Responding to Myners: Notes on Co-operative Governance

Paul Myners is conducting a review of Governance of the Co-operative Group in the wake of the near-insolvency caused by the problems at the Bank formerly owned by the Group. In his reply to the Group’s consultation exercise, Dave Boyle makes some suggestions for constructive reform.

Dave Boyle
28 March 2014

There’s been considerable scepticism about the review for a variety of reasons. It chose not to be advised by people with serious understanding of international efforts to reform co-operative governance like Stirling University’s Johnston Birchall but instead favoured people with track records within the PLC environment and business school orthodoxy. 

Secondly, it divided its work into two phases – the first to sort out the Boardroom issues, and then deal with the rest of the Co-operative Group’s governance layers. 

But this is to get things the wrong way around; in a co-operative, governance flows up from them and so to determine the part which connects with members as of second-order importance is somewhat telling. 

For many of us, the problem with democracy in the co-operative is that there is far too little of it in general, and too much of what is present is of desperately poor quality and the poor performance of its democratically-elected officials says much more about the health of the system that produced them than it does about the principle of member-controlled enterprise. 

But to do a two-stage review invites a response in which the poorly-performing elected officials are kicked upstairs (rather than out) and thus kicked upstairs, allow the system that produces them to be at best of much lesser importance and at worst a matter of no consequence to anyone in management because it ceases to be nothing more than the dignified part of the constitution.

At a recent meeting of the Sussex Area Committee of the Co-operative Group, I suggested that all submissions be published in the interests of transparency, and ensuring that the report reflected the thrust of comments fed in, not reflected those comments which fit a pre-ordained set of conclusions. That can’t be done, apparently, as some submissions have been received on the basis of confidentiality, but since I argued for it I thought I should at least publish my own, for what its worth etc. 

Q1: What weaknesses in TCG’s governance have the events of the last few years – and especially 2013 – revealed? What changes in governance processes and structures are needed and why?

The root cause of the recent failures is not to be found in the governance structure, but in the culture that underpins British retail consumer co-operation which created and sustains those structures.

The governance architecture of the Group of course needs to change, but any change must try and reboot that culture as much as it must deliver institutionally effective governance. Shuffling the pieces to better arrange them will not change the fact that the board, the game and the pieces are the problem, not their configuration. The catastrophic expansion of the business was unable to be resisted by the Board, still less the members, who at no stage had any meaningful say on this.

The Co-operative Group hasn’t grown by making strategic acquisitions and mergers like a successful corporate. It has grown because of the nature of Industrial and Provident Society law, which requires that a co-operative society is either able to be wound up by a liquidator, or its assets taken on by another Industrial and Provident Society.

As a result, mergers in the co-operative movement have always been rescues of the stricken much more than aggregations of the strong. It would appear that Britannia was the continuation of a historic pattern, not an aberration.

It has thus grown more like a principality in the Holy Roman Empire – a strategic marriage here, a war acquisition there, suzerainty over there and inheriting another anomalous piece of territory due to that area royal line dying out and so on.

The end result is a sprawling business compelled by its size to compete with the large multiples with an infrastructure and governance ill-befitting it, driven by the logic of size to be something it is strategically unsure it wishes to be.

In short, I’m not convinced that a business active in so many disparate sectors, let alone that those managers can be given strategic direction or accountability by another body.

This creates a secondary problem, that since the dice are so stacked towards executives (I’m here conflating Michels’ Iron Law of Oligarchy with the Principal-Agent problem) the elected-component is compelled to stay closer and closer to those executives and further and further away from members in order to know what is happening.

Add in the incredibly long pathways to the Board, which mean that someone usually will have served 15-20 years before getting to that stage, and you have a recipe for a very insular and unreflective culture, that has an excessive regard for tradition and a certain way of doing things (such as executives of merged societies getting jobs as a ‘reward’ for delivery of the merged enterprise, despite such merged enterprises often being in dire straits and hence requiring rescue masquerading as merger). Because the Board is so far removed from the ordinary member arrangement that the ordinary members might find amazing – like payment for remaining years in terms of office cut short by re-organisation – seem commonplace.

The culture is nominally accountable to lower layers, but isn’t meaningfully so. People are sent to the main Group board from regions, and the culture of confidentiality means that knowing how one’s representatives voted is hard to discover, and so holding your representative to account is nigh on impossible.

The information revealed about the parlous state of the bank’s affairs via the Treasury Select Committee investigation shows that it was known in 2010 that there were problems, a full 3 years before these became public or indeed were known to the elected representatives of members.

I’ve witnessed senior elected members stand in front of members of the group at open meetings and tell them what we now know to be barefaced lies. I’m sure these people would plead the need for confidentiality for regulatory reasons; if so, something has to give in either the confidentiality that cloaks business decisions, or the democratic culture that depends on transparency and information in order to deliver its core functions.

I was also able to attend the Annual General Meeting in May 2013 as a regional delegate, which was a rather surreal experience. Unbeknownst to everyone outside the board and senior executive, the group was teetering on the brink of insolvency at this point; people knew things weren’t well, but had no idea just had parlous the situation was. And yet the AGM was a dog that didn’t bark.

As a delegate, my vote was to be cast according to the decision already reached by Regional Board. So as far as I can tell, several hundred pounds were wasted sending me to Manchester to do what could have been done by the Regional Chair. The majority of those who attend have no role, and the meeting utterly and completely failed at holding the group board to account at a very moment where account needs to be held. A more perfect metaphor for the decrepitude of the constitutional arrangements it would be harder to find. 

Q2: How does the work of area committees and regional boards contribute to the efficient running of TCG and its overall commercial performance? Please cite examples.  

It doesn’t. It’s an inefficient system that serves a single purpose of ensuring that governors at the highest level have earned [?] their spurs by attending many years worth of long meetings.

The actual decisions made by Area Committees are negligible and certainly not mission-critical. Their prime role is to provide a pool of candidates from which to draw on for other higher tiers of governance to those who have proven their worth; that, of course, could be people with dynamic and radical ideas, but tends rather more to be people who have shown above average toleration for repetitive evening meetings; as one person once said to me ‘if you play your cards right, in about 10 years you could be on the Regional Board’, both clauses of which seemed to be perfect summations of the problem.

Elections for Area Committees take place with a curious version of Purdah, in which candidates are forbidden from making any utterance in support of their candidacy. As a result, members get a paltry few hundred words on which to judge the suitability or otherwise of candidates. Unsurprisingly, incumbency effects are significant, but more pertinently, the election singularly fails in one of the core functions of a democratic system, to provide a mechanism of the owners of the organisation to provide comment and feedback on strategic direction.

Since elections take place in something of a vacuum of information and comment, they are a lottery in real terms, though one without the main benefit of a ludic representational system, namely in shaking things up by providing the chance element of diversity.

Instead, a small number of people who would seem deeply unrepresentative of the wider membership (the voters) go through the motions of selecting which subset of an even more unrepresentative group (the candidates) should enter the governance system in order to act with the conceit of saying they act in the name of the 5m ordinary members.

Our core and sovereign role as Area Committee members in the constitutional architecture is to choose which members of our committees go to the regional Board and thence to the Group Board. Yet this in itself is almost laughably ill-executed.

In the midst of the current crisis afflicting the enterprise, there was an election to the regional board here in the South East from our committee, in which there were 3 candidates for 2 positions. The first I was aware of this was in the papers for the meeting itself which I received a week in advance, in which a short statement from each candidate was circulated. At the meeting each candidate read a prepared statement of around 5 minutes, then left the room, at which point a secret ballot was held.

There was no scrutiny of positions, attitudes, and approaches. No questioning of candidates individually or collectively. No discussion amongst ourselves in candidates’ absence; a deeply inadequate conclave.

I had noted that, in the midst of this grave crisis, some members who had often exhibited strong views were not joining the discussions between members of our committee on email. I discovered that all three were silent on the advice of the regional executive, lest communication breach the Purdah rules and count as ‘campaigning’; heaven forefend an electoral decision be made in light of full and frank discussion between voters and candidates, which the Co-operative Group’s constitution would seem to abhor.

The final problem is of vertical integration and a lack of horizontal communication. The Group’s democratic procedures are gloriously siloed. Members from different areas get to meet twice a year, in which they will spend several hours in discussing an agenda set by the regional board. The time for free discussion focused on concerns raised from the bottom-up is highly circumscribed.

The structure is redolent of the democratic centralist tradition common to 20th century democratic organisations, in which each unit had a geographic or sectional power base, and control of information was a key instrument of power over that base.

Free communication is necessary across areas and regions, unmediated by regional boards or executives. 48 meetings in which people hear bad news can lead to resigned cynicism; one big discussion with angry yet energized people with the power to change something has the potential to be more vibrant, challenging and effective.

Sad then, that the Group has seemed to be caught between an executive and senior democratic level who, by virtue of their positions, are not at all sure that a meaningfully engaged and free flowing communication network between ordinary members is necessary or advisable.

Belatedly, the Group have provided an online forum for elected members to discuss matters, but for a variety of reasons (which might include a terrible technical platform, a lack of drive to underscore its importance, moderation of critical postings by executives and general demographic unwillingness and unfamiliarity by predominantly aging cohort to use methods more popular with people two generations younger) it has failed to reach the critical mass needed to generate the network effects that underpin meaningful online fora which have a vital role in forming, shaping and informing geographically disparate elected members. 

Q3: The size and mix of TCG’s business make the Group more complex than most large UK companies. How should TCG resolve the tension between a commitment to member control and the deep expertise required – particularly at Group Board level – to direct effectively a commercial enterprise of such scale and 

Q4: To what extent does the current 3-tier governance structure, with its eligibility preconditions and the considerable time demands required for concurrent membership of each tier, discourage more active participation by some talented members? What changes, if any, would you like to see introduced?

If – as I suspect it is – the issue of radical decentralization to more locally-based, sub-regional or regional enterprises is not on the agenda (and certainly isn’t part of any terms of reference or any of the current reviews, and more’s the pity) then the current system is utterly unsuited; it’s hard to find what circumstances the current system is suited for (save a moderately democratizing Holy Roman Empire circa 1700).

The job of scrutinizing the executive – that their plans are sound, that they are executing them well – is the task of a body more similar to an internal audit committee, but instead of proving scrutiny over spending, takes the same critical and challenging approach to strategic implementation and competence.

That should be within a framework set by democratically-elected members, who need not be experts at retail but need to be experts in understanding what member benefit might look like.

In short, a two-tier approach, in which one group set the strategy in consultation with members, and another implement it with scrutiny from experts accountable to the strategic board.

Essentially, the role of governor in a single system requires that the lines between operational matters and strategy to be far more well defined and obvious that it ever will be in a sprawling, unwieldy democratic organisation.

It’s a form that takes its inspiration from the Policy Governance approach of John Carver, and the two-tier board common in German vereins (members associations), such as professional football clubs, which balance major revenues and turnover with democratic member ownership. It gets the best from ordinary people with variable knowledge, skills and commitment – their thoughts on core existential questions about the nature of an enterprise – whilst avoiding the worst, namely Parkinson’s law of Triviality, political hackery, responsibility avoidance, inadequate scrutiny, closed cultures which seek to self-perpetuate rather than meaningfully regenerate.

I’d go further and say that beyond a certain scale, the core qualification here for our member-representative board is that they are more obviously ordinary members, which is to say a jury-model would be far better at delivering than the current system in which the currency of the realm is less talent and perspicuity than ability to last the course, curry favour, make alliances and ‘play the game’.

A randomly selected body need not be 15-strong but could be several hundred strong and more, focussing into sub-sections governed by interests and commitment rather than geography; it would be more open, less secretive and more permeable to participation by ordinary members.

Asking the same people to set strategy on behalf of 5m members and hold executives to account for the implementation of it is beyond them, and in trying to achieve the two, they have failed at both. Executives were not scrutinized, with catastrophic results. Members were not invited to approve mergers with Britannia, Somerfield and before, with other societies, again with catastrophic results.

Q5: What changes in governance arrangements do you think would enable TCG to connect more effectively with all its members, their interests and what they want and value from their membership? What do you see as the priority interests of the majority of members?

The core issue for the majority is the provision of a beneficial consumer experience, with benefit being defined differently by many. For some, this is price alone. For others, it is about availability of lines, others the proximity of locations, whilst with yet others about driving ethics into the heart of retail and so on.

But I think all expect the co-operative to mean something a little better, a little different. Not necessarily chest-beatingly amazing, but certainly aspiring to be so, and not, to list off a damning charge sheet, being in the rogues gallery of PPI mis-selling, OFT-indicted cartels or the lower ranks for retail staff satisfaction and retention.

Members first and foremost relate to the business as a whole, and in their local store geographically and their interest will vary according to their personality and interests. The creation of Areas and Regions is a bureaucratic fiction that does nothing to recognise this textured and fluid reality. It’s done with internal needs of the bureaucratic structures in mind, not members, so we should have no surprise that members are not engaged in it. It’s not been designed that way.

Members should be able to engage in different dimensions – as members voting on a one-member, one-vote basis across the country, in conjunction with acting as activists in the causes that drive them, be that employee welfare, fair trade, co-operative principle six or whatever else. They also need to be able to engage fluidly with the operations of their local store, and the strategy of their national business.

I’d recommend, as stated previously, that the model of democracy practiced –representative and geographic constituency-based - has had its day; everywhere it develops the same closed, inward-looking complacent culture to the point where one must say that these are less bugs than features. Other models present themselves, from the oldest, such as jury service models of random selection, through to member parliaments, through to modern innovations like liquid democracy.

Core to this is that communication horizontally, vertically and diagonally is essential. Knowledge is power, and we are to distribute power meaningfully, we must distribute information and knowledge.

Q6: How far should members as a whole be able to exercise direct choice over the allocation of funds to social, community building causes and other donations? Given the financial and commercial challenges facing TCG, how far do any such donations need to be closely aligned with TCG’s strategic objectives for ensuring the future success of its portfolio of businesses?

There is simply no reason on earth why funds cannot be allocated on a democratic basis by members voting online and in shops. Members shop locally, and local action can and should operate at the same level. Turning money members have allocated from their own dividends to action in their own communities is going to be more salient and attractive the closer to home it is. It needs to also be done not through the tax-efficient-driven vehicle of a charity, which leads to a far-too narrow definition of what counts as a good cause. This means that the Co-operative currently funds projects that other enterprises’ CSR programmes could cover, and leaves many co-operatively inclined institutions which aren’t covered by alternatives left high-and-dry by the largest retailer with greatest affinity with them.

Q7: TCG members account for fewer than half of its customers. What can be done to increase the appeal of membership to TCG’s entire customer base?

Massive, radical and fundamental change. Tinkering with the edges will perpetuate more of the same, which is to say another review of the disconnect between members and customers with a backdrop of even more decline in a decade.

We know that doing nothing radical won’t work, but don’t know precisely what might. This nexus is the handmaiden of institutional cowardice and conservatism. At good times, it can prevent too much change, but it more often slows the pace of necessary adaptation. Such is the gravity of this crisis that now is a time for experiment and innovation. The clock is ticking on the very nature of the Group as a salient and connected enterprise in the 21st century.

A starting point must be to recognise that the pool of people who identify as co-operators and who are willing to commit years of their life to being part of the democratic process is shrinking because the 19th century world in which that was commonplace has long gone. People have greater commitments that vary and reflect the changes in their interests, commitments and willingness to offer themselves to the service of the wider collective.

Any system based on repeated attendance at formulaic meetings will continue to disconnect. Any system based on commitment to attending meetings at which no real decisions can usefully be made will continue to be populated by unrepresentative people like myself. Any system that offers little reason to vote and no opportunities to engage or hold representatives to account will deservedly be deemed illegitimate.

Any system that feels like it reflects the priorities of the past rather than the needs of the present and future, will disconnect.

Any system which doesn’t understand that the internet unbundles intermediaries is dead. Any system which doesn’t recognise that the biggest intermediary due to be unbundled is a monolithic institution which still appears to be grappling with the notion of the computer, let alone the connectivity and networked power of a new generation with computing power in their pocket to power a moonshot, will die. Any system that seeks to manage decline in conditions of radical industrial and commercial change will die. There has been ignorance, obstinacy and cowardice enough in the name of stability. Aversion to change has led to disaster after disaster.

It is time for us to take the risks necessary for survival.

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