Failures of governance and leadership contribute to £2.5bn loss

“Major failings of governance, leadership and accountability,” has led to the Co-operative Group’s lowest point in its 150-year history, according to interim chief executive Richard Pennycook. Mr Pennycook,...

“Major failings of governance, leadership and accountability,” has led to the Co-operative Group’s lowest point in its 150-year history, according to interim chief executive Richard Pennycook.

Mr Pennycook, who took over the top post last month when Euan Sutherland resigned, said: “The credibility, trustworthiness and financial strength of the Group built up over nearly 150 years have been stripped away over the past five years.”

The £2.5bn loss has come from three areas, said Mr Pennycook, who joined the Group last year as interim finance director.

“Firstly, the continuing losses reported by the Bank as a result of the impairment of corporate loans, conduct issues and failed computer development projects.

“Secondly, the write-off of our accumulated 115 year investment in the Bank following its emergency recapitalisation, in which we participated, but in the process saw our shareholding fall from 100% to 30%.

“And thirdly, a partial write-off of the goodwill created on the 2009 acquisition of the Somerfield food business following a strategic review of that business.”

In his 2013 business review, Mr Pennycook reflected on the recent “history of poor results”. He said: “Debt has risen from £0.6bn five years ago to £1.4bn at 4 January 2014. At this level, most Group debt ratios are adverse to those recorded by listed company peers, reflected in our sub-investment grade credit rating of B+ awarded by Standard and Poor’s in January 2014.”

Though he said this trend is reversing: “Group debt did in fact reduce by £286m in the year, but as a result of business disposals and a sale and leaseback of the Group’s new head office (itself another form of debt) rather than through solid cash generation by our businesses. The Group’s balance sheet also reflects the accumulated legacy of obligations taken on in the past, but now holding back our financial progress.”

Mr Pennycook also said the Group has made a provision of £197m for lease costs on buildings that are owned by the society, but unoccupied. There are 645 units nationwide and the chief executive said it will be looking for sub-tenants to reduce these costs.

Another change needed is governance reforms, according to Mr Pennycook: “A combination of the Kelly Inquiry and the Myners Review will help us to ascertain where failings have arisen and what needs to be done to address them. This will be painful for those concerned, but there will be no sugar coating.

“While we await the detailed reports, it is clear that they will reveal major failings of governance, leadership and accountability. The 87,000 colleagues and 8.1 million members will look to the Group board, our regional boards and the independent societies for an appropriate response.”

Group chair Ursula Lidbetter said she recognises “the scale of the change required to our governance”. She added: “This essential and urgent work is critical to our future and will enable us to build a more effective organisation which can deliver for all our members, customers and colleagues.”

As well as the recognition for governance changes, a two-year business transformation plan is now in place. “We have stabilised the Group, with the support of many stakeholders, and we are ready to begin the process of recovery,” says Mr Pennycook. “Our short term plan for the turnaround phase is simple. We need to invest in our retained businesses, and operate them effectively in highly competitive markets. We need to reduce a bloated cost base in order to generate cash for that investment and to enable us to reduce our levels of debt. And finally we need to ensure that we generate good proceeds from the businesses that are for sale in order to accelerate further the necessary debt reduction.”

He said all of these activities are underway. The True North strategy for food has seen a sustained period of market outperformance, and a “rigorous programme” to take costs out of the business has started, with £100m of savings being found.

Looking further into the future, the chief executive said a fundamental review of the purpose of the organisation has been undertaken. “While we have no automatic right to exist,” he said. “It has confirmed to us that in the 21st Century, just as in the 19th, we should have a place in the communities of the United Kingdom. The work has been undertaken co-operatively with the Group board, with extensive input from colleagues, members, customers and the general public.”

The purpose is set to be unveiled at the Group’s annual meeting on 17 May. “At the heart of our purpose will be our determination to be distinct, remain true to the essence of our co-operative roots and deliver for our members, customers and the communities in which they live,” added Mr Pennycook. “We know we need to make that meaningful to everyone who cares about the Co-op.”

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