Governance at the Co-op

This article was previously published on the Leadership Foundation website.

Failings in management and governance: the Co-operative bank

Sir Christopher Kelly's independent review of the events leading to a capital shortfall at the Co-operative bank was published on 31 April 2014. The report is one of a number of reviews being undertaking into the problems experienced by the Co-operative group and its bank.

The report finds a key weakness was the system of governance: 'the existing governance structure has badly let down the Co-operative group's members.'

Chapter 13 of Kelly's report examines in detail matters of governance. It finds significant failure both in terms of the board of the Bank and of the Group.

The Group board failed to exercise effective oversight of the Bank, with the board's size and lack of commercial and banking expertise being cited as limitations to how it performed its responsibilities. Kelly also suggests 'one of the most surprising features of this whole episode is the that Board seemed unaware of its limitations.'

The report highlights that the Board was 'heavily reliant' on the Executive team when it came to commercial matters, suggesting in the face of a 'strong willed chief executive' the board was 'too weak to hold him adequately to account.'

Chapter 14 of the report identifies 15 lessons to be learnt from the problems at the Co-operative bank, although Kelly suggests most of the lessons are not new: some of them are very basic. For example, the most important task of any board is to put in place the right executive leadership of the business, and a recognition that training cannot compensate for a lack of the necessary skills and expertise on a board.

Myners' report: review of governance structures at the Co-op

In December 2013, Lord Myners was appointed to the Co-operative Group Board, as senior independent director. He was asked by the Board to lead a comprehensive and independent review of the Group's governance, focusing on the board's effectiveness.

A progress update published in March 2014 identified ‘acute systematic weaknesses’ in the governance arrangements.

The Board had failed to effectively challenge and question the executive, and a number of poor strategic decisions had been made. As a result, competitive positions were lost and capital destroyed.

A key reason for the Board’s ineffectiveness was its composition. The Co-op regions and independent societies elect the board directors. This lead to a lack of the necessary qualifications and expertise amongst the directors, and a failure to effectively monitor, challenge and provide guidance to management.

Myners’ recommendations involve making future appointments on the basis of objective criteria and filling specific skills gaps. A key element to this process is establishing a nominations committee.

Read the Lord Myners' progress report on the Co-op here.

Lord Myners resigns from the board of the co-operative society

On 9 April 2014 it was announced that Lord Myners had tendered his resignation from the co-operative board in the face of growing opposition to his planned reforms of the society's governance. Lord Myners would however continue with his review of governance.

To be adopted by the society, the changes proposed by Lord Myners require a vote in favour by two-thirds of members of the society's regional committees. A number of these committees have already voted against the proposed reforms.

A key part of the opposition to the Myners' proposals is the suggestion that they would turn the co-operative society into a public listed company (PLC) and undermine its long-standing ethical principles. In others the members concerned do not believe the proposed changes to governance are in line with the organisation's culture and values.

Publication of the Co-op's annual results

On the 17 April 2014 the Co-operative Group announced losses of £2.5bn for 2013. This was the worst result in the Co-op's 150 year history. The largest component of the loss (£2.1bn) related to the Co-operative Bank.

As a result of the acquisition of Somerfield supermarkets in 2008 a further area of difficulty was food retailing. A significant number, particularly of the larger stores which had been acquired, were under-performing and would be closed.

The Group's results emphasised the past failures of management and governance at the Co-op, and the need for reform.