22/04/2014 07:54 BST | Updated 22/06/2014 06:59 BST

Future of British Co-operatives Rests on Radical New Thinking

Former CEO Euan Sutherland's parting shot across the bows of The Co-operative Group (The Group) following his resignation was that it was 'ungovernable'. Lord Myners' resignation, following resistance to his reform plans, further substantiates this claim. Both have left a business struggling to cope with mountainous debts and fundamental challenges to its business model. Many have since offered views on how these challenges might be addressed, including the most recent Myners Review (commissioned by The Group), and a host of journalists. What has been lacking to date, however, is these issues placed in proper context.

This is critical, because these issues are not new to the Co-operative Group. Along with its predecessor, The Co-operative Wholesale Society (CWS), it has experienced recurring corporate governance crises over its 150 year history that have brought its whole existence into question. It's also important to look at The Group's current corporate governance challenges in a broader context. Recent reports by John Kay and the Ownership Commission have highlighted that governance difficulties are certainly not a co-operative monopoly. What's happening at The Group is a microcosm of wider issues affecting UK businesses. Above all though, we need to link this corporate governance discussion to an analysis of The Group's business model and its relationship with its owners. It is time to ask some hard questions, because failure to think radically places the future of co-operation in the UK in jeopardy.

Having started in 1863 as a secondary co-operative supplying local retail societies with everything from food to manufactured goods, it has evolved into a conglomerate covering food retailing, pharmacies, funeral care, banking and insurance, legal services, agriculture, energy and a part share in travel agencies. Over time the ownership has also become more dispersed: while its original owners were retail co-operatives, after it moved into retailing from 1973 (when the Scottish CWS was obliged to merge with its English counterpart as a result of its bank's illiquidity!) and hundreds of societies were absorbed by CWS, by the 1990s millions of individual consumers were registered as owners. This mass membership has resulted in a 'democratic deficit' within the Group and some other co-operatives, with allegations that cliques in local and area management dominated, effectively disengaging most members from the running of the organisation. These two fundamental features of The Group remain prevalent features in 2014.

Other issues have surfaced too, though. The recent Myners Review revealed systemic governance weaknesses (for example, in board appointment processes), strategic misjudgements, and a lack of board member expertise and influence which ultimately leads to diminished performance. Recent CEOs have been more concerned with building scale through an aggressive acquisition strategy, something that arguably further marginalised individual members. As Peter Marks (CEO, 2007-13) noted when describing his strategic vision: "We were on our way to becoming the most ethical business in the corporate graveyard".

This last point links closely with the broader observations arising from the Kay Review of UK equity markets, which highlighted how the interests of investors and management have diverged to such an extent that it's become essential to bring a greater degree of engagement and stewardship. This parallels what we're seeing at the Co-operative Group, with many members feeling isolated from the senior layers of executive management while the lay board lacks sufficient expertise to influence strategy.

So where do we go from here? How do we tackle these deep-rooted issues with the business model, organisational culture and corporate governance structure at the Group? Here are some options:

  • A restructuring of the commercial focus of the Group, away from its traditional dependence on food retailing towards new areas of growth such as legal services, housing, social and health care, and educational services - areas where continuing state retrenchment for the foreseeable future are likely to create new and more member-beneficial opportunities, and where an ethical approach to provision is especially needed. This could be combined with the development of a package of member benefits to reflect this commercial focus. This would re-energise member involvement and commitment, an essential pre-requisite for the engaged and vigilant membership essential for effective governance.
  • Dissolve the Group, and create separate co-operative societies to own and run the respective commercial fields in which The Group is involved. If one accepts Sutherland's claim that The Group is 'ungovernable' because of its Leviathan-nature and being spread across too many unconnected sectors, this might be a way of improving governance and making it easier for member engagement and vigilance to be enhanced. Careful structural design of the successor co-operatives would be essential, though. Either way, it is clear that new arrangements are needed to secure a better balance between executive management and lay representation, perhaps involving more professional experts as executive directors who would be capable of challenging proposals. There should be no repeat of the situation whereby The Co-operative Bank's board was nominated almost entirely by The Group.
  • A membership-driven Mission that is visibly manifested in the actual corporate governance mechanisms, employed within either The Group or any new co-operative society structures. A key aspect of this would be the development of a benefits package that incentivises membership (as with Finland's SOC, which provides a wide range of financial discounts and welfare services to members). This would overcome the current uncertainty about The Group, reflected in the common question: 'What's the difference between shopping at Tesco and the co-op?'

Achieving radical restructuring and mission reorientation - whatever precise form it takes - would also contribute extensively to British businesses and investors thinking more seriously about effective interaction and engagement.

The frank message to The Co-operative Group is that corporate governance reforms cannot be separated from the need to alter a business model that does not currently offer many benefits to its owners. In turn, this new business model must actively engage its members to radically improve accountability and performance.

Unless both of these challenges are met, the future of the British co-operative movement could be bleak.

John Wilson is Director of Newcastle University Business School.

Anthony Webster is Professor of History, Northumbria University.

Dr Anna Tilba is a Lecturer in Strategy and Corporate Governance, Newcastle University Business School

John Wilson and Anthony Webster, along with Rachael Vorberg-Rugh, co-authored Building Co-operation. A Business History of The Co-operative Group, 1863-2013, published last year by Oxford University Press.