Can Co-op Group Learn from Waitrose Governance?
It was interesting to see Sarah Butler in the Guardian comparing the fortunes of the Co-op Group and The John Lewis Partnership last weekend. Clearly, the decisions of the last Group management to try to buy market share for the Group via Somerfield and for the Bank via Britannia and the Lloyds Branches were important. However, as Paul Myners has pointed out, that arose, in part, from the failure of the Group Board to have any effective oversight of the managers or enough board members with the expertise to achieve that. Maybe having elected directors who were concerned about Co-op Values and Ethics but incapable of effectively challenging business decisions suited the executives while also suiting the politicos from the area committees and regional boards who got those jobs.
The FT claimed last Thursday, in a story (perhaps coming directly or indirectly from those favouring the Myners reforms?) that at the April 2014 Group Board meeting that pattern continued. The story alleges that some Group elected directors can pull in £100,000 and yet, at least at the beginning of the meeting, failed to deal with the central and potentially fatal business problems that the Group faces. It is claimed that they expressed concerns about the availability of fair trade bananas rather than the £2.5bn loss and consequent renegotiation of bank covenants to avoid breaking them. It seems that those particular problems would be less likely to arise on the John Lewis Board because of structures combining business expertise, legally mandated commitment to co-ownership and ethical structures and a culture of involvement and transparency by the employees.
So maybe it would be helpful to look a little more closely at how The John Lewis Partnership works. The information here is mainly sourced from their web site but I have also consulted the John Lewis M & A and the Partnership Constitution.
The John Lewis Partnership uses of a combination of a trust mechanism and corporate structures to establish a subtle and finely balanced governance system to combine business efficiency in the market place with democratic involvement and financial benefit for the employee-owners. The business is not a partnership in the technical legal sense of the word but rather a collaborative relationship among the employee co-owners in their joint interests in the legal form of companies controlled by trustees bound by Trust obligations. The Partners, as they are known, enjoy bonuses of a proportion of salary depending on the performance of the business.
The structure was established when the owner of the business decided to hand it over to the employees in the 1920’s and created a trust to do so. Currently, the John Lewis Partnership Trust Ltd, a private company formed in 1950, whose objects are to uphold the Partnership Constitution and the employee benefit objectives of the trust, controls the PLC which carries on the business. The voting rights attached to the only two classes of voting shares in the Trust company, ensure that a majority of votes on crucial decisions are held by trustees who are bound to exercise their votes in pursuit of the trust objectives and the maintenance the Partnership Constitution. Crucial decisions include changing the voting rights or winding the company up, and all decisions made by the company general meeting during an interregnum after the removal of a Chairman by the Partnership Council – a key mechanism backing up the Chairman’s accountability to the employee Partners.
The governance practice of the Partnership, within this legal framework follows the Listing and Disclosure and Transparency Rules and the UK Corporate Governance Code applicable to listed companies, despite the fact that the Partnership’s companies are not listed or bound to follow those rules. The Partnership Constitution consists of principles and rules which respectively set out its purpose and policies. The duty to uphold the Constitution is a key element in the objects of the Trust Company.
The key top level governing bodies are The Partnership Council, the Partnership Board and the Chairman. The Council is 80% elected by secret ballot every three years by the employee Partners, all of whom can vote in the elections or stand for election. The elections are based on one or two representatives from each local constituency, the detail being decided by the trustees elected by the Partership Council and serving as directors of the John Lewis Trust Ltd. Remaining Council members are appointed by the Chairman, often from people holding posts such as Director of Communications, Director of Legal Services, or Company Secretary. The intention is that those people can provide the Council with specialist knowledge but it also means that, together with the Board members who are automatically Council members, there is full participation by senior management. The Council meets at least four times a year and the Chairman attends and reports to it twice a year, facing questions on the performance of the business. It is the Council which has the power to remove the Chairman. There are also divisional, regional and local democratic bodies composed of Partners. Together, these bodies are intended to hold management to account.
The Partnership Board manages commercial activities. Its members include the Chairman, five directors appointed by him or her, five elected by the Partnership Council and three non-executive directors. It is thus linked to the Partnership Council, partly by a Partners’ Counsellor whose remit is to uphold the values, ethics and integrity of the business as set out in the Constitution. The Counsellor sits on the partnership board and convenes meetings of the elected directors (as appropriate but at least once a year) from which executive directors are excluded.
The Chairman’s Committee consists of the Chairman and the Board members appointed by him or her plus the Partners’ Counsellor and meets frequently and informally to develop strategy, business plans, budgets and to review operational and management issues including results, forecasts and proposals. This is presumably the equivalent of executive meetings in PLC’s or the Co-op Group.
Separate Divisions such as John Lewis and Waitrose are managed day to day by divisional Management Boards which are accountable to the Chairman for performance but are also held to account by their own Divisional Partners’ Councils.
This structure illustrates the use of the trust mechanism and also represents an intricate set of organs which have separate roles of democratic representation and business management but which link together both at the apex (in the Partnership Board and Chairman role) and at Divisional level with the Divisional Councils.
The values and purposes enshrined in the Constitution and the Trust objectives are fully legally secured and worked out institutionally. In addition, the Partnership Councils provide fora for questions and concerns from the employee owners. The whole organisation is served by the Gazette, an internal newspaper where articles on retail are published and issues can be raised and ideas suggested. The organisation currently enjoys significant commercial success while maintaining its identity as a values based employee owned business.
So, any lessons for the Group here?
The John Lewis Partnership is not, strictly, a co-op but it is very close. On the removal of the Chairman his or her nominee or a Deputy takes over or the Board appoints someone. The Chairman is not elected by the Partners or their Council.
John Lewis is employee and not consumer owned. That makes it easier to persuade members (“Partners”) to engage as employment is important in their lives and bonuses can be substantial. Consumers can just choose to shop somewhere else so getting them engaged will always be harder. Members’ dividends on purchases are modest at best.
The John Lewis Partnership has an element of paternalism in the role of the Chairman – John Spedan Lewis was the first one and no Chairman has ever been removed by the Council.
The Trust structure makes the business very secure against demutualisation or takeover but does not represent member control in the mainstream co-operative tradition.
The business of John Lewis and particularly Waitrose serves upmarket customers and that makes sense for the benefit of employees. A consumer co-op aims to serve its consumer members rather than simply make a profit from them.
Clarity of function exists strongly in John Lewis but commercial success for the employee owners and upholding the organisation’s values combine when necessary – especially at the top. In the Co-op Group, if one assumes the Board and Regional Boards were made up of people concerned with co-op values, who was holding executives to account for business decisions?
In John Lewis executives are accountable for their business performance and decisions which are directly in the financial interests of the Partner owners who get a bonus depending on success. However, executives are also accountable for their adherence to the values and ethics of the organisation. Was that effectively true in the Co-op Group or was rhetoric and judicious spending of profits enough there? Who was concerned about how the profits were made and, more importantly whether any were?
In John Lewis one board has full power and can make fast business decisions when needed. Its internal members are 50:50 between elected Partners and executives but the Chairman’s role covers both Values and Ethics and commercial success.
The appointed outside non-execs bring independent expertise. The Co-operative Group never appointed any of those to its board even after rule amendments were passed to permit that. The Co-op Bank had some but their wise advice was ignored there.
The John Lewis Partners’ Counsellor is there to ensure that the elected directors are empowered and served. That is a board level job by someone paid to do it who can actually organise the elected directors and act as the lead independent non-executive.
The organisation voluntarily observes all the disclosure and transparency and governance obligations of a listed PLC. They are all aimed to make sure executives are accountable. However, in John Lewis they are applied to the benefit of the Partners who own it and not investors.
Perhaps just as important the national regional and divisional Partners’ meetings take questions and comments from Partners and the Gazette gives a forum for debate and complaint. Thus the culture is open and encourages a healthy and informed involvement outside the formal mechanisms of decision making
This all gives food for thought. Could Lord Myners’ proposals be tweaked to take advantage of some of these apparent lessons? Could the NMC have a role similar to the Partners’ Council? Could it elect or nominate some directors or have some reserved Board seats? Is there room for a Members’ Counsellor role? Could the Group increase transparency by adhering to appropriate Listing Rule and other requirements, suitably adapted for its member controlled co-operative status?
© Ian Snaith 2014 This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 UK: England & Wales License.