Michael Mol: Massive losses must be wake-up call for the Co-op

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THE Co-operative Group and Co-operative Bank have been in the news for far too long now and for all the wrong reasons – big losses, top executives being chased out of the organisation and former chairman, the Rev Paul Flowers, pleading guilty to drugs offences.

So what has gone wrong and more importantly what can now be done about it? This is a question of huge importance for close to 100,000 Co-op employees and millions of customers.

In two recent reports Sir Christopher Kelly and Lord Myners have laid the Co-operative’s key problems bare: they are to do with governance and decision-making. There is nothing wrong with a mutual (co-operative) model. There are many mutuals all over the world that work very successfully, the UK’s John Lewis being one of them, but this particular mutual (the Co-op) has been a disaster in recent years.

The Co-operative Group losses of £2.5bn for 2013 – the worst in the group’s 150-year history – should be the wake-up call they finally need to make the necessary changes or I firmly believe the whole organisation will cease to exist. Two acquisitions, Britannia Building Society and Somerfield supermarkets, have proven particularly value destroying.

Lord Myners has come out with some interesting proposals to change the way the Co-op is being managed and governed. There has already been a lot of resistance to his proposals. He effectively asked the regional members to remove themselves from power, like asking turkeys to vote for Christmas. They don’t seem particularly keen on that; I like to call these people the “angry birds” of the Co-op. One for instance publicly compared the proposed changes to the “North Korean model”. This is very unhelpful and also insults those who do suffer in North Korea.

From my point of view, the board has overseen this destruction in value and that is what needs to stop. And the Co-op has been overseen by a huge board of 21 people, many of whom lack qualifications to do this kind of work. The board has too many members and the structure means you go through areas, then through regions and only then do you get to the board level. At present, ordinary members have no real say over the organisation. Furthermore this approach just invites chancers to come in who don’t have the right expertise.

When I need nursing, I prefer it to be seen by a nurse, not a manager and when it comes to running a multi-billion pound operation someone with management expertise is better than a nurse in my view.

So the Co-op badly needs to adopt many of Lord Myners’ recommendations. But I am very worried about the “angry birds” not taking the right decisions and that will endanger the future of the Co-op Group. They have to streamline its structure with a simple “one member, one vote” method of electing directors rather than through area and then regional boards. If you have direct elections, and have seven million members directly choosing those at the board level of the group, that would significantly improve the quality of the people on the board and the level of democracy at the Co-op.

Today’s AGM is the best time for the Co-op to try to turn things around. I think it would be very unwise to get rid of Richard Pennycook, who has recently come in as the CEO. Some people say he is a Plc man and therefore cannot run a mutual, but for me that is just symbolism and that is not what this is all about.

It is about having a board that is competent and small enough to effectively oversee what the executives do. The board were asleep while executives made disastrous decisions to acquire Somerfield and Britannia, which have caused much of the group’s losses. There has been a failure in strategy and both the board and previous CEO Peter Marks are responsible for this.

We know that most mergers and acquisitions end up in failure. We also know that cases of success often rely heavily on having strong skills at integrating the acquired firm with the acquiring firm. Co-operatives in general do not really have those skills, because they are much more suited to steady, organic growth and the Co-op Bank and group have certainly proven they are no exception to this rule. Peter Marks grossly overestimated his abilities to do this successfully.

So there really are two steps to be taken. First, today’s AGM is now-or-never time for radical governance change. Second, if the Co-op pulls that off and strong leadership is in place it can start changing its strategy. This will involve focusing on areas of excellence like the food and funerals businesses and ensuring these areas are highly profitable. We must continue to believe there is a future for the Co-op.

• Michael Mol is professor of Strategic Management at Warwick Business School.