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.