereas shareholders in listed companies simply monitor governance by the board. The co-operative board is expected to engage with active members and maintain close relations, whereas the investor-owned business board is charged only to ensure dialogue with major shareholders.

There are some high profile issues that will have a different emphasis in co-operatives.  The form of executive compensation, for example, may be somewhat less contentious in a co-operative. Because there are no offers of share options to top managers as part of their remuneration package, the opportunities for inappropriate incentives or abuse are more limited.

The revised code sets out twenty high level principles, spanning 163 separate provisions, which societies are required to report against, on a ‘comply or explain’ basis, to their own members in the Annual Report as well as to Co-operatives UK, which monitors compliance with the code. The code will also be subject to periodic review and revision. In particular, there will be a need to consider the review by Sir Christopher Kelly in relation to The Co-operative Bank when this is completed in May and by Lord Myners, who is looking into the governance of The Co-operative Group. 

In the meantime, we are looking closely at international trends on governance, with case studies of a number of large-scale co-operatives world-wide. This work is being carried out by Professor Johnston Birchall, Research Adviser to Co-operatives UK. Don’t let anyone tell you that co-operative models of governance are not for large-scale businesses. There are 1,465 co-operative enterprises world-wide with a turnover of over $100m.

The values of good governance are close to the traditional values of co-operatives, including self-responsibility and honesty. Good governance in mutuals may not be a guarantee of business success, but sustained commercial success does unquestionably require a high quality of governance over time – close to members, but decisive in terms of strategy and action.