Co-op Group Governance: Quick Questions for Myners and some puzzles……

The Quick Questions

I’ve been very busy lately and wasn’t able to submit anything to Myners by his deadline. Below are my questions on what seem to be the broad lines allegedly agreed by the current board in their panic meeting earlier this week.

After the questions you’ll find some fuller thoughts. I have not addressed the role of members and wider democracy as that is Stage 2 of the Review. Maybe the apparatus of local committees and other structures fit in there.

First, remember two general points:

1. Governance and the text of laws and rules only set a framework. The success or, as we have seen recently, failure of the business commercially and in co-operative terms depends on the quality of the people involved and the culture. If those things are wrong the rules won’t mend them.

2. Read the Wikipedia on Berle and Means (or even the book). That is, as the wikipedia author says, the “foundational text in corporate governance”.  The key role of corporate governance in any big businesses with widely dispersed ownership (8 million members counts as that, I think?) is to hold managers to account in the interests of the owners of the business. For PLC’s that is the shareholders and the Corporate Governance Code tries to do that. For co-ops it’s the members and the Co-operatives UK Code tries to do the same but with less emphasis on non-executive directors. Without clear and effective monitoring and challenge to the internal executives, the system won’t work. For the reasons Berle and Means give, the challenge has to operate above and beyond general meeting (in the Group delegate meetings). The lack of that challenge sank CRS in the late nineties and others before it – London, Greater Nottingham etc.etc.etc. It has come close to sinking the co-op group. It’s time to get that right.

These are the questions that I squeezed into the available box at the Myners website :

“1. (a) Doesn’t the elected board need some significant basic powers to approve business strategy, investment and disposals and annual financial statements, and to appoint and remove the CEO to be able satisfy the FCA that the group meets the ICA requirement of member control – a condition of continued registration as a co-operative?

(b) Doesn’t that mean it needs independent non-execs or others with business expertise there to hold executives to account & discuss business strategy? If not it’ll repeat the mess that just happened.

2. Why reject a majority directly elected single board with non-execs & CEO as members and board recommendation of candidates to members at election, e.g. Nationwide?”

Why these questions?

The starting point is that to retain registration as a co-operative the Group needs to show the FCA  that the members have control of the society and elect officers i.e. directors:

“Control – Control of the society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society.  In general, the principle of ‘one member, one vote’ should apply. Officers of the society should generally be elected by the members who may also vote to remove them from office.”

the FCA Notes on applying to register (see page 8 of the PDF)

See also ICA Statement 2nd Principle:

“Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives members have equal voting rights (one member, one vote) and cooperatives at other levels are organized in a democratic manner.”

If there is to be a two tier board of some kind, everything depends on the detailed remit of each of the two boards. I am puzzled by the current press reports which put the outside non-execs in the “management board” as systems with two tier boards call it e.g. European Co-operative Society or the German system for companies which gives significant powers on commercial matters to the “supervisory board”.

The Co-op Group Rules currently list matters which have to be dealt with by the full board rather than being left to the executives who, in practice, meet weekly almost as if they were a lower tier board – just as PLC executives do.

It’s a long and rather messy list and you can find the full detail  in Rules 2.10 – 2.17.

Core functions of the board include the following that it cannot delegate. Maybe those would be placed with the elected supervisory board in a system like the one mooted in the press?

They are:

“2.10 The Board has the following roles and responsibilities (which it cannot delegate):

2.10.1 deciding the vision and strategy of the Society and its businesses in consultation with the Subsidiary Boards, and having regard to the nature and extent of its interest in all of its businesses;

2.10.2 ensuring, whether directly or through other people, that the Society’s businesses and affairs are conducted and managed in accordance with its Purpose and Objects, and in accordance with the best interests of the Society and its Individual Members and Independent Society Members;

2.10.3 monitoring the Society’s businesses; and
2.10.4 overseeing the Group Chief Executive and the other members of the
Executive as they carry out their roles.”

It seems to me that if you cut out 2.10.3 and 2.10.4 and give them to the unelected board of executives and independent non-execs it is hard to say that the members control their society, even in the sense of “ultimate” control. The people they elect are unable to control or monitor management.

If you leave them in and place the non-execs with the execs you need another way of ensuring that the elected board has the skills and experience to do that vital work. Maybe that would be the “guided democracy” that works with building societies where all members vote for directors but the board recommends people that it feels will fill its skill gaps.

If you are going to do that, why not have one board along those lines with execs and independent non execs and an elected majority? The members could elect everyone except the executives, including the outside non-executives.

Maybe a two tier board is needed because a single board decides on a strategy and finds it hard at a certain point to admit it got it wrong? At what point could the Group Board have decided to abort the massive IT spending or challenge the amount of borrowing. Presumably each decision about it was agreed by all (or most) of them. Maybe the separation into two tiers avoids that and would allow the supervisory elected board to demand a review. However, to do that, it needs expertise and the confidence to face down a CEO who refuses to revise his or her policy. There are no perfect answers but a combination of co-operative legitimacy (through election) and expertise seems vital.

Marginalising the elected people and denying them control of the business does not achieve that. However, serious failure to challenge management on business matters led to the present near catastrophe. It follows that people with expertise and people with legitimacy both need to be involved in business decisions. The underlying question is how to achieve that.