Vogel Wakefield blog

Vogel Wakefield blog

December
04
2013

Co-operative values: missing in action

Spinning in their graves? The Rochdale Pioneers, founders of the Co-operative Movement

Spinning in their graves? The Rochdale Pioneers, founders of the Co-operative Movement

Last week, I ended a 30-year customer relationship with the Co-operative Bank. The move was precipitated initially by financial caution as a gaping hole was revealed in the bank’s balance sheet but cemented by dismay at the catalogue of mismanagement revealed in recent weeks.

While I feel a litte sad as a customer, I’m also discomforted professionally as the collapse of the Co-op Bank raises questions about my advocacy of values-driven leadership. I believe the problems of the self-styled “ethical bank” stem not from an excessively values-driven approach but from a disconnection from its values. But – and here’s the sting – the complacency generated by its intent as an ethical business may have played a role in the bank’s undoing.

As a customer I found the Co-op’s claim to offer an alternative model of banking not only appealing but authentic in that I experienced only excellent and friendly customer service. The first duty of a bank, though, is to keep its customers’ money safe. Once news emerged in April of, first, a £1bn capital shortfall – later revised to £1.5bn – any notion of the Co-op’s ethical differentiation dissipated. The mutually-owned bank which had come through the financial crisis unscathed had become infected by the same expansionary hubris which brought down RBS.

It’s easy to forget the regard in which the Co-op Bank was recently held. Only a year ago, The Economist was commenting that public trust was the Co-op’s main strength. “There is less incentive,” it said, “for a member-owned business to price-gouge or mis-sell.” An article in The Observer, headlined ‘Co-operative model could the answer to economic woes’, noted the Co-op’s governance:

“When the idea of Co-op buying the Lloyds branches was first mooted, its governance was criticised, with commentators pointing out that it has, for example, a Methodist minister on its board, which is chosen by ordinary members. But [then-chief executive, Peter] Marks is unashamed of its democratic structure. ‘My board is full of ordinary people – they’re risk averse. Perhaps if Barclays and RBS had Methodist ministers on their board, they wouldn’t be where they are now.’”

How wrong it all turned out to be! Yet, also, how true!

The Co-operative Bank wasn’t above mis-selling. And the affair of the Crystal Methodist – whose chairmanship of the bank was so appalling, leaving aside his drug-taking – has belied the careless drift from purpose into which the Co-op’s democratic governance had fallen.

The attempt to absorb part of the Lloyds network was a sign of this, not an exemplar of the strength of the mutual ethos. The Lloyds deal was predicated on the management of the acquired entity taking over the running of the enlarged group. This was to be, in effect, a reverse take-over and would have had adverse consequences for sustaining a historic and differentiated purpose. If you hand over the leadership of your bank to people who have no experience of the values you exist to promote, you cannot expect those values to thrive. Even to contemplate doing so indicates that you have already lost sight of the necessity to align corporate behaviour with corporate purpose. To realise a distinctive purpose, you need to put in charge people who are steeped in your corporate values. The Co-op was turning to managers of a failed institution whose culture stood in antithesis to what it claimed to represent.

It had already made this mistake once when it took over the failed Britannia building society and appointed its chief executive to head the Co-op Bank. So the organisation was led into the Lloyds merger by someone who was himself unfamiliar with the Co-op’s traditions and insensitive to what in its culture needed to be preserved.

After the Lloyds deal collapsed, the shortfall in the Co-op Bank’s capital was revealed and a stock market listing became inevitable. The chief executive of the Co-op Group, Euan Sutherland, who arrived in the midst of the mess(£) deserves credit for effecting a masterplan to save the business. But when he told Today listeners in June that a stock market listing would have no bearing on the bank’s ethical stance, he betrayed scant understanding of the Co-op’s distinctive tradition.

It may well make sense from a marketing perspective for the Co-op’s hedge fund partners to maintain the bank’s ethical policy. But the bank’s customers have been encouraged to understand that its ethics are enabled by the Co-op’s values which include democracy, equality, equity and solidarity. The Co-op’s website says “we encourage people to take responsibility for their own community, and work together to improve it” and “we regularly fund charities and local community groups from the profits of our businesses”. This is what the Co-op was set up to do when it was formed as a mutual in 1844 by the Rochdale Pioneers. They wanted to run businesses to give customers a better deal and thereby improve social conditions. It was an explicit alternative to private ownership. It insults the intelligence of customers to pretend that a stock market listing will change none of this.

None of what has happened disproves the viability of the mutual model. But it does suggest that the Co-op lost sight of the practices that must be enacted day after day to keep realising its vision. That a Methodist minister with no banking experience can be appointed chairman of the Co-operative Bank does not in itself prove that the Co-op’s stewardship was ineffective. The whole point was to enable ordinary people to run businesses in the interests of their peers. But that the Co-op’s machine politics contrived to appoint a man who apparently took no interest in understanding nor exercising his responsibilities is an indictment of the movement. It seems to have sleepwalked into a strategy of relentless growth without appreciating the challenges involved in running a complex, modern institution.

As the blogger Chris Dillow points out, the competence of management to run big organisations is limited because diseconomies of scale create bureaucratic limits to efficiency. The simplicity and clarity of purpose in the Rochdale Pioneer’s original mission suggests that they might have appreciated this insight. But here is where the narrative of ethics may not have helped their 21st Century descendants. The ordinary folk who run the Co-op may have relieved themselves of the obligation to ask sceptical questions of management, seduced by the notion that the Co-op’s intentions were sound. I suspect the Telegraph commentator, Charles Moore, is no friend of the Co-operative movement, but he is onto something in his critique of the self-proclaimed ethical approach:

“I sometimes wonder if the greatest institutional problem of our time is not plain, unvarnished evil, but this obsession with Ethics as an outward form, with compliance rather than conscience. The whole idea of an Ethical business, as distinct from a normal one which behaves ethically, is flawed.”

I moved my banking from the Co-op to HSBC, just as The Times columnist, Janice Turner, was making the reverse journey – motivated, she said, by moral disgust:

“The US Senate had revealed HSBC to be money-laundering for Mexican drug cartels, the Syrian regime, Russian mafia, arms dealers and a Saudi bank that funds al-Qaeda. How could I, via my savings, help facilitate the worst people in the whole world?”

It gives me no pleasure to be saving with such an institution. Nor am I much inspired by the glib hogwash in HSBC’s declared purpose: to “enable businesses to thrive and economies to prosper, helping people fulfil their hopes and dreams and realise their ambitions.” But the Co-operative no longer offers a meaningful alternative. The BBC’s Robert Peston noted the irony:

“For those who – perhaps understandably – believe that the source of all financial calamities are investment bankers and hedge fund managers it may be worth noting that it was ethical bankers who wrought havoc at Co-op Bank, and hedges advised by investment bankers who saved it.”

But the hedges have saved the bank in name only. The values we thought it represented had already fallen into disrepair under the stewardship of the Co-operative’s ordinary folk. That is a huge setback for the idea of mutuality.

 

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