Co-operatives’ crisis of corporate governance

Posted on January 19, 2014 · Posted in Co-operative News

The Treasury Select Committee hearings into the crisis at The Co-operative Bank have shone a bright light onto the uncomfortable hidden truths of our movement.  Most of us knew that some of the directors of some of the societies were not up to the job.  Now, it seems, everyone knows this – and perhaps wrongly assume that all directors of all societies lack competence.

 

Paul Flowers’ evidence to MPs displayed his lack of knowledge of the Bank’s balance sheet and his failure to ensure that senior Bank staff reported promptly to the board regarding major developments.  This followed Peter Marks’ comments to the same committee that appeared to blame the elected directors and the corporate governance structures for the movement’s problems.

 

We cannot now avoid a debate on how societies must strengthen their boards and improve their corporate governance structures.   “These things are going to come out and we have to be grown up about it,” says Peter Hunt, the chief executive of Mutuo and former general secretary of the Co-operative Party.

 

“Our co-operative governance structures do not sufficiently control management,” continues Hunt.  “Anything that is put in place now has to ensure that management is held to account and that directors have the skills to do that.  The Co-operative Group structures don’t do that.”  The same, surely, applies to most (or all) other co-operative societies.

 

Governance structures of societies have been a long standing concern of mine, ever since I unsuccessfully stood for the board of the former Leicestershire Co-operative Society.  I was convinced that the then chief executive, who died many years ago, instructed staff on how to vote, effectively rigging ballots to ensure that member elected directors were people who would be led by the chief executive.  The purpose seemed to be to give the chief executive an easy ride.

 

I don’t know if a similar situation still applies in parts of the country.  However, I do not believe the system provides appropriately skilled non-executive directors on the boards of many societies, nor does it ensure that all societies have sufficiently skilled senior management.  To be blunt, while some societies have superb executive leaders, others do not.

 

Our system is democratic, of a sort, but it is not effective.  In the words of Hunt: “A structure designed for local community businesses doesn’t work when scaled up.”

 

In preparation for this column, I phoned several co-operative societies to ask them what training they do of their member elected directors to ensure they can do their job.  Only one society gave me an answer – Lincolnshire.  This happens to be one society that has consistently impressed me.  I fear that some of the societies that failed to respond may have done so because they do little or no training of their non-executives.

 

Lincolnshire’s society engages an independent body to do an annual skills audit of its directors.  Flowing from the skills audit, an ongoing training programme is agreed for each director, according to their needs, dealing with “a range of issues”.  In addition, the society appoints three directors who are not elected by members, but who are recruited to bring in specific skills as required by the board.

 

Personal experience has underpinned my belief in the importance of relevant skills and training.  I was a (Labour and Co-operative) city councillor in Leicester from 1987 to 1991.  There was a small amount of training provided by the Labour Party, but to the best of my recollection no training by the city council itself to help us undertake our roles as councillors.  Our approach as councillors was unsystematic, individualistic and based according to what each of us believed was the best way to do things.

 

Some years later, I was engaged by the Audit Commission to write a case study on a London borough that had serious problems with its corporate governance.  Attendance at committee meetings was inconsistent, with the result that there was inconsistent policy making.  Among other problems, investment returns were poor, because of the inconsistency of investment policy.

 

That council undertook a comprehensive member training programme.  Councillors were taught how to chair meetings, speed read committee papers, make effective contributions to committee meetings, better understand the council structure and handle the media more effectively.  The quality of decisions improved substantially afterwards – not least because as councillors became better aware of what they were doing, they became more interested and their committee attendance improved, with the result that decisions became more consistent and much better.

 

One of the UK’s largest and most successful social enterprises, the Bryson Group, is also committed to the highest quality of corporate governance.  The Group contains seven subsidiary social businesses, each with their own boards.  It has a combined turnover of £34m, a trading surplus of £1.5m and 690 staff.  This is small by comparison with some societies, but it is a very fast growing business that has won several awards for combining commercial success with achieving social objectives.

 

Bryson Group’s boards contain only unpaid non-executive directors, all of whom have relevant professional experience and who can and do challenge the Group’s management.  “They would not be providing good governance if they did not challenge us,” says chief executive John McMullan.  “At the same time they provide encouragement and support.  Strong governance is important on a number of levels.  It gives confidence to people receiving services, to funders and it is incredibly helpful to staff that they can present ideas that are understood.”

 

Training for the non-executives is overseen by Brendan Mullan, the unpaid company secretary of the Bryson Group.   “Corporate governance is a speciality of mine,” he says.  “I advised the Bryson Group to get a structure right in terms of good governance,” he says.  “To get the right skills is part of that.”

 

Mullan continues: “Debate and challenge lead to good decisions.  Getting the right people on the board is essential.  A lot of effort goes into this.”  Professional skills recruited onto boards include finance, legal and human resources.  Recruitment can involve conversations with the Institute of Directors, the CBI and local universities to identify strong candidates.  “Only leaders in their field are invited onto the boards,” says Mullan.  But even so, directors are trained after being selected, recruited and appointed.

 

Directors are monitored and appraised each year.  An initial one day training workshop provides an introduction to the work of the Bryson Group and its subsidiary companies.  Sessions explain responsibilities under the Charities Act and the Companies Acts, along with training on financial oversight and risk oversight.

 

There is annual self-assessment of individual directors, with comments contributed by the chairmen of the boards.  Questions include the number of board meetings attended, the extent of contributions to board meetings and whether these provide a challenge to senior management.  Where directors’ scores are weak, they will be spoken to. Directors gain a recognition through this process of whether they are effective and may step down if they recognise they are ineffective.

 

Boards undertake collective self-assessments to see where they are weak.  This has led recently to a greater focus on risk management for directors and boards.  Additional training has been provided in-house to meet recognised needs.  While managers are allowed to manage, the Group operates a ‘statement of reserved matters’ that are strategic decisions, which only the board can decide.

 

Democracy is at the heart of the co-operative movement – so a structure based on recruitment and appointment is not something that can be imported wholesale into societies.  But these and other approaches may give us ideas about how to ensure directors are given support to improve their skills and also of the need for the presence of professional non-executives.

 

Ironically, points out Peter Hunt, it was actually The Co-operative Bank’s board that most looked like that of a plc, yet it was the one that came most spectacularly unstuck.  It is also worth noting that, according to the Financial Times, the two deputy chairmen of the Bank – who were put in place by the then regulator, the Financial Services Authority, as ‘minders’ of the under-qualified Paul Flowers – were the only two board members who opposed the Project Verde deal.  Despite the two most qualified directors opposing the bid, it was pursued.

 

These experiences seem to raise more questions than they provide answers.  Hunt suggests that we learn from public sector mutuals in terms of providing a democratic framework, while allowing experts to make the operational decisions.   He also believes, as does Peter Marks, that preventing senior executives from also sitting on the board as members is a mistake, which reduces operational accountability.

 

“We don’t want to throw away the democracy of the co-operative movement in all this,” says Hunt.  “So perhaps you want a mixture of executive and non-executive directors.  You need to have non-executives who have the requisite skills to hold management to account.”

 

Public service mutuals have a second tier body to ensure the entities operate in accordance with their purpose, but these bodies are not there to direct the way the business is run.  These bodies – called councils of governance in foundation trusts – appoint the board chairs and non-executive directors, ensuring directors have the competence to do their jobs.

 

“We do need a proper academy for all this, but let’s not train people to undertake inappropriate roles.,” says Hunt.  “You don’t have to elect people to the main board.  But you do have to ensure the main board is skilled and holds managers accountable to the membership.”

 

The challenge, it seems, has multiple strands.  We need to attract and retain high calibre senior management, but ensure they are accountable to both a skilled board and, indirectly, to the wider membership (being the consumers).  We need to ensure directors are capable of making the right strategic decisions and are able to produce a strategy that is consistent and consistently applied over the years (the Bank board failed to do this).  We also need to engage the membership so that it takes informed decisions.

 

If we can agree that together this provides the objective for where we need to go, we should then be in a better position to decide on how we achieve this.