Practitioners Forum: Governance in the mutual sector

“Can co-ops learn from best practices in the mainstream corporate sectors?,” was one of the questions asked at the Practitioners Forum in Manchester. Designed for co-operative practitioners, the...

“Can co-ops learn from best practices in the mainstream corporate sectors?,” was one of the questions asked at the Practitioners Forum in Manchester. Designed for co-operative practitioners, the forum featured a series of presentations on governance, communications, finance, human resources and membership.

One of the key issues explored in the governance forum was the distinct nature of co-operative governance. Kevin Jaquiss, a solicitor and consultant who specialised in governance looked at the co-operative and mutual approach to governance and how this compares to governance models of listed companies. Mr Jaquiss has been working in the sector for over 25 years and in 2010 he received the Financial Times Innovative Lawyer of the Year award. With support from Co-operatives UK he researched best practices in corporate sectors to see how co-operatives and mutual compare.

“Governance is a fascinating area. It is about mechanisms and processes, how people work together. It is an art and not a science,” said Co-operatives UK secretary general, Ed Mayo. The umbrella body for co-operatives has published a governance code for consumer co-operatives, which was updated in 2013. In conjunction with the Scottish Agricultural Organisation (SAOS), Co-operatives UK has also issued a corporate governance code for agricultural co-operatives. Another booklet published by the organisation in 2006 and updated in 2012 aims to help to govern and manage worker co-operatives.

Ed Mayo (left) and Kevin Jaquiss at the Governance Forum
Ed Mayo (left) and Kevin Jaquiss at the Governance Forum

“Some aspects of the corporate code for listed companies are not relevant for co-ops. If we don’t take responsibility for making sure that that is up to scratch then we’re always going to be compared to somebody else’s governance,” said Mr Mayo.

The research looked at different governance models, from listed companies to financial mutuals, building societies, co-operatives, NHS foundation trusts and supporter trusts. “People have a very different understanding of what governance is. In recent years the approach to governance has been influenced by the financial meltdown”, said Kevin Jaquiss.

Governments are now focused on taking steps to prevent risks and safeguard businesses from fraud and waste. The UK code of PLCs is seen as the gold standard for governance, he added. The code operates on a ‘comply or explain’ basis, meaning that when companies fail to comply with certain guidelines they explain why they fail to do so.

“The Association of Financial Mutuals (AFM) and the Building Societies Association (BSA) both have a commentary on the UK code which says to their members: “Here is the code and here are comments and bits that don’t necessarily fit with what we do and here’s how we are trying to address them,” he said.

The purpose of the research was to show the Financial Reporting Council (FRC) that there was a reason to look at mutual as a different sector, as a way of maintaining their distinctiveness.

One of the issues touched upon was the role of senior independent directors. The UK code assumes there will be a mixed board of executives and professional non-executives, and that non-executives will develop a relationship with major shareholders.

“The Building Society Association says building societies should either appoint a senior independent director or provide an alternative route for members to express disapproval about the way in which the business is run,” explained Kevin Jaquiss.

“The Association of Financial Mutuals says you should have an alternative means by which members can express worries they have to the board,” he added.

“The Co-operatives UK code talks about the chair having an important role in maintaining contacts with directors and the chief executive, outside board meetings, so the chair is filling the role of bridge between the shareholders and the board.”

Building societies and mutuals also have a different approach when it comes to who should serve on the board. If in PLCs directors are seen as the real drivers of success and they need to talk to the major shareholders, in co-ops and mutuals the idea of shareholder value does not exist in the same way, due to their one member, one vote rule, said Mr Jaquiss. A key question is therefore the extent to which directors have to represent members and the extent to which they have to be competent.

“How do you strike the balance between democratic representation and competence? UK code focuses on competence and tipping the balance in that direction. Every business does have to strike that balance, we are always vulnerable to critics if we are balanced a lot in favour of democratic representation,” he said. “It’s fine to elect directors, but we need to elect the one of same calibre as PLCs, the co-op movement has not done that successfully in every single society.

Ed Mayo added: “We are seeing experimentation across co-ops. They elect whoever stands and then give them training and even if they are not experts they can ask useful questions. We need to understand competence and expertise in a broader setting that fits with what the co-op needs.”

Helen Barber facilitated the Governance Forum
Helen Barber facilitated the Governance Forum

Another difference can be found in the additional provisions about the purpose. This is seen as crucial in mutual, but in PLCs it is not something that would be taken into account that much when it comes to governance. “The higher goal of co-ops and mutuals needs to be reflected in the governance framework,” said Ed Mayo.

Another important aspect in the governance of mutuals and building societies is member engagement, something not explored in the PLC governance model.

Joining the discussion James Graham, chief executive of the SAOS, argued that a more intimate relationship existed in agricultural co-operatives. He believes the point of representation versus competence is a continuing issue for co-ops, particularly when they are trying to do something different from what they are doing. Global agricultural co-ops address this by creating a co-operative that is a major shareholder in a company that deals with the process of export. The company, controlled by the co-op, has a board of experts in the field. “In the UK we haven’t gone down that way,” he explained.

Cliff Mills, a practitioner in the law and governance of co-operative, added: “A governance code is about organisations succeeding. What does it mean? Financial return on investment. The code for PLCs is all about financial reporting, for co-ops success is not the same, there’s an argument that what we should do is define success for ourselves.”

Kevin Jaquiss also said that a separate code was preferable but if that was not possible then the current UK code should at least clarify the difference between mutuals and PLCs.

“The PLC model leaves gaps in accountability if used by mutuals, with the addition of member engagement, the role of the board, competence, the purpose, all those are important in the mutual context and not addressed by the code for PLCs as it stands and there’s no reason why they shouldn’t be,” said Mr Jaquiss.

“We’re not suggesting a new code but some additions to the UK code for the benefit of mutual organisations. A proper articulation of what membership value means and a system of reporting against that and provisions around member engagement, creating opportunities for members to participate and how that relates to the accountability of the board”.

  • You can read our overview of  the Practitioners Forum here.
In this article

Join the Conversation