From the sidelines to the top: witnessing the disaster and rebuild of the Co-operative Group

The News speaks to Richard Pennycook, chief executive of the Co-op Group – and the man in charge of leading it to recovery after the crisis of 2013 …

In the space of two months during 2013, the Co-operative Group lost a number of executives; the Co-operative Bank was downgraded to junk status by Moody’s; a £1.5bn capital hole was found; the Treasury Select Committee announced an inquiry; the regulator started negotiations over a capital action plan; and there was a non-stop attack on one of Britain’s oldest institutions by the national media.

“The scale of it was pretty dramatic and very intense,” says Richard Pennycook, “but we came through it.”

Mr Pennycook, the Group’s chief executive, has experience of revitalising the fortunes of wobbling organisations, including the RAC and the Welcome Break Group. As well as being the chair of the Institute for Turnaround, he was involved in a financial crisis at former department store chain Allders, where he had to negotiate with 23 banks and 25 equity holders, an experience that introduced him to the world of equity bankers.

The Group has a debt of £1.3bn to a banking syndicate, which was a particular threat in the summer of 2013; a breach of its loan agreement could have forced the society to pay back all £1.3bn of borrowings and put it into administration. This would have left more than 70,000 jobs in jeopardy, as well as thousands of branches.

From his appointment as finance director in June 2013, Mr Pennycook was one of the key advisers working with the banking syndicate to save the Group. “Being with a banking syndicate, when you’re in breach of your obligations, is not for the faint-hearted when dealing with the regulators in those situations,” he says. “There were times when the Group was in great jeopardy and we had to make sure that disaster didn’t strike. That was pretty intense – and through great work by a lot of people, we did save the Group.”

Sitting in the Group’s Angel Square head office, Mr Pennycook remembers those few months.

“It was helpful that both I, and a number of other members on the team, had been involved in turnarounds before, some of them on quite a big scale. I think when you’re in a crisis it’s helpful to be able to fall back on past experiences that are relevant,” he says. “I take my hat off to the team who were involved in that. It was a tremendous achievement.”

Unlike his predecessor Euan Sutherland, who left the Group after labelling the organisation “ungovernable”, Mr Pennycook believes the directors played a key part in the turnaround.

“The board should take a lot of credit,” he says. “They’ve had a lot of stick for past failings, but the fact is, there was a very active board who went on that journey of saving the society. I found them very constructive and positive throughout the process.”

Fast forward 20 months to February 2015 and Mr Pennycook, who was confirmed chief executive in September 2014, shares a sigh of relief that this is now behind him.

“We finally had a meeting with our core syndicate of banks two days ago,” he says. “That was the first meeting where everybody around the table was a so-called ‘relationship banker’. Prior to that we were in what is called a ‘workout team’, which are basically designed to get money back for the bank.

“Relationship teams are happy to talk about long-term things rather than very short-term things, and that’s a sign of our rehabilitation and recovery.”

But this turnaround has not been without controversy. A need to plug the finance gap led to the sale of the so-called ‘family silver’; in the 12 months after the loss of the Co-operative Bank and its life insurance business, the Group disposed of its farming, pharmacy and security businesses. The net gain was £910m, which will be used towards investing in its core businesses: food, funeralcare, general insurance and legal services.

The separation of the Co-operative Bank from the Group led to its biggest ever loss of £2.5bn in 2014.

But Mr Pennycook, who holds a degree in economics and accounting from Bristol University, says the Group must adapt to reality and continue working with the Bank. “We have a common name and we have a lot of common customers and members and so we remain closely linked,” he says.

“Although we’re a minority shareholder, we’re not involved directly in the management. We’re entitled to one board seat and, once we’ve got our own board in shape, we’ll finalise our representation on the Bank board.

“We need to make sure that we are representing the Co-operative Group and the principles and ethics which we defined in the memorandum for the Bank, which are associated with our continued shareholding.”

Mr Pennycook knows the business was left “battered” by problems at the Group and Bank – “we can see that in the brand scores,” he says – but he was encouraged by last year’s public opinion survey, Have Your Say, which received over 144,000 respondents.

“What we saw in Have Your Say was much more powerful than just nostalgia – I think that was a concern. Nostalgia doesn’t deliver day to day. If people don’t feel that you are relevant for the future then they’re not going to come back to you just because you were relevant in the past.

“But we have a great opportunity, in that, in the post-financial crisis world, people are really interested in better ways of doing business. Our new purpose is all about doing business differently and doing it very locally in the communities where people live and work.”

As well as the loss of businesses, the Group also lost status within the movement. “We’ve lost half of our net assets over the last five years and that’s been very painful,” says Mr Pennycook. “But if you translate it into a business context, the Group is perhaps no longer the proxy for the movement that it used to be. We no longer own the Bank. We don’t own the life insurance company. We don’t own the pharmacy business. We don’t own the farms. We don’t run the travel business, that’s a joint venture.

“We are still a significant business in terms of scale, but we’re not anything like as broad as we were just a few years back, and we have to adapt to that. We have to find our way in the world recognising that we’re a smaller organisation.”

It’s clear that the downfall of the Group has also had an impact on the reputation of other co-operatives. Last year, Co-operatives UK revealed that 53% of the UK population trusted co-operatives less as a result of the Co-operative Bank crisis. Have Your Say showed there was a lack of understanding around the co-operative difference, too, with just 27% of the public understanding that membership card holders had a say in how the co-operative was run.

The Co-operative Group is also one of the biggest promoters and financial supporters of co-ops, extending support to the Co-operative Party, Co-operatives UK, Co-operative College, Co-operative Press, Woodcraft Folk and many other smaller co-op organisations. So how does this, together with the record losses, translate to its future role in supporting the co-operative ethos?

“What we need to be conscious of, as we move forward, is that all of our relationships are in a state of flux,” says Mr Pennycook, “and we need to be having sensible conversations with everybody about how we worked in the past and about how we can work in the future.”

After looking at the state of the business, which he now describes as “basically a food retailer and a funeral care provider with some other businesses that aren’t making any money,” he ponders the future co-op connections.

“How do we engage more widely, whether that’s with the Party or the wider movement or independent societies?” he asks. “We need to have forthcoming conversations with all of those stakeholders to ensure we come out with the right answer.”

But support for the sector doesn’t just extend to financial aid. “We have to play our full part in the wider movement because we stand for a different way of doing business and a different ownership model,” he says. “The co-operative sector is one that needs to thrive.”

“As we go through the rebuild, I think we’re going to have to be quite disciplined about what we can take on. It may be that this is a time for the wider movement to shoulder a bit of the burden because, if you like, we’re a wounded patient – we’re recovering fast but we have to go through that recovery period.

“There will be feelings of impatience because, in the 21st century, there’s so much co-ops could do. We can all see markets that aren’t working as they should. We can all see ways in which we could work effectively together and support one another. We just need to pace ourselves to make sure we aren’t taking on too much too soon; restoring our own health is the key priority.”

Along with finance and co-operative support, another part of the Group’s link to the sector is its federal relationship with independent co-ops, with which it shares some of the Co-operative branding, as well as bulk-buying agreements. Just last year, the reform of the Co-operative Retail Trading Group into Federal Trading Services began. The new buying group will have an independent chair and a managing director.

“The reform [of CRTG] was another consequence of the crisis we went through,” says Mr Pennycook, who welcomes “the fact that we have a little bit more structure to this”.

The independent societies realised that if the Bank had failed, and if this had triggered a failure of the Group, life would have been made extremely difficult for those societies who depend on the Group to buy for them.

The revitalisation of the buying group is linked to the wider package of changes to governance at the Co-operative Group. Last August, members approved changes to the governance structure, abolishing area and regional committees and reducing the board from 20 directors to 11. Described by many as a “plc-style board” with a heavy focus on professional directors, the new structure will also see the chief executive receiving voting rights as a director.

“The important thing about being a board member is that you are fully accountable,” says Mr Pennycook. “You have fiduciary duties to operate within the legislative or governance requirements of the organisation that you’re working for. So, I think it’s a hugely positive step.

“Actually, I think the previous structure, where the chief executive of the organisation wasn’t on the board, was very odd. If you want to hold somebody to account, one of the best ways you can effect that is for them to be a board member; the ultimate sanction of not fulfilling your duties as a member of a board is that you go to jail – that’s quite sobering.”

The changes have also seen the establishment of a members’ council, which will comprise 100 members and run the senate – a link between the council, the board, the executive and ordinary members.

“The council has started its work and a lot of that has been about the fine tuning of the governance arrangements,” says Mr Pennycook. “What we’ve not really begun to do yet with the council is to exercise their key role which is holding the board and I to account, making sure that we do the certain things that we say we’re going to do.”

He recognises it is early days, and admits “it’ll take a little while for that democratic process to really start to breathe”, with elections taking “two or three cycles” until the Group has the “confidence to come through” its challenges.

The first 18 months of Richard Pennycook’s time at the Group has been about the recovery and balancing the books. As well as the near-billion pound asset sale, £100m of other internal savings have been made. “Some of that has been relatively easy to do,” he says. “It’s just been a case of tightening up on things as basic as travel expenses, for example. But some of it has been more painful because it has involved staff and difficult choices. That part needed to be handled very respectfully and sensitively for colleagues concerned. I pay tribute to those involved because there’s been a huge amount of understanding and maturity.”

The Group’s annual results for the financial year ending January 2015 are due to be published at the start of April. Although Mr Pennycook gave no insight into what the results will reveal, he says those 12 months were about putting “balance sheets into much better shape” so it can “finance investments for the Group going forward”.

“Part of the reason we had to sell some businesses last year was because we needed to invest in the remaining businesses,” he says, describing how the organisation was spread too thin. “We were a mile wide and an inch deep.”

He added: “We couldn’t do everything, and by now focusing on some very good businesses that we have, we can invest in them using the proceeds of the disposals. They need that, because if I look at the food business, for example, we’re operating with shops that have been a bit unloved and haven’t had the investment that they need. That’s not sustainable in such a competitive sector.”

Competition and focus is a key part of the turnaround strategy. “We have to be very focused on the portfolio of businesses that we retain. They’re all good businesses for a co-operative to own and operate, but they’re all in slightly different shape and they all need attention and focus.”

To help focus the Group further, a 15-point plan, ‘Rebuilding The Co-op’, has been devised and will be delivered over the next three years.

“This journey that we’re on for the Co-operative Group is trying to turn around 50 years of gradual decline,” says Mr Pennycook. “The next three years are just the start of that journey.”

The initiative firstly refers to five key focuses, ‘Vital 5’, which are each led by members of the executive and shared internally through the management structure.

In addition, there are another ten programmes, which are described as the ‘Winning 10’ that will help the Group to stand out in its markets.

Out of those programmes, engaging members is number one, says Mr Pennycook. “What I’ve said to colleagues is: ‘We need to reconnect at the grassroots with our members in the communities where they live and work, and value something that is going to be fundamental to our future success.’.

“For a large number of members that involves, it’s not necessarily about being actively engaged in our democracy –  we have to realise that this will always be a minority of members.

“But for a large number of our customers, I need to get them interested in being a member of the Co-operative because, if we don’t achieve that, then I think our long-term future is in some doubt. It’s about reinforcing our difference as a co-operative and people wanting to associate themselves with us because of that.”

One of the main ways to encourage members to shop and become involved with the Group was through the dividend. But Mr Pennycook predicts that the next three years will not see a surplus, and thus there will be no dividend.

“We’ve unfortunately had to say that through this three-year rebuilding phase, we don’t envisage declaring a surplus. As a result, monies which could be available for anything that the members would like to tell us to do won’t be available.”

So, what needs to change for the Co-op to bring back its members? “A huge number of things, actually,” says Mr Pennycook, “but perhaps one of the fundamentals is getting our members engaged at the local level with our businesses.

“That needs to happen on the ground. I think that in the past, the executive became a bit too divorced from what was going on at the front end of the businesses, and that some of the membership activity got divorced from what’s really relevant to supporting our businesses. We need to reconnect those things so that the Co-operative has its place again in those local communities.

“I define community very locally – groups of a couple of thousand people. It’s the village or suburb where you live, it’s the parents at the school gate, it’s your workplace … on that measure, there are 30,000 communities in the UK.

“The Co-operative Group, which is the UK’s largest co-operative, is in 3,500 communities, and so we touch one in ten, which is not a bad start. The ambition is for co-operatives to be vibrant in every community – we’ve got to work together with other co-operatives because collectively we can cover all communities. We can do it in a way that is very joined up so that co-ops with different activities are supporting one another in those local communities – that’s the work of many years but I think there is a real demand for it.

“I think that’s a key part of our future success because we know that the reputation of business and other institutions has been damaged. It’s seen as being far removed from the reality of people’s day-to-day lives. We’ve got to reconnect.”

Coming from the private-sector world – with previous roles at Morrisons, RAC and Welcome Break, among others – Mr Pennycook believes that there is in fact very little difference between the shareholder-owned and co-operative model.

“The irony for me is that they have a lot more in common than perhaps meets the eye, and I think that saying the plc model is dramatically different is unhelpful.

“There are elements of commonality across different business models, from membership structures, and the need for absolute clarity around the strategy, to what you stand for, what your appetite to risk might look like, and how you engage your colleagues, customers and members.”

But he believes the co-op model could be a powerful one compared to plcs. “Plcs are very often owned by institutions who hold fraction percentages of the company. They can buy and sell very easily, so a number of those shareholders will have a trading mentality rather than a long-term mentality. That is a real challenge of the plc model, and where it falls down.

“It’s something that co-ops should be better at because we’ve got right-thinking, well-meaning members worried about what our ten- or 20-year view is. What I saw too much of in the plc world was worry about this quarter’s results rather than where we would be in ten years’ time.”

But a restriction for co-operatives is the access to capital. “We don’t have access to the markets in the same way that plcs or private equity companies do,” says Mr Pennycook. “Through the activity over the last year or so, we’ve put ourselves in a position where we can invest in our businesses and get them back into shape. A question for us further down the line will be if we want to go into new markets on behalf of our members, how do we find that investment, and it’s back to discussions around surplus.

“On that happy day when we start to generate surplus monies again, one of the conversations with members will be, ‘Would you like us to give you our surplus back by way of a dividend or would you like us to put it into social goals and causes? If so, would one of those good causes be investments in new areas on behalf of our members where the markets aren’t working properly?’

“One of the dilemmas for the movement in general is how can you compete when you don’t have access to those capital markets?”

If Mr Pennycook could write a government bill tomorrow, he would favour a piece of legislation that would open the door to greater member investments.

“It’s somewhat theoretical for us at the moment, but it’s quite interesting to think about how you might be able to better put member capital, alongside other sources of capital, to work,” he says. “A difficult part of the co-operative model is putting all the financial burden on the shoulders of members. We saw that with the disposal of our farms business. When we first talked about the farms being for sale, we said that we would be very open to co-operative solutions.

“Unfortunately, it quickly became clear that there wasn’t a co-operative solution that was going to raise a quarter of a billion pounds to buy those farms. Members just don’t have pockets that big.

“In terms of future legislative structure, would there be an effective model that would see members investing and contributing alongside other sources of capital, so-called patient capital, which doesn’t just demand its money back in three to five years but is happy to take investments for 15-20 years?”

But, wishful thinking aside, as the chief executive of a long-standing co-operative he recognises the heritage that was almost lost in a two-month panic.

Eighteen months on, Richard Pennycook is a few months into a three-year plan that will build upon “the past associations” of the Co-op and “150 years of doing the right thing”. He hopes this history will mean “people will get behind us as we start to recover”.

Rebuilding The Co-op

Vital 5: five key focuses, which are each led by members of the executive and shared internally through the management structure 

• Deliver True North: Become the number one convenience retailer by investing in better products and better shops, with fairer prices and more consistent customer service
• Keeping it Lean: Saving on costs will help the Group to pay down its debt and allow it to focus its resources on doing business
• Meaningful Membership: Giving members a better deal, a voice in the business and showing the impact in communities
• One Team: Creating a new deal between the organisation and staff based on values, reward, capabilities and structure
• Fixing the Plumbing: Making sure the IT and logistics are better at supporting the needs of the business

Winning 10: ten programmes the Group hopes will help it stand out in its markets

• Growing Funeralcare
• Transforming general insurance
• Defining Co-operative Legal Services
• Making the most of data
• Revitalising the brand
• Campaigning for a better society
• Digital trading
• Working co-operatively with partners
• Making governance work
• Looking to the future