The capital injection announced for the Co-operative Bank resolves its immediate financial needs — in terms of boosting its equity cushion in line with the way regulatory requirements are headed.
But with minority shares and external investors, is it a co-operative? There is a clear answer. Yes, even if, by degrees, close to the edge.
The indirect nature of member ownership of the Co-operative Bank has long been debated. Whereas most co-operative banks worldwide are consumer-owned, the UK Co-operative Bank was formed long ago by consumer-owned societies, and started with their needs rather than seeing itself as directly consumer-oriented. It is a co-operative as a direct part of the wider Co-operative Group, as it now is.
Whereas other countries, with some exceptions, have legislation in place allowing for co-operative banks, the UK has never had this clarity and the UK Co-operative Bank is set up in legal terms as a company, wholly owned by the Co-operative Group.
How the Co-operative ended up needing this capital injection is another story – one that is important to learn from when things settle. Robert Peston sets out many of the key issues in his latest blog (s.coop/1q918), but it is also about internal culture and governance, including the approach to financing business and expansion; the regulatory shift, particularly in the UK, to require higher equity cushions; and the way that ratings agencies operate.
So, is the Co-operative Bank a co-operative?
What is a co-operative is determined by the Statement of Co-operative Identity agreed by the International Co-operative Alliance (ICA). Here, it is Co-operatives UK, as the recognised apex body for the ICA, that applies this as a guardian of co-operative identity. Our long-standing policy on implementing this in a UK context, following consultation with our members, was published in 2012.
This covers the issues and challenges of where we are now, including the tensions and issues that are going to need close attention over time to ensure member ownership and control.
“What starts as one form of enterprise can change,” it says. “Some co-operatives begin as 100 per cent member owned, and then diversify, offering shares to investor-owners. This applies mainly to farmer co-ops, but also, internationally, to some others needing large investments, such as telecoms and insurance co-operatives.
“Here, while member ownership is obscured it still exists in a pure form behind the business. Sometimes investors are brought into direct ownership, and here the business can still be seen as member-owned if members retain more than 50 per cent of the equity. However, there are doubts as to whether in practice members can exert enough influence to be said to be still in control. It is harder to apply, but it may be a better if more subjective interpretation to ask not just that members have majority ownership, but that they retain control.”
The Co-operative Bank is on a firm footing. The commitment to ethics remains. It is a bank, like others, but its value is its difference – it needs to remain co-operative.
None of this has been good news. There is a strong sense of loss and of concern, both on how we got here and how we move forward. The pessimists fear that the Bank could edge towards a full shareholder model over time. The optimists sense that if the Group sees better trading over time, shares can perhaps be re-purchased – the model that the family-owned German firm, Porsche, has just taken.
But the deeper learning that is needed has to sit alongside immediate action and reflection. The new model needs to be developed with care. There is a new art of blended governance that is needed, compliant with listing rules, to retain member ownership and control, while respecting that minority investors need to be treated with and to operate with respect for co-operative values.
It can be a recipe for co-operation, or for conflict. Governance is like this for all co-operatives. If you design something as a boxing ring, you will get a fight. In the detail and design of how governance operates, so much matters. That is why one of the key services we offer to our members, led by Helen Barber and her team, is a periodic health check and review of governance.
The mesh between co-operative principles and finance is no less important to consider and learn the lessons from. Co-operatives UK organised a members’ round table on co-operative capital last month, looking at this issue and will publish a report from it over the next period, authored by Dr Mark Hayes of the University of Cambridge.
We have also helped to set up access to potential lending facilities with our member Unity Trust Bank to support co-operatives and mutuals to meet their business needs. The Co-operative Bank can still be a first point of call for its existing customer organisations. But Unity Trust Bank is also part of the wider co-operative sector, focuses on social business lending and has a very good understanding of the unique needs of co-operatives and mutuals. It was also the first bank in the UK to be registered as a living-wage employer.
But it has been encouraging for me to see the way that the new leadership team at the Co-operative Group has responded to this, with a clear and credible set of steps to move forward. Any slower and the risks would have multiplied. A new team has proved its worth and deserves the chance now to rebuild from a context of emergency.