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.