The Co-operative Bank and the co-operative economy

Until a month ago, when the Co-operative Bank’s problems began to surface, it was regularly said that co-operatives are enjoying a renaissance. A new report on the co-operative sector shows that the recent difficulties at the Bank should be seen as an anomaly, not an example of the UK’s co-operative economy.

There are two arguments forwarded as to why co-operatives are enjoying a renaissance. First, customers are turning to known, trusted businesses and co-operatives exemplify this, both in the UK and elsewhere. Second, co-operatives are showing stronger financial resilience because they are not owned by outside investors and therefore are able to think long term rather than bow to short term shareholder pressure.

Both are simplifications of a complex business landscape, but as shown in Co-operatives UK’s new report,Homegrown: The UK Co-operative Economy 2013, both contain kernels of truth.

The recent revelations about the Co-operative Bank – which pulled out of a major deal to buy Lloyds bank branches, was subsequently downgraded by Moody’s to ‘junk’ status and then revealed a capital hole of £1.5 billion that resulted in a partial stock market flotation – has put both of these into question.

The Co-operative Bank is, after all, an iconic UK co-operative brand with very high levels of trust precisely because it is a mutually owned bank. Although it is a small part of the co-operative sector, accounting for only about 6% of the sector’s turnover, the knock on effect of the Bank’s high profile problems for other co-operative and mutual businesses are potentially huge.

Homegrown, though, shows that regardless of whether or not the Bank’s problems are significant as reported in the press, we must not extrapolate from the Bank to the wider co-operative sector.

– Co-operatives, the annual report shows, have grown year on year since the start of the credit crunch. Since 2008 turnover has grown by 23%, the number of members by 36%, and the number of co-operatives by 28%. The sector is growing at a startling rate in a terrible economic climate.

– It shows that trust in co-operatives is high. 52% of people describe co-operatives as trusted, whilst only 7% – yes 7! – say the same of PLCs.

– It shows that this can’t be down to one or two businesses. There are over 6,000 co-operative businesses. High profile examples like The Co-operative Group and John Lewis, but other also other large yet less well known businesses like Milk Link, First Milk, Midcounties Co-operative, Unimer, and many others.

– And it shows that co-operatives aren’t working in boom industries – the vast majority of the co-operative sector is made up of retailers and farmers, hardly two sectors you’d put money on to thrive over the last few years.

Clearly, co-operatives are no panacea for a struggling economy. They need to compete, financing growth is difficult, they suffer from many of the management issues other businesses have. The Co-operative Bank illustrates that.

But even the Financial Times, one of the papers most critical of the Co-operative Bank’s bid for expansion, recognised that the Co-operative Bank is an anomaly, not an example of the co-operative economy:

“Co-operative businesses grew in number, turnover and jobs last year, underlining the movement’s resurgence despite the travails of the Co-operative Group.”

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Ownership implications of the Co-operative Bank flotation

The Co-operative Bank will raise the £1 billion it needs to plug its capital hole by selling shares on the stock market.

This signals a major shift in ownership of the Bank, giving outside investors a significant share for the first time.

There are some significant implications for business ownership here, both for the Co-operative Bank’s current and soon to be owners, and for businesses more widely.

1. Member control. The stock market flotation won’t result in a demutualisation. The new investors will have between them less than 50% ownership of the Bank, with The Co-operative Group (which previously wholly owned the Bank) holding controlling shares.

The Co-operative Group is, in turn, owned by its six million customer members, meaning that the customer members will continue to have control, albeit shared with outside investors.

In any mutual there are always productive tensions between the members and the executives; the introduction of a new class of investor members focused on profit will add an additional dimension and shift more control from customer members.

2. Complexity. The new class of members also adds a further level of complexity into the ownership structure.

The Co-operative Group has always had a mix of owners: a small number of corporate members, which are businesses that use The Co-operative Group, sit alongside millions of individual customers. The business has always dealt with this complexity and now it will have another set of owner investors to deal with too. The interests of shareholders, individual and corporate members may sometimes be aligned, but in areas like ethics and long term vs short term profitability perhaps less so. Time will tell on this.

3. Investors. Another interesting implication is for the stock market investors. There are mixed models out combining member owners and investor owners. Circle, the private health provider, for example, is owned 49.9% by employees and the remainder by investors through a PLC. But not many.

It will be interesting to see what impact this model will have on shareholders. Will they see the benefits of sharing ownership with business and individual customers? Will it put investors off? How will these groups relate to one another and to the executive team?

4. A new model? And, finally, will other businesses see the benefits of attracting capital from investors whilst keeping ownership in the business through a customer or employee ownership model? Might we see more of these models emerge? Maybe not in the immediate term, whilst the Bank deals with some reputation issues, but longer term perhaps. After all it’s a good approach for mixing investment and member ownership and this offers a high profile example and test bed.