What hope for mutuals after the Co-op?

While the disaster-prone Co-op Group is in an ever more precarious state, it doesn't have to be that way. Many businesses, both here and abroad, are making a go of non-plc models of ownership.

by Jeremy Hazlehurst
Last Updated: 26 Nov 2015

With its faux-Moorish Turkish baths, its quaint Edwardian tearooms and hordes of retirees, the north Yorkshire town of Harrogate might seem a long way - spiritually, if not geographically - from the origins of the cooperative movement.

As a modern business model, ownership of a firm by its customers dates back to 1844, when 28 impoverished workers, dubbed the Rochdale Pioneers, set up shop in the town, at the less-than-glamorous address of 31 Toad Lane.

The Rochdale Pioneers


They sold oatmeal, candles and other staples, and also came up with the influential idea of the patronage dividend, sharing profits among member/owners, according to how much they spent in the shop.

The founding fathers of the cooperative movement were trying to protect themselves against the rapacious, top-hatted Victorian industrialists who were lowering wages and forcing up the cost of living for workers. That's something the affluent denizens of Harrogate do not have to worry about today.

And yet in a sign of how the movement has evolved, one of the country's most successful cooperatives is flourishing amid the town's award- winning flowerbeds and fleets of Land Rovers.

Engage's affable CEO, Peter Burrows, explains that it has an impressive half a million customers and its main product is a very Harrogate-friendly whole-of-life insurance product for the over-50s. Engage clearly does a great job. In the recent LAMRA survey of the insurance industry, it scored well above the average for customer satisfaction and was the top-scoring business in the UK for dealing with customers.

Burrows says that the business's success is directly attributable to it being a mutual. 'It doesn't exist to create lots of profits for the providers of capital for the business,' he says. 'The organisation exists solely for the benefit of the customers, who are both policy-holders and owner.'

That changes the way things are done 'both tangibly and intangibly', Burrows adds. 'It sounds a bit of a cliche and it is hard to describe, but there is a real ethos of mutuality around the business.'

It recently launched a foundation to give hardship grants to members who are facing tough times, which, it was decided, was a better use of excess profit than divvying it up between members.

That sounds very cosy and, just as it is far from the soot and fire of the early cooperative, it is also distant from the horror-show headlines that have recently surrounded the Co-op Group, the showpiece of the country's cooperative movement.

Things culminated in the messy departure of its chief executive, Euan Sutherland, in March, who, it emerged, was in line to be paid £6m a year. That fact was leaked to the press; he was miffed and sent a 'back-me-or-sack-me' ultimatum to the board. They parted company. Sutherland blamed stick-in-the-muds who didn't want to make necessary changes to the group, called it 'ungovernable' and ranted in an undignified manner on Facebook about the whole sorry affair.

Things got worse in April when Lord Myners, who was brought in to reform governance, quit, saying that he met fierce opposition. Then the group announced that the bank made a £1.3bn pre-tax loss in 2013 and will not return to profit until 2016 at the earliest.

The saga began when the Co-op Bank - which is part of the group - realised that it had a £1.5bn black hole in its finances, and a deal to buy 600 bank branches from Lloyds collapsed. That deal would have tripled the size of its banking business, which it had already tripled when it took over the Britannia Building Society, something that left it with more bad debts than it had anticipated.

The bank had also lost money on several disastrous IT projects and was hit with some big PPI mis-selling costs.

Seventy per cent of the bank was sold off to the likes of hedge funds, in order to raise cash. Then it turned out that the bank's chairman, Paul Flowers, a Methodist minister, was a party animal with little understanding of the business he was in.

To be fair to Sutherland, the group is hardly in the rudest of health. Its pharmacies and farming businesses are struggling and its £1.57bn takeover of Somerfield supermarkets has not entirely gone to plan.

Disgraced former Co-op Bank chairman Paul Flowers


After the financial crash of 2008, lots of people, including Vince Cable, championed mutuality as an alternative to short-termist capitalism. But following the implosions at the Co-op, it's hard not to wonder: can coops and mutuals really work in the modern world?

For the cooperative movements' champions, the question is a cliche. In a recent report about large cooperatives, Professor Johnston Birchall, of the University of Stirling, wrote: 'When a business fails, people ask: "What went wrong?" When a cooperative fails, people ask: "Can the cooperative model ever be made to work?"'

Ed Mayo, secretary-general of Cooperatives UK, a body that campaigns for cooperatives, insists that 'the future is certainly bright for cooperatives'. He cites examples from the social care and creative sectors, as well as finance, to support his case. Take the Foster Care Co-operative, which works with vulnerable young people.

'You don't see the problems you see in that sector, for example, with Southern Cross, where the service is incidental, and it exists in order to make money,' says Mayo. The country's largest cooperative in terms of employees, with 450, is Leading Lives, which provides support to adults with learning disabilities in Suffolk.

Cooperatives also work well in areas where there are compatible long-term interests, Mayo says. For example, more than 3,700 newsagents in the UK set up a mutual called Regis in 1999 in order to get better insurance.

'There is unquestionably a future for coops,' says Mayo. 'They can be a very successful model of business in areas particularly where you need trust and to be able to share ownership with those most closely involved in the business.'

In these situations, 'the model is a real source of competitive advantage'. In all these cases, people use the coop model 'because it's an effective way of meeting people's needs'.

In areas such as insurance, mutuals are arguably the ideal model. As Engage's Burrows says: 'What insurance is trying to do is one of the fundamental principles of mutuality: individuals sharing their financial strength for the common good.'

There have been some very successful insurance mutuals, including Eureko, a Dutch mutual that had revenues of $28bn in 2012. They also work well in other areas of finance. France's Credit Agricole and Rabobank from the Netherlands are both huge, and hugely successful, financial mutuals. Despite the raft of 1990s demutualisations, the UK's building society sector is still surprisingly buoyant: 23 million people are members of building societies and they have retail deposits of more than £225bn, 19% of UK balances.

Insurers and building societies both have clear functions. So is the problem at the Co-op Group that it is too large and diverse? Despite its woes, it reported revenue of £5.8bn in the first half of last year and still has an empire that takes in 2,800 retail stores (employing 70,000 people), a funeral care business with 700 branches and a pharmacy one with 650. The insurance operation, although it no longer has branches, employs 1,000 people. There are also farming and estate-management businesses.

But in global terms, the Co-op Group is certainly not an outlier. According to the World Cooperative Monitor, in 2011, 1,465 coops across 42 countries had a turnover of more than $100m each. The 300 largest generate a turnover of $2.2trn, meaning that together they would be the world's ninth largest economy.

Almost a third of these large mutuals are in finance and more than a quarter are in agriculture, including Fonterra, which has 10,600 New Zealand dairy farmers as members and is the world's largest dairy exporter.

Another, Danish Crown, is Europe's biggest meat company, and the world's second-largest pig-slaughtering business.

Japan's Zen-Noh has nine million members, a turnover of more than $60bn and handles 45% of Japan's rice. Some of the US's biggest agribusinesses are mutuals. Another quarter of mega-mutuals are in retail, including German supermarkets groups, such as Rewe in Germany, and E.Leclerc in France. Many of these are diversified, too: the farming businesses typically also run credit unions and banks.

So cooperatives can be big, and they can be diversified. But whatever size they are and whatever they do, all cooperatives have to overcome a major intrinsic problem: governance. As the membership gets larger, it is harder to respond to - and reconcile - everybody's views.

Also, in contrast to shareholder-owned business, where the aim is to make money, the member-owners' interests might not align.

Lord Myners had slammed the group's governance, writing that its system 'has consistently produced governors without the necessary qualifications and experience to provide effective board leadership' and that they took some 'breathtakingly value-destructive' decisions. He called for the board to be cut from 21 to members to 10 and an end to the practice of electing members with no executive experience - the board currently includes a nurse, a plasterer and a retired publisher.

It is an issue that all cooperatives struggle with. 'You have to differentiate very clearly between having a say in how the business is run, and having the professional skill and experience to actually run the business,' says Burrows. Engage has customer panels and forums for members to have their say - the foundation idea came out of those - but the board is as professional as any plc's.

In the large, successful cooperatives, governance structures are complex, but they are run tightly. Perhaps the difference between the Co-op Group and, say, the New Zealand dairy farmers' coop is that the latter has a very clear mission - to sell more milk - whereas the Co-op Group's aims are more diverse and nebulous.

For all their problems, the figures show that coops are far from moribund. The world's cooperatives and mutuals employ a billion people. Why are they so enduringly popular? Perhaps there is something about them that appeals to a fundamental need.

Much talk about business concentrates on the entrepreneur cutting a swathe through the world, what Ed Mayo calls the 'heroic John Wayne loners'.But most of us are not like that. In reality, most businesses run on cooperation; suppliers, producers and sellers are all on the same side.

In a 2012 pamphlet called It's Cooperation, Stupid, Charles Leadbeater, a former adviser to Tony Blair, argued that the 'assumption of selfishness' that underpins modern laissez-faire economics is false and that 'reciprocal altruism' and collaboration have been central to human development.

For all the benefits of the corporation, maybe cooperation is more human.


COOPS BIG AND SMALL

The cooperative movement is alive and well in the UK, and the number increased to 6,169 coops in 2012, up from 4,820 in 2008. Some of these are tiny, such as the West Highland Free Press, which in 2009 became the country's first employee-owned newspaper. Also in Scotland, in the small town of Dunbar, 670 locals clubbed together to raise £55,000 to save the town's only bakery when its owners decided to close it in 2009. (It is now flourishing and was runner-up on ITV's Britain's Best Bakery show.)

There are a number of other coops in the food business. Suma, the largest wholefoods wholesaler in the UK, started in Leeds in 1975. Last year, it posted profits of £1m on a turnover of £34m.

First Milk is the UK's largest dairy coop, and the only wholly British-owned dairy business. It began life in 2001, having evolved out of the Milk Marketing Board. Its members account for one in every four packets of cheddar sold.

It has a longstanding deal to provide protein products to Team Sky, the cycling team that Sir Bradley Wiggins and Chris Froome ride for. 'We can say that we powered them to victory in the Tour De France,' they say. They are working on exporting British dairy products to Taiwan and the Middle East.

Cooperatives are also rapidly emerging in the energy sector as an alternative to the Big Six. Examples include Sharenergy and the Llangattock Green Valleys hydropower coop, both in Wales, and the Brighton Energy Cooperative.

The biggest is Co-operative Energy, run by the Warwickshire-based Midcounties Co-operative. The organisation's energy arm signed up some 70,000 customers during the past year and now provides power to more than 200,000 households. Recent results showed that sales increased 243% year on year to £159m.

But not everybody is convinced that cooperatives are the way forward. When Caroline Murphy, the heir to Murphy Group, the building firm founded by her late father, told the board that she wanted to turn the firm into a worker-owned cooperative based on the Basque Country's successful Mondragon Corporation, she was met with implacable resistance. Murphy has now left the business.

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