Is the John Lewis model perfect for the Co-operative Group?

Over the past year, the Co-operative Group’s issues have been well-documented. But would these problems be less likely to arise if there was a different structure, with grassroots...

Over the past year, the Co-operative Group’s issues have been well-documented. But would these problems be less likely to arise if there was a different structure, with grassroots members still maintaining an element of control?

Looking at the John Lewis board, its structure combines business expertise with a legally mandated commitment to co-ownership and ethical structures, and a culture of involvement and transparency by the employees.

The partnership uses a combination of a trust mechanism and corporate structures to establish a subtle and finely balanced governance system to combine business efficiency in the marketplace with democratic involvement and financial benefit for employee-owners.

The business is not a partnership in the technical legal sense of the word, but rather a collaborative relationship among the employee-co-owners, in the legal form of companies controlled by trustees bound by trust obligations. The partners, as all employee-owners are known, enjoy bonuses of a proportion of salary depending on the performance of the business.

The voting rights ensure that a majority of votes on crucial decisions are held by trustees who are bound to exercise their votes in pursuit of the trust objectives and the maintenance the partnership constitution. Crucial decisions include changing the voting rights or winding the company up, and all decisions made by the company general meeting during an interregnum after the removal of a chairman by the partnership council – a key mechanism backing up the chairman’s accountability to the employee partners.

The key top level governing bodies are the partnership council, the partnership board and the chairman. The council is 80% elected by secret ballot every three years by the employee partners, all of whom can vote in the elections or stand for election. The elections are based on one or two representatives from each local constituency, the details being decided by the trustees elected by the partnership council and serving as directors of the John Lewis Trust Ltd.

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Remaining council members are appointed by the chairman, often from people holding posts such as director of communications, director of legal services or company secretary. The intention is that those people can provide the council with specialist knowledge, but it also means that, together with the board members who are automatically council members, there is full participation by senior management.

The council meets at least four times a year, and the chairman attends and reports to it twice a year, facing questions on the performance of the business. It is the council which has the power to remove the chairman. There are also divisional, regional and local democratic bodies composed of partners. Together, these bodies are intended to hold management to account.

The partnership board manages commercial activities. Its members include the chairman, five directors appointed by him or her, five elected by the partnership council and three non-executive directors. It is thus linked to the partnership council, partly by a partners’ counsellor whose remit is to uphold the values, ethics and integrity of the business as set out in the constitution. The counsellor sits on the partnership board and convenes meetings of the elected directors (as appropriate, but at least once a year) from which executive directors are excluded.

The chairman’s committee consists of the chairman and the board members appointed by him or her plus the partners’ counsellor, and meets frequently and informally to develop strategy, business plans, budgets and to review operational and management issues including results, forecasts and proposals. This is presumably the equivalent of executive meetings in plcs or the Co-operative Group.

Separate Divisions such as John Lewis and Waitrose are managed day-to-day by divisional management boards which are accountable to the chairman for performance but are also held to account by their own divisional partners’ councils.

This structure illustrates the use of the trust mechanism and also represents an intricate set of organs which have separate roles of democratic representation and business management but which link together both at the apex (in the partnership board and chairman role) and at divisional level with the divisional councils.

The values and purposes enshrined in the constitution and the trust objectives are fully legally secured and worked out institutionally. In addition, the partnership councils provide forums for questions and concerns from the employee owners. The whole organisation is served by the Gazette, an internal newspaper where articles on retail are published and issues can be raised and ideas suggested.

So, are there any lessons for the Group here?

The John Lewis Partnership is not, strictly, a co-operative but it is very close. On the removal of the chairman, his or her nominee or a deputy takes over, or the board appoints someone. The chairman is not elected by the partners or their council.

Clarity of function exists strongly in John Lewis, but commercial success for the employee-owners and upholding the organisation’s values combine when necessary – especially at the top. In the Co-operative Group, if one assumes the board and regional boards were made up of people concerned with co-op values, who was holding executives to account for business decisions?

At John Lewis, executives are accountable for their business performance and the decisions which are directly in the financial interests of the partner-owners, who get a bonus depending on success.

However, executives are also accountable for their adherence to the values and ethics of the organisation. Was that effectively true in the Co-operative Group, or was rhetoric and judicious spending of profits enough there? Who was concerned about how the profits were made and – and more importantly, whether any actually were?

At John Lewis, it is one board that has full power and can make fast business decisions when needed. Its internal members are split 50:50 between elected partners and executives, but the chairman’s role covers both Values and Ethics and commercial success.

The appointed outside non-execs bring independent expertise – the Co-operative Group never appointed any of those to its board, even after rule amendments were passed to permit that. The Co-operative Bank had some (Rodney Baker-Bates and David Davies), but their wise advice was ignored.

The John Lewis Partners’ counsellor is there to ensure that the elected directors are empowered and served. This role is a board-level job performed by someone paid to do it, who can actually organise the elected directors and act as the lead independent non-executive.

The organisation voluntarily observes all the disclosure and transparency and governance obligations of a listed plc, aimed to make sure executives are accountable. However, in John Lewis they are applied to the benefit of the partners who own it, not investors.

Perhaps just as importantly, the national regional and divisional partners’ meetings take questions and comments from partners, and the Gazette gives a forum for debate and complaint. Thus the culture is open and encourages a healthy and informed involvement outside the formal mechanisms of decision making.

This all gives food for thought. Could the Myners proposals be tweaked to take advantage of some of these apparent lessons? Could the proposed Co-operative national members council have a role similar to the partners’ council? Could it elect or nominate some directors or have some reserved Board seats? Is there room for a members’ counsellor role? Could the Group increase transparency by adhering to appropriate Listing Rule and other requirements, suitably adapted for its member-controlled co-operative status?

• Ian Snaith is a co-operative lawyer and researcher, writer and consultant.

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