A way forward for the Co-operative Group?

25 July 2014 | News

Cliff-Mills-Close-Up2-2375-199x300The emerging proposals at the Co-operative Group seem to have moved significantly beyond the proposals put forward in the Myners report, and if they are building support with members’ representatives through a process of constructive dialogue, then this is an enormous step forward.

However I still have concerns in three areas, in all of which it seems to me there is scope for further progress.

Member influence

There has been much focus on the composition of the Board, and in particular the number of Member Nominated Directors.  I understand the reason for that and don’t wish to undermine it, but it is clear that in the new model, the focus at Board level is primarily on competence and ability to run the business rather than member influence.  For me, the primary focus for preserving real member influence in the new model is through the role of the Council, which needs to be strengthened.

The directors of a co-operative (and of a company) are the agents of the owners – they are given responsibility for running the business and delivering the organisation’s strategy.  But the business belongs to the members, and unlike the members of a company (investors), co-operative members participate in the business of their society.  Members therefore have a material interest in what the business does in a way that investors do not, and it is fundamental that members have a say in what that business will do in the future.  The principle of Member Democratic Control expresses this.

The process of deciding forward plans, therefore, needs to be a dialogue between the Board and the Council.  The Board has to write the business plan, but it is for the members’ representatives to contribute to shaping that plan, and not just reviewing it from a perspective of values and principles.  The members need to “own” the plan which their society aspires to deliver.

There should therefore be a requirement that the forward plans are approved by the Council; or at the very least, an express duty for the Board to have regard to the views of the Council in drawing up the plans.

Holding to account

My second area of concern is in relation to holding the Board to account.  The forward plans having been agreed, it is the Board’s job to deliver them.  The Council’s role is to hold the Board to account in doing this, which means to receive reports on progress, and either to confirm/congratulate where things are going well, to criticise/correct where they need improvement, or ultimately and in exceptional cases to remove/replace when performance remains unsatisfactory and there is no alternative.  Unless the broad powers exist for the Council to achieve these things, then I believe that it is misleading to say that the Council “holds the Board to account”.

At present, if the Council is dissatisfied with the performance of the Board or individual members of the Board, it has the power to propose a motion at an SGM to remove a director, which must then be carried by a 75% majority.  This is frankly inadequate.

There is a necessary tension within any business between its owners and its managers.  That tension is necessary, because without it managers go unchecked, or owners risk destroying their business.  The purpose of ownership and governance arrangements is to provide a framework to hold that tension, and to provide a clear and constructive mechanism through which to resolve issues which arise from time to time.

At the heart of that governance framework, there needs to be dialogue, on a regular, respectful and open basis through which managers and managers can build up mutual trust and work collaboratively to enable the organisation to achieve its purpose.  The further away that the mechanisms of enforcement are from that dialogue, the weaker and less effective it is likely to be.

The power to remove directors is a last resort, and it is rarely used.  Those coming from an investor-ownership background will be uncomfortable with the Council having powers of removal of directors; but without it, there will be insufficient tension, less likelihood of building a real collaborative relationship between managers and owners, and no real holding to account.

I believe that the Council should have the power, in exceptional circumstances where performance continues to be unacceptable, to remove (non-executive) directors.  If they are not to be given this power, then at the very least, the Council needs the express power to call an SGM to remove a director, and the resolution to remove should only need a simple majority (50%) as is the long-standing position in company law.

Nominations Committee

My third point concerns the composition of the Nominations Committee.

A priority for the new governance model is the assurance of competence at Board level.  As well as for the first time including the two most senior executives on the Board, the proposals limit the presence of member nominated directors to 3.  Although this represents an enormous shift of formal power away from member representatives, I believe that it is the right thing to do.

I also believe that it is fundamentally correct that the criteria for Board membership should be determined by the Board, probably supported by external advice.

However, the proposed composition of the Nominations Committee provides that only a minority are member nominated, and the majority comprise the Group Chair and two independent non-executive directors.

As already observed, the Board are the agents of the owners in running the business.  It seems to be flawed that a majority of the Nominations Committee are agents, nominating further agents.

Whilst this is a level of detail that I would not expect the Financial Conduct Authority to be concerned with, I believe that unless the majority of the Nominations Committee are member nominated, the proposals will fail to convince many co-operators that member control has been preserved.

In practice, a limited change is needed to address this issue.  It is difficult to see why this would cause an unacceptable risk since members of the Board would still form the majority of the Nominations Committee; and there is still a process of appointment by the Board after a nomination has been made.

Concluding remarks

I have highlighted three issues above, all of which could be addressed relatively easily in drafting new rules.  In my view, they all enhance the role of members in the proposed new constitutional arrangements without compromising the drive for Board competence, and if implemented should enable the proposed new rules to appeal to a wider audience.  Without addressing them, I believe there is greater risk that the huge shift of formal constitutional powers away from members and their elected representatives in the proposed reforms will result in an imbalance, and a tragic loss of co-operative authority.

Cliff Mills, Principal Associate, Mutuo