Project Verde was a ‘step too far’, say former co-chairs

Project Verde was a “step too far” and contributed to a number of errors, according to the two former co-chairs of the Co-operative Bank.

Rodney Baker-Bates and David Davies, who were brought in to advise former chair Paul Flowers on banking matters, told the Treasury select committee  they had resigned from the Bank’s board because of its determination to push ahead with Project Verde.

Mr Baker-Bates, who chaired the Britannia Building Society until its merger with the Co-operative Bank in 2009, said he left the board in July 2012 because he believed the acquisition of 631 Lloyds branches was “a step too far”.

He argued the decision to bring the management teams of the Co-operative Bank and Co-operative Group together, as part of Project Unity, had enabled the Group to have a much more direct role in the strategic operation of the Bank. This impacted on the independence of the board and further compromised the feasibility of Project Verde, he said.

He described Unity and Verde as “two related major errors”, and added that Unity, which aimed to reduce costs, was born out of a “fundamental misunderstanding about the shape of a banking balance sheet”.

Prior to his resignation in 2012, Mr Baker-Bates had a meeting with Paul Flowers and former Group chair Len Wardle. He said he told them about his decision to quit and they tried to convince him to stay. “Paul Flowers and Len and Peter Marks were well aware of my opposition both to Unity and Verde,” he added.

David Davies, who resigned as co-deputy chair in June 2013, was initially in favour of the Verde Project from a strategic sense. But he said the decision to integrate Britannia and Co-op technology platforms into the Lloyds platform undermined his confidence in the feasibility of the project, particularly because the Bank had not been able to successfully integrate Britannia into the Co-op platform.

Referring to the merger with Britannia, Mr Davies said: “Our overall conclusion was that the combination of the two entities was stronger than the two entities on their own.”

Mr Baker-Bates also said he was concerned with the Bank’s lack of competence and capital and he believed Project Verde was “an enormous risk”. He argued the Group was pursuing two different policies at the same time, aiming to heavily invest in the food business and finance, two parallel industries that were highly capital-intensive.

Paul Flowers’ appointment

Mr Baker-Bates said he was one of four candidates for chair of the Bank who lost out to Paul Flowers, who had a much better understanding of the complexity and the politics of the Co-operative Group. He said Mr Flowers was chosen over him because he had done very well in psychometric tests.

Mr Davies said he had been told Mr Flowers was chosen for his leadership skills. But he and Mr Baker-Bates agreed the Methodist minister did not have the financial expertise to be the chairman of the Bank.

Following the Mr Flowers’ appointment, Mr Baker-Bates and Mr Davies were elected as deputy chairmen. Both said they believed the idea to have two deputy chairs with hands-on experience in banking and insurance had come from Mr Flowers and  they were surprised to find out later on that this had been one of the regulator’s requirements.

The Financial Services Authority never asked the two deputy chairs specific questions about how Mr Flowers was performing. “I don’t recall having any discussions with the regulator on Flowers’ performance”, said Mr Davies.

Mr Baker-Bates revealed he had coached Mr Flowers, helping him to prepare for his “controlled function” interview with the FSA. “It was very clear he was dependent on financial expertise around the board. But when you go back over history, there was never a man who had sufficient financial expertise,” said Mr Davies.

The Board

Mr Baker-Bates said the Bank’s board was functioning “reasonably well”, with a “wide spectrum of knowledge and ability”. The board was overseeing three different businesses – a bank, general insurance and a life business. It was difficult to cover complex issues mainly due to the lack on hands-on experience of board members.

“There wasn’t really enough knowledge of risks and opportunities in banking and financial services,” he added.

Mr Davies said the Group’s directors added a different dimension to the Bank’s board. He explained that an independent report into the effectiveness of the board, carried out in 2009, had revealed that Mr Flowers was leading the board effectively, but that this report had a quantitative approach, rather than a qualitative one.

The regulator

Before resigning, Mr Baker-Bates met with Clive Adamson, then Director of the Major Retail Groups Division within the Financial Services Authority, to inform him about his concerns over Project Verde.

The negotiations with Lloyds were led by the then-chief executive of the Group, Peter Marks, the committee was told. According to Mr Baker-Bates, the risk committee and board were meeting every month, but were not engaged in the financial deal.

Asked whether the regulator should have done more to stop the deal, Mr Davies said the FSA was “sufficiently uncomfortable with the deal that he would keep pushing at the capital position and, a bit like lobster in the pot, keep turning up the heat until we cracked.” Mr Baker-Bates added that the regulator could have stopped the deal if it wanted to.

To watch the hearing online, click here.