Co-op takeovers 'breathtakingly destructive' says review

A general view of a Co-operative Bank Co-op Bank's takeover of Britannia left it with large debts

Related Stories

The Co-operative Group spent too much time on takeover deals that proved "breathtakingly value-destructive", an initial review has found.

Lord Myners' review is highly critical of the group's takeovers of Britannia building society and supermarket chain, Somerfield.

He added it would be "inappropriate and premature" to appoint a new boss of the Group now.

Co-op chief executive Euan Sutherland resigned on Tuesday.

Mr Sutherland's resignation came after it was revealed he had described the Group as "ungovernable" in a recent Facebook post.

Start Quote

The appalling financial performance of Co-op gives its banks, led by Barclays, the ability to seize its assets ”

End Quote Robert Peston BBC business editor

Earlier this month details of his basic salary of £1.5m, including a retention bonus for another £1.5m, were revealed.

With pension contributions and other extras, Mr Sutherland would have received £3.66m this year.

'Democratic deficit'

The first stage of the Myners review accuses the Co-op of suffering from a significant "democratic deficit" in which ordinary members have surprisingly weak constitutional rights and a limited ability to influence the group's social mission and activities.

The Britannia building society and Somerfield takeovers had cost the Group billions of pounds and had led to the accumulation of unsustainable debts which undermined its competitive position and severely eroded its capital base, Lord Myners added.

The former Labour City minister was appointed as a senior independent director by Co-op Group chair Ursula Lidbetter in December, to undertake a full review of the entire business.

It followed the collapse last year of Co-op Bank's deal to take over 632 Lloyds Bank branches and the arrest of the bank's chairman Reverend Paul Flowers on drugs allegations.

He was suspended from both the Methodist church and the Labour party and later resigned from the Co-op.

Co-op Group chairman Len Wardle, who appointed Reverend Flowers, was also forced out.

Paul Flowers Paul Flowers resigned as Chairman of Co-op Bank last June

Lord Myners' initial report found the Group's three-tier system of elected member representation had "consistently produced governors without the necessary qualifications and experience to provide effective board leadership".

He added this had "massively raised the cost of decision-making and diminished genuine accountability throughout its governance hierarchy".

And he said that while "one member, one vote" had been a core principle of co-operative ownership, at present ordinary members do not have the right to attend Annual General Meetings or to elect or re-elect Group board directors.

Business restructure

The Co-op Group is cutting staff and selling off parts of its business in an effort to save itself but is still expected to post annual losses in excess of £2bn at the end of this month.

Lord Myners' review will recommend that Group board directors should be subject to annual election or re-election by all members and that vacancies should be openly advertised and candidates appointed on merit against clear criteria of skills and experience.

They will also include the creation of a new Group board made up of an independent chair with no previous association or involvement with the Group, six to seven independent non-executive directors, and two executive directors.

Start Quote

The Co-operative Group ….has consistently produced governors without the necessary qualifications and experience to provide effective board leadership ”

End Quote Lord Myners The Myners Review progress update

Lord Myners said the new, far smaller board would replace the existing 20-strong elected board of directors.

He pointed out he had no power to decide whether his recommendations would be approved.

Lord Myners said the decision to accept the recommendations would most likely "lie in the hands of fewer than 50 elected members" who if they acted together would be able to cast more than one-third of the Group's votes in opposition to them.

He added: "Until the outcome of these constitutional changes is decided, it is my opinion that it would be inappropriate and premature to proceed with the appointment of a new CEO, in view of the risk that, while these governance issues remain unresolved,

"The Co-operative Group will be unable to attract applications from best-in-class retail executives. Confirmation of members‟ readiness to approve radical governance reform will also be essential to reduce current uncertainty among existing key employees."

Separated

In December of last year the ownership structure of the Co-operative Bank was changed and it is now only 30% owned by the Co-operative Group.

A spokesman from the Bank said: "The Co-operative Bank is a separate organisation to The Co-operative Group and has already made significant advances in reforming its governance and leadership.

"The Bank has a separate board with its own Chairman, Chief Executive and a new management team."

More on This Story

Related Stories

More Business stories

RSS

BBC Business Live

  1.  
    ASOS SHARES 12:25:
    Asos share price graph

    E-retailer Asos shares are off like a rocket. There's talk it may be a takeover target. Talk or not, plenty of people are thinking it's worth a punt. A short while ago the shares were up 332p at 2680p - a rise of 14%.

     
  2.  
    IRISH HOUSE PRICES 11:50:

    There's been a surge in house price inflation in the Republic of Ireland. Irish house prices outside Dublin grew at their fastest rate in seven years. Rises were typically 5% in the year to July, up from 3% previously. In Dublin, though, wow. Prices were up 23% in the year to July, a slight fall from the 24% rises recorded in the year to June. Despite that rock 'n' roll growth, prices in Ireland remain more than 40% below the pre-crash peak.

     
  3.  
    LAGARDE PROBE 11:25:
    Christine Lagarde (27 August 2014)

    The IMF head, Christine Lagarde, is under official investigation for negligence. The French corruption probe dates back to her time as France's finance minister. She faces questions about her role in a 400 million-euro (£320m) payment to former Adidas owner Bernard Tapie. Ms Lagarde says she will appeal against the decision to put her under formal investigation.

     
  4.  
    MORTGAGE LENDING 11:08:
    The Boat House, where Dylan Thomas and his wife Caitlin lived between 1949 and 1953

    Finally with those CML stats: Wales. The number of first-time buyers rose by nearly a third in the second quarter of this year. Their typical mortgage was £99,000, and their typical household incomes were £30,400.

     
  5.  
    RUSSIAN MCDONALD'S 10:47:
    McDonald's

    Russia continues to get tough on Western businesses operating in the country. A Russian court has ordered a McDonald's restaurant branch under the Kremlin walls to close for 90 days for not meeting sanitary standards. Russia has closed down other McDonald's outlets this week the same reason.

     
  6.  
    MORTGAGE LENDING 10:33:

    And what about Northern Ireland? The CML says things have been busy there too. As a result, the typical mortgage size for first-time buyers was £78,000 in the second quarter of the year, compared to £72,000 in the previous quarter. The typical first-time buyer household had a gross income of £26,300.

     
  7.  
    LAGARDE PROBE? 10:16:

    The Reuters news agency is reporting that the head of the IMF, Christine Lagarde, has been put under formal investigation for "negligence" in a French political fraud investigation case. The agency cites a source "close to Ms Lagarde".

     
  8.  
    MORTGAGE LENDING 10:09:
    Houses

    More CML stats, this time about Scotland. Mortgage lending to home buyers jumped by 32% between the first and second quarters of the year. The typical loan for first-time buyers was £95,000, up from just under £90,000 in the first quarter. And the typical gross income of a first-time buyer household was £32,300.

     
  9.  
    MORTGAGE LENDING 09:52:

    Figures on regional mortgage lending have been published by the Council of Mortgage Lenders (CML) They look at London, Scotland, Wales and Northern Ireland in the second quarter of the year. A few tasty facts about greater London. The typical gross income of a first-time buyer household was £55,000. 63% of first-time buyers bought properties costing more than £250,000. And first time buyers typically put down 25% deposits, more than elsewhere.

     
  10.  
    RBS FINE 09:32: BBC Radio 4

    RBS is very sorry for the poor mortgage advice it gave to 30,000 mortgage customers in recent years. Lloyd Cochrane, head of mortgages at RBS and its subsidiary NatWest told the Today programme that it reckons about 4% of those may have been disadvantaged financially. That's about 1,200 people. "We did not do a good enough job [but] very few customers lost out as a result of this," he said.

     
  11.  
    Via Twitter Adam Parsons Business Correspondent

    tweets: "RBS's Lloyd Cochrane tells me the bank spent many months retraining staff; management "takes responsibility" for selling mistakes."

     
  12.  
    FOXTONS 08:56:
    Foxtons share price graph

    Shareholders don't seem happy about Foxtons' special dividend or higher profits. The shares are down almost 6%. Why? Perhaps some profit takers are among them. Or perhaps it's the warning that asking prices in London are dropping and it expects to see a slow down in transactions in the second half.

     
  13.  
    SCOTTISH INDEPENDENCE 08:36:
    No campaign stuff

    Business hasn't been shouting about the matter. Views have been dripped out. Bigger names who have spoken up include Douglas Flint, head of HSBC, against, and Standard Life, also against to the extent the business said it would consider leaving the country if it chose independence.

     
  14.  
    MARKETS UPDATE 08:13:

    Shares in London have begun higher. The FTSE 100 is up 48 at 6,822.76. In Frankfurt, the Dax is up 29.83 at 7106.70 and in Paris the Cac 40 is up 51.30 at 4393.41.

     
  15.  
    HEADLINES
    • RBS and NatWest fined £15m for bad advice
    • Businesses doubt Scottish independence
    • Foxtons earnings jump after strong house sales
     
  16.  
    BANANA MERGER 07:52:
    Fruit

    An update on Fyffes and Chiquita's attempt to merge and complete their corporate fruit salad. They say they hope to save $60m a year in overheads. Their official name for this plan is "the Combination". The capital C is vital, of course.

     
  17.  
    RBS FINE 07:38:

    All this was happening four years after the government bailed out RBS, years after it had started eating humble pie for mis-selling payment protection insurance, and after it had been discovered committing other misdemeanours. The FCA said: "Only 2 of the 164 sales reviewed were considered to meet the standard required overall in a sales process."

     
  18.  
    CARS TO RUSSIA 07:37: BBC Radio 4

    Sanctions have not dampened the enthusiasm of car firms to sell their vehicles in Russia - the world's seventh biggest car market. The Moscow Motor Show is getting underway and fully bullet-proof cars are on offer. Paul Willcox, chairman of Nissan Europe, told the Today programme he was taking the long view with nine new models being launched. "Our plan is in the next three years to grab 10% of the market," he said.

     
  19.  
    RBS FINE 07:23:
    RBS pillar sign

    And there's more: "In the firms' own mystery shopping there were examples of advisers giving personal views on the future movement of interest rates," says the FCA. "This was highly inappropriate and may have resulted in the borrower being sold the wrong type of mortgage for them."

     
  20.  
    RBS FINE 07:21:

    What did RBS do wrong? "Affordability assessments failing to consider the full extent of a customer's budget when making a recommendation, failing to advise customers who were looking to consolidate debt properly and not advising customers what mortgage term was appropriate for them," says the FCA.

     
  21.  
    FOXTONS 07:16:

    Foxtons, the London estate agency that put the F in flashy, has benefitted from the past year's surge in home sales. Its half-year earnings are up 16% to £73m, and its half-year profits jumped 57% to £23m. That's a huge profit margin. So much so that shareholders are getting a special half year dividend on top of the normal one - £13m in all.

     
  22.  
    RBS FINE 07:14:

    The FCA's statement on RBS's failings on mortgage advice include some gems: "The firms [RBS and NatWest] failed to ensure that advice given to customers was suitable. Two reviews of sales from 2012 found that in over half the cases the suitability of the advice was not clear from the file or call recording." This was happening two years ago.

     
  23.  
    RBS FINE

    The Financial Conduct Authority confirms it has fined RBS and NatWest £15m for failures in their mortgage advice process.

     
  24.  
    RYANAIR BUSINESS 07:04:
    Ryanair poster

    Ryanair is pitching for business travellers. It says it will offer them free flight changes in future, as well as a 20kg checked-in bag allowance. But to get this they will need to pay almost £60 to join the Ryanair Business Plus club, via www.ryanair.com/en/business-plus. You need to put in all your details before it will tell you any more about it.

     
  25.  
    SALMON SANCTIONS 06:44:
    Fish on plate

    News from Norway. Marine Harvest, the world's largest salmon farmer, is warning that Russian sanctions will present it with some short-term challenges. Meantime, the company reports operational earnings of 1.22bn crowns (£120m), nearly double last year's figure.

     
  26.  
    RBS FINE 06:30: BBC Radio 4

    Richard Jeffrey of Cazenove Capital Management tells listeners to the Today programme that the impending fine for RBS over poorly sold mortgages is "disappointing". But he says we shouldn't beat up the banks too much as it is essential that confidence in the banking system is maintained.

     
  27.  
    SCOTTISH INDEPENDENCE 06:23:

    The Scotsman letter says business is worried about - yes, the pound - and the EU and tax and pensions. There are of course some industries that are warmer towards independence - the airlines for one. Remember Willie Walsh of BA said independence could be positive for the country and Ryanair backed the SNP's plans to cut air passenger duty.

     
  28.  
    CPP 06:13: Radio 5 live

    Sarah Pennells of SavvyWoman.com has been on Wake up to Money, telling us that this Saturday is the deadline for millions of people to claim compensation for being mis-sold unnecessary credit card insurance, or identity protection policies, by the company CPP. Around seven million people are thought to have been mis-sold this "insurance" over the years. But so far only 1.7 million have lodged a claim.

     
  29.  
    SCOTTISH INDEPENDENCE 06:05:
    Oil rig

    More than 130 businesses have signed a letter saying the business case for Scottish independence "has not been made". The signatories come from a variety of businesses including banking, mining, engineering, food, whisky, and technology. The letter is published in today's Scotsman newspaper.

     
  30.  
    06:01: Ian Pollock Business reporter, BBC News

    We are expecting the formal announcement that RBS is being fined £15 million for giving poor mortgage advice.

     
  31.  
    06:00: Rebecca Marston Business reporter, BBC News

    Morning. Looks like we're in for a busier day than yesterday - let's hope so. Stay with us here on Business Live 'til 13:00 for the pick of the news.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.