Co-op Group's board is 'dysfunctional', says Myners

Customers enter a branch of a Co-operative food store in central London April 16, 2014. The Co-operative needs board members with experience to match their competitors, says the report

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The Co-operative Group should adopt a much smaller board and focus on being profitable in order to survive, according to a major review of the 150-year old organisation.

The report by former City minister Lord Myners says the group's current board is "manifestly dysfunctional".

He recommends replacing it with a smaller board made up of people with business experience.

The Co-op said it was committed to "far-reaching and fundamental reform".

'Business calamity'

Lord Myners told the BBC: "The group has lost half of its net worth over the past four years, circa £3.5bn of erosion of wealth.

"It is one of the great national business calamities and it is being led by a board totally unable - because of a lack of experience - to hold them to account."

Lord Myners has decided that attack is the best form of defence. Over 186 pages he details a litany of failings not only in the governance structure of the Co-op but in the very culture of the organisation which he describes as "corrosive". If the Co-op does not vote for reform at its annual general meeting on 17 May, then critics of the organisation will say it was not for lack of warnings.

Lord Myners' report sits four-square with that of Sir Christopher Kelly, the former civil servant whose report on the near collapse of the Co-op Bank last week used similarly strong language.

Lord Myners also makes a brief but vital mention - on page 97 - of the Co-op's creditor banks. This is the syndicate led by the Royal Bank of Scotland which is supporting the Co-op's debts. Sources tell me they want to see reform and may well decide to make some noise publicly about the issue.

The danger in the reform push is that more traditional members who fear the democratic structure of the Co-op is at risk could feel they are being bullied into submission. A second major report detailing the failings of a board that is still largely in place could receive a very negative response from at least some of its members.

In his report, Lord Myners said: "Radical decisions on governance structure need to be taken very soon - and with resolution - if the Co-op, as my mother knew it, is to be saved."

Lord Myners resigned from the Co-op board in April after his suggestions for reforming the group's corporate structure ran into resistance from supporters of its mutual model.

The Co-op Group commissioned the report from Lord Myners but is not obliged to act on the suggestions.

At its annual general meeting on 17 May, eligible members will be asked to vote on a resolution which the Co-op says provides a framework for governance reform, and echoes Lord Myners' recommendations.

"A resolution containing four key principles on reform is being put to members at a General Meeting in May and we will build from there to ensure we put the right changes in place," said Co-operative Group chair Ursula Lidbetter.

Around 100 members will be eligible to vote, including its regional board members and members of its independent Co-operative Societies.

The report comes just days after the Co-op Group, which runs a variety of businesses from banks, to supermarkets, funeral homes and pharmacies, was sharply criticised in a review by Sir Christopher Kelly into the near-collapse of its banking arm.

The bank faced near-collapse last year after the discovery of a £1.5bn hole in its balance sheet, and had to be rescued by bondholders in a move that saw the group's stake reduced from 100% to 30%.

Former City Minister Lord Myners warns that the Co-op needs "radical and fundamental change"

Its former chairman Paul Flowers was arrested last year following allegations that he was involved in a drug deal.

Mr Flowers has since been charged with possessing drugs and on Wednesday pleaded guilty to drug possession, at Leeds Magistrates' Court.

Smaller board

Last month, the Co-op Group reported losses of £2.5bn for 2013, the worst results in its history.

Lord Myners said the group's board was "still stuck in denial over this near ruinous failure of governance".

He has recommended a smaller board for the group, that is made up of members with similar skills and experience to those at competing companies - such as Tesco and Sainsbury's in food and Nationwide in lending.

graphic The current structure is unwieldy, says the report

However, he admits that he is "less confident" that traditionalists at the group will accept the radical decisions he believes are necessary to overhaul its corporate governance structure.

"The decision lies in the hands of the elected democrats. I have done all I can do," he said.

The current arrangement, he says means there is "limited shared purpose among group board directors," as they are elected to the board with differing views on what the Co-op's priorities should be.

One director, who was not named, told the review: "Some want a dividend, some want low prices, some want to do social good and some want free range chickens".

Members of the board also failed to follow their own rules.

During the review, one director "appeared to have actively participated in a campaign to reverse a strategic decision made by the group board only days earlier".

That happened despite a rule that directors "support any decision of the board, whether they agree with it or voted in favour of it" and "should stand by the decisions made by the collective board".

Skills gap

Similarly, the current multi-layered system of group and regional boards and area committees slows down decision-making as "directors claim that they need to get an opinion from their respective region before condoning a course of action" even though they are expected to make up their own minds.

Currently, the Co-op has 48 area committees - the grassroots of the organisation - which each have 10-12 members. They elect members of seven regional boards who in turn elect 15 members of a board that can be as large as 23 members.

There are also boards for the food business; the bank, which the group no longer fully owns; and specialist businesses, which include the pharmacies and funeral care. The Co-op calls these subsidiary boards.

"The group's bottom-up, competitive election process provides no rigour for assessing the commercial capability levels of candidates as there is no meaningful competency bar in place. Similarly, it provides no scope to balance the capabilities and fill skills gaps," says the report.

Lord Myners proposes a board with six or seven independent directors and two executives as well as a separate body to handle members' concerns, called the National Membership Council.

The National Membership Council, with about 50 members, would hold the board to account and help decide who is elected to the board. It would also advise the board on ethical matters.

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