THE Co-operative Group must take urgent steps to reform a “massive failure” of governance or it will go bust, former City minister Lord Myners has warned.
In a damning interim review of the way the group is run, Lord Myners slammed the Co-op’s board for its lack of adequate experience and oversight failings and said he was “deeply troubled by the disdain and lack of respect for the executive team” among some members.
He said members of the board who have been elected from within the Co-op have “simply not been up to their task”.
“The Co-operative Group suffers from acute systemic weaknesses in its governance framework that over many years have gravely damaged the organisation,” he said.
“Unless the group takes urgent steps to reform its governance so that it generates sustainable economic value, it will run out of capital to support its business.”
Lord Myners, who was appointed by the Co-op to conduct the governance review, said he published his findings early after the mutual was thrown back into crisis this week following the controversial resignation of chief executive Euan Sutherland.
Mr Sutherland quit on Monday, claiming the Co-op was “ungovernable” and board members had repeatedly frustrated his efforts for reform.
In an extraordinary Facebook rant, Mr Sutherland blamed “an individual, or individuals’’ at the top of the group for deliberately seeking to undermine him by revealing details of his £3.66 million pay deal to a Sunday newspaper.
Lord Myners, who is also a new board member at the Co-op, heaped praise on Mr Sutherland and his team, saying it was “only due to the exceptional skill and tireless efforts of a new executive team, led by Euan Sutherland, that the group survived”.
But his report lays bare a board that is reluctant to accept change and unsupportive of executive management.
He said: “There is a phrase frequently used in Co-operative Group circles that the executive should be ‘on tap but not on top’,” he revealed.
There is also “acute concern” among Co-op board members and those in the regions and areas over how reform can be achieved while preserving democracy, according to his report.
“I, however, am confident that the two are fully compatible,” he said.
In an emergency call on Monday following Mr Sutherland’s resignation, the Co-op board agreed to the main recommendation by Lord Myners in his review that it should be abolished in favour of a new ‘’plc’’ style board including only executive and non-executive directors, responsible for taking commercial decisions.
But the board shake-up still needs to be finalised and agreed by Co-op members.
Lord Myners said previous attempts at governance reform had been largely ignored, but cautioned: “This time, such an outcome will create significant risk of the demise of this organisation.”
The governance issues also need to be resolved before the Co-op brings a new permanent chief executive on board, as the group would fail to attract applications from “best-in-class” retail executives, he said.
Mr Sutherland has been replaced by chief financial officer Richard Pennycook, who has been appointed as interim chief executive.
His departure after less than a year at the helm leaves the Co-op without a permanent boss and facing the biggest governance overhaul in its history.
Lord Myners also launched an attack on the group’s elected membership system, that leaves ordinary members with “very little power” and “surprisingly weak constitutional rights”.
“’One member, one vote’ has been a core principle of co-operative ownership, yet at present ordinary members do not have the right to attend annual general meetings or vote to elect or re-elect group board directors,” he said.
Alongside the complete boardroom overhaul, Lord Myners is also recommending that a National Membership Council (NMC) be set up, including employee representatives, to hold the board to account and have powers to ensure the group adheres to co-op values and ethics.
His review also said group board directors should be subject to annual election or re-election by all members.
But he raised concerns that his recommendations could be voted down by a powerful group of members, “few of whom have any serious business experience and many of whom are drawing material financial benefits from their positions”.
He said: “The future of my Phase One recommendations will therefore potentially lie in the hands of fewer than 50 elected members who, acting in concert, would be able to cast more than one-third of the society’s votes against these proposed reforms.”
He is due to publish his first full report by the end of next month, but said he “found it necessary to go further” in his recommendations after uncovering weaknesses throughout the entire democratic process at the Co-op.
His report also raised concerns over the group’s social goals agenda and called for a full audit of controls over money spent in this area.
Lord Myners was appointed to the board in December and tasked with the independent review after a disastrous year for the Co-op in which its banking arm needed to be rescued following the discovery of a £1.5 billion hole in its finances.
It is now facing a series of investigations into what went wrong, as well as continuing questions over the appointment of disgraced bank chairman Paul Flowers despite a lack of knowledge of the sector. He was later exposed in a newspaper drugs sting.