Getting perspective on the Co-operative Bank

Last week’s media furore over the Co-operative Bank’s ills was an onslaught of revelations and reactions.

Thankfully, though, there were some commentators offering a sensible perspective.

It’s worth bringing them together here because a common view emerges.

Probably first in the week was Philip Augar’s comment in the Financial Times

Second was the Guardian’s leader column published the same day

Then a few days later, on Friday, was the Co-operative News’ comment

And finally there was Ed Mayo’s blog this weekend

These commentators managed to stand back and look relatively dispassionately at the Co-operative Bank’s difficulties.

Yes, they say, there were big problems of governance, management and hubris at the Co-operative Bank.

But these were sad mistakes by The Co-operative Group, an otherwise successful business.

Most importantly, these commentators are all clear on one thing: the Bank’s problems tell us little about the state of the wider co-operative and mutual sector; nor do they put into question the legitimacy of the member-owned model of business.

The Co-operative Bank is just one unfortunate co-operative business.

Beyond the Bank, co-operatives and mutuals are diverse, global and thriving.

Why the Co-operative Bank’s problems matter

So, the Co-operative Bank’s rescue bid – which involved a partial flotation on the stock exchange to raise capital whilst The Co-operative Group retained around 70% ownership – has failed.

Following very difficult negotiations, it now looks like the majority of shares in the Bank will be held by institutions, with The Co-operative Group retaining just 30% ownership.

There is – and will continue to be – an inquest into the causes of the problems that led to this. Hubris, failed expansion plans, disengaged members, executive failings and much else will surely turn out to be factors.

But what perhaps hasn’t been said, in simple terms. why it matters. For what it’s worth here, I think, is why it matters.

To society. The Co-operative Bank has been arguably the biggest force for good in the UK banking sector for the last 20 years – a prominent ethical bank that led the way on ethical investment and sustainability. Without it there will be less of an ethical counterpoint to standard banking practices.

To customers. The Co-operative Bank provided an alternative for customers, offering them an accessible mainstream bank where they could feel good about what their money was being used for. There are other ethical banks, but all are small and niche; there may be no easily accessible alternative anymore.

To co-operatives. The Co-operative Bank was perhaps the defining brand of the co-operative sector in the UK – when people think about the word co-operative they think about an ethical leader. In the short to medium term, this association will be damaged by the Bank’s problems.

To the economy. The tragic unfolding of events stem from a deeper problem – that the institutions governing banks and business favour one model of banking, despite the fact that the model has been shown to fail since 2008. Specifically, in this case, Standard and Poor’s downgrading of the Bank was partly a consequence of the rating agency ignoring the capital available to The Co-operative Bank because it was owned by a much larger Co-operative Group. A major catalyst for these problems was the blinkered view of acceptable banking practice.

If Vodafone was a mutual

What would happen if Vodafone was a mutual, owned by everyday people rather than shareholder investors?

Vodaphone announced recently that it was selling its 45% stake in the US mobile company, Verizon Wireless, for over £80 billion. With much praise in the press, Vodaphone said that £66 billion of the sale will go to its shareholders. With nearly 50%of its shareholders in the UK, this will give a much-needed boost to the UK economy, equivalent to around 2% of GDP and some in the press said, akin to quantitative easing.

That’s a lot of money, no doubt, and it shows the ability of businesses to generate and distribute wealth.

The thing is, though, over 75% of Vodafone’s shares are held by ten investment institutions. So only a small amount of money will go into the pockets of real people or into the economy in any meaningful sense. Most of the pay-out will be re-invested in the markets with little tangible impact for economic wellbeing and the wider economy.

If it was a mutual things would be different.

If Vodafone were owned by its 19.3 million UK customers, rather than shareholders, each customer owner would get around £3,500, giving them a significant chunk of money. If Vodafone were owned by its 84,000 staff, the share each would receive would be considerably larger.

Not only would a mutually owned Vodafone put money in people’s pockets and boost the economy, it would share the wealth generated by the business amongst around 40% of the UK adult population.

And that’s without even mentioning tax. Which, it turns out, Vodafone will pay very little of because of its clever tax arrangements. But that’s a different story.

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.