What happens to the Co-operative Bank over the next period comes down to who owns what, when the dust settles and whether that helps one of Britain’s great recent ethical businesses move forward.
How to operate with minority external investors is something we explore in a new report we have released, called Good Governance in Minority Investor Owned Co-operatives – a review of international practice by the distinguished academic, professor Johnston Birchall.
The reasons for a hybrid model with external investors can vary. It may be an investor-owned business that is considering moving towards full co-operative, member-ownership, as in the case of the efforts of supporters trusts in football. It may be a co-operative business on the opposite path, towards demutualisation. Or it may be a co-operative or mutual, needing to bring in new investor equity alongside existing co-operative capital.
The main case studies are to be found in the fields of agricultural and financial co-operatives, with the addition of businesses, notably in the insurance field, that are part-owned by co-operatives:
- In the last 20 years, agricultural co-operatives have faced enormous pressures to grow into large agri-food businesses, so as to compete with transnational corporations that threaten to reduce them to the –increasing unprofitable – role of a marketing co-operative. In order to move along the supply chain they have needed masses of capital, sometimes far more than they could raise from their members. Some of them, notably dairy co-operatives in Ireland and Switzerland, have put their ownership stake into a holding company and then floated the co-business on the stock market. Examples of co-operatives that have taken steps of this form include Kerry Creameries, Glanbia and Emmi. However, most co-operatives have resisted this option and have found other ways of raising capital that do not compromise farmer ownership.
- In financial services, Credit Agricole is the largest French mutual bank, but for historical reasons at the national level it still has a substantial private equity stake, though at the regional and local levels it consists of independent co-operative banks. Kenya Co-operative Bank was owned by agricultural co-operatives, but it floated on the stock market and put its farmer ownership stake into a holding company.
- Some co-operatives have invited in a minority investor-ownership stake and then decided that it was a mistake – examples include the French co-operative bank, BPCE, and the American insurance provider, Nationwide Mutual. So they re-mutualised, back to 100% member ownership.
The report focuses on the key role of good governance and how this can be designed to work from the outset. As I see it, what underpins good governance, in turn, has to be good membership.
The Co-operative Bank in the UK has an unusual structure, in that it is not owned by its customers but by a consumer co-operative whose business includes food retailing, travel, funerals and other services. Its membership and governance are pooled with the wider business of the Co-operative Group. Co-operative banks in Europe have a two tier system of local and national banks, directly owned by their bank customers. In some countries, such as Sweden and Japan, retail co-ops are not allowed to have their own bank, because the regulators see banking as a dangerous activity that should be isolated from other (potentially loss-making) activities – who now would say they are wrong?
Conversely, when things have indeed gone wrong, some co-operative banks turn to their members rather than external investors to make up the losses. In Japan, the Norinchukin Bank made losses that were exposed during the 2008 banking crisis, having purchased worthless US securities at a time when the rating agencies were saying these were triple A secure. The bank turned to its members, who are farmers, to return it to solvency. The financial gap was around $900m, and they members indeed made up the loss.
Membership is vital. it could be argued that UK financial mutuals have tended over time to anaesthetise the role of members – Building Societies for example by having to treat customers automatically as free members and looking for additional capital from non-members. There are some member rights (a fact exploited in the wave of demutualisation from the 1980s) but less member responsibilities. Successful co-operative banks, such as Rabobank, focus on their members, both in the way they do business and in governance, which for them is a complex but effective two-tier structure.
Where things go wrong, as they have for example with Britannia Building Society being merged into the smaller, successful Co-operative Bank, then it may be that there is not enough co-operative member control, genuinely reflective of the customer base, rather than too much.
In the immediate context, for the Co-operative Bank, it is likely that money will want to talk and shape what emerges. But whether or not this happens, over time, for a bank to be genuinely different to its competitors in serving customers, it is membership that matters.