The Co-Op in crisis – what now?

The Co-Op in crisis – what now?

Will the LAB links be another casualty of the Flowers scandal?

The scandal surrounding Paul Flowers has had plenty to keep the media entertained: drugs, sex, money, power and the fall from grace not just of a preacher-politician but also, and in parallel, that of the bank he once headed.  However, while the human interest may lie in the man, the longer term political consequences of the events lie with the questions that must be asked of the Co-Op itself.

The organisation is facing something of an existential crisis.  What is its purpose and its role?  What do the recent crises it’s faced mean for its structure, governance and ethos?

The real scandal about Flowers’ chairmanship of the bank is not that involving drugs, rent boys and undercover reporters; it’s that someone with his background and lack of experience was appointed to such a senior position in the first place.

    I should mention a personal connection here.  I served briefly but quite closely with him on Bradford Council in 2002-3, when he was a member of the committee I chaired.  At the time, I found him a forceful, intelligent but thoughtful individual; not one to suffer fools lightly but not bull-headed either.  That said, while he was undoubtedly a capable and effective local politician, he didn’t strike me as board-level material for a national bank.  So how did he get there?

The answer to that question raises further questions both of the regulators and of the Co-Op itself.  The original idea behind cooperatives made sense: local people working together for mutual benefit.  Over the years, however, the raft of mergers and takeovers has produced an organisation whose governance is unfit for purpose and which has suffered from mission-creep and empire building.  One check and balance that plc’s have is that large institutional investors should in theory mitigate against the kind of ill-advised expansionism that the Co-Op bank engaged in.  (In practice, this is far from assured as the RBS proved – the tension lies between the investors wishing to protect their capital value and their wishing to see higher returns on it – and in the worst cases, the institutions can be cheerleaders for expansion rather than prudence).

In any case, there should have been at least three other checks, all of which failed in the case of the Co-Op: the Board should have acted on behalf of its members and enquired more deeply into what the takeover of Britannia or the purchase of the Lloyds branches meant for the business; the regulators should have more effectively vetted board members and company policies; and a culture of self-restraint should have been more evident among executives in an industry whose continuance is critical to the entire population of the country.

The failures of the regulators are things which the government and the FSA’s successors will have to pick up.  On the other hand, the question of business culture, while not specific to the Co-Op, does raise particular questions.  This was a company that prided and marketed itself on being an ‘ethical’ bank.  Leaving aside whether there was any justification in fact for such an assertion (having to set aside an additional £100m this year to cover PPI mis-selling, for example, suggests not), that self-image should of itself have acted as a restraint.  Did anyone ask whether it ethical to risk so much members’ money on the gambles of expansion?  If not, why not?

The biggest failure though, and one which goes to the heart of the Flowers question, is about structure.  Almost certainly, in no other financial institution could he have risen so high.  That he did so was because of the unique way the sprawling Co-Op Group is structured.  While other national mutuals exist, none of them to my knowledge is set up in such a byzantine and political way, with what amounts to a parallel internal political structure for members: area and regional committees feeding through to the national Board.  With millions of members but few interested in participation, an individual skilled at committee work and ambitious for advancement can progress a very long way, which, as Robert Peston noted[1],  Flowers did.

That represents a serious failure of governance but correcting it – which essentially means cutting out membership involvement in Board activities – places in question the purpose of the Co-Operative Group itself: is it a business or is it, as it styles itself, a ‘movement’?

Which is where the big politics comes in.  The Co-Op and the Labour Party have very strong links, via the Co-Operative Party, which is legally a separate organisation but which for practical political purposes is a trading name of Labour (a situation not unlike that of the National Liberals within the Conservatives in the 1960s).  Ed Balls, for example, is completely constrained from saying anything meaningful about Flowers or the Co-Op Bank, despite being Shadow Chancellor, because of the obvious conflicts of interest that both his own Co-Op Party nomination and the £50k donation his office received from the Co-Op Group represent.

Present troubles aside, what the Labour Party gains from its links with the Co-Op ‘movement’ is obvious: lots of money.  What the Co-Op gets from the links is a far more open question.  As it reassesses what it is, where it should be going and what it should be doing in the light of the shambles in its banking arm, one imagines that senior management will ask whether it’s appropriate for a business conglomerate to be so closely aligned with one political party (and hence, by definition, against the others).  The fallout from the Falkirk selection may result in a substantial weakening of the links between Labour and the unions.  The fallout from the Flowers affair could well prompt the disengagement of another component of the broader Labour movement.

David Herdson

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