News that the John Lewis Partnership is considering the sale of a minority stake has added fresh urgency to questions around the regulation of mutuals and co-ops, and their ability to raise capital.
In March, the organisation – which is owned by its employees through the John Lewis Partnership Trust – posted a £234m loss as the economic crisis continues to dog the high street. The Sunday Times reported the organisation was “in the early stages of a plan to change the retailer’s mutual structure” in a bid to raise between £1bn and £2bn in new investment. This plan could reportedly include selling off a minority stake in the business.
The ‘capital conundrum’ has long been a concern for co-ops and mutuals, and is part of a wider problem of regulatory environments that are not conducive to member- or worker-owned businesses.
A hostile legal environment has contributed to some high-profile demutualisations in the movement, such as Canada’s Mountain Equipment Co-op (MEC), which was sold to a US private equity company in 2021. Members opposed to the sale pointed the finger at the Companies’ Creditors Arrangement Act (CCAA) –
a federal law that gives financially troubled businesses the opportunity to restructure their affairs – saying it was used to override a provincial law, the British Colombia (BC) Co-operative Association Act.
British Columbia is now rethinking its co-op law, with the provincial Ministry of Finance launching a two-stage consultation last summer. It asked co-operators for suggestions on how to improve and modernise the act and received 26 submissions, and is now asking for people’s responses to those suggestions.
Ideas include giving members more opportunity for involvement in governance through members’ councils or member forums; more transparency on directors’ compensation; and the addition to the law of “additional duties for the directors that would require the director to consider the co-operative basis and principles upon which their co-operative is operated”.
The Save MEC group, formed in a last-ditch effort to save the iconic outdoor leisure retailer, is urging followers to contribute. In a post to its Facebook page it noted that “there are many points in the summary that are very relevant to how the MEC debacle unfolded, e.g. the difficulty of getting enough member signatures to call an emergency general meeting; the lack of board communication with members prior to the board’s decision to file for bankruptcy; and the undemocratic practice of “recommending” board candidates.”
MEC is not the only sector icon to be targeted by private equity funds. Successful and longstanding co-ops and mutuals generally build enviable reputations for trustworthiness among consumers, allowing them to build valuable and familiar brands. The UK’s Liverpool Victoria (LV=), whose sale to US fund Bain Capital was thwarted last year, is a prime example.
The LV= crisis brought fresh urgency to the capital conundrum in the UK, prompting Labour/Co-op MP Mark Hendrick to introduce a private members’ bill last year. Elements of this have been adopted by the government, which will allow co-ops to legally guarantee that some or all of their assets are held in common and non-distributable among members.
Fellow Labour/Co-op MP Gareth Thomas, a prominent voice in the campaign to save LV=, has also introduced a private members’ bill – awaiting its second reading – which would enable co-ops to issue permanent shares.
He says: “The challenges facing John Lewis only underline the limited capital-raising options for successful, sustainable co-op and mutual businesses that need to finance expansion and investment plans but do not want to give up control by their British customers or employees.
“My bill would help companies like John Lewis and also housing associations, agricultural co-ops, employee-owned businesses and mutual insurers. Through permanent mutual shares they would have access to a source of venture capital that would not require them to demutualise, end their British ownership, or scrap their democratic governance.”
There have been notable successes elsewhere: in Australia, the Business Council of
Co-operatives and Mutuals helped push changes to the Corporations Act, incorporating a definition of the mutual business model and allowing mutually owned deposit-taking institutions to raise capital without having to face enhanced disclosure requirements, which will only apply to businesses that no longer meet the definition of a mutual entity.
With such changes still to happen in the UK, there is no such fix for John Lewis. Unable to raise equity externally, it is squeezed by inflation, with falling sales contributing to a £234m loss last year, and a £50m bank loan due in December. More optimistically, it has cut its net debt to £1.7bn from £3.5bn in 2015, plus £1bn of cash and an unused £420m bank facility.
Recent Financial Times analysis noted that it also owns £2.5bn worth of freehold and leasehold buildings across the country, giving it scope to raise money through property deals.
A John Lewis spokesperson told the FT: “We’re two years into our transformation plan and the partnership is in robust financial health. We have a strong balance sheet with high liquidity and net debt at historic lows.”
Ann Tyler, former executive director of the Employee Ownership Association (EOA), chair of Ownership at Work and an associate of sector think tank Mutuo, said in a post on Mutuo’s website that “it isn’t easy to raise investment for growth and development whilst protecting and preserving the employee-owned status. This is not just a problem for EO businesses. Co-ops and mutuals face the same challenges when seeking external finance. Whilst there are ethical social-impact led investors such as Bridges Ventures, Big Society Capital and Big Issue Invest who have the appetite for long-term debt, the scale of investment will be limited by their own structures, the regulatory framework and the size of their funds. Options are limited.”
Tyler points to alternatives, noting Australia’s reforms, and also UK changes which mean that building societies have been able to raise finance through core capital deferred shares since 2013.
“We need an urgent and radical review of options available in the UK to provide sustainable long term financial investment for employee-owned, co-operative and mutual businesses before it’s too late,” she wrote. “John Lewis & Partners is the retail jewel in the UK’s economy. We need to make sure it continues to shine.”