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Editor’s blogMarch 13 2014

Give the co-operative model a chance

The resignation of the CEO of the UK's Co-operative Group shows that running any bank – listed or co-operative – is fraught with difficulties. But it does not mean that the co-operative model is completely unfeasible.
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It is not surprising that the UK’s Co-operative Group appears “ungovernable” – the word used by outgoing CEO Euan Sutherland in his resignation letter. Co-operatives, with their political dimension, are likely to have more complex governance issues than public limited companies. The idea of hiring Mr Sutherland with his public limited company background (he was formerly chief operating officer at London-listed UK retailer Kingfisher) was to make it governable.

Mr Sutherland joined last May just after the deal for the Co-operative Bank to buy 631 Lloyds branches under 'project verde' fell apart. He only learned about this and the full extent of the bank’s £1.5bn ($2.49bn) black hole (mostly relating to bad loans that came with the 2009 purchase of Britannia Building Society) after he had agreed to take on the job.

Overseeing the recapitalisation of the bank occupied most of Mr Sutherland’s initial efforts and the end result was a bank 70% owned by hedge funds and institutional investors and only 30% by the Co-operative Group – not exactly what the advocates of the co-operative movement would have preferred but the best that could be achieved under the circumstances.

So far so good, but the group is still facing many problems including the prospect of record losses when it reports later this month (March). Disposals such as the farms and pharmacies businesses have been proposed.

Naturally many of the Co-operative’s 8 million members and elected board members are unhappy about these departures from the group’s origins. Mr Sutherland was facing huge opposition in trying to push through a streamlined governance structure more akin to a public limited company. The leaking of his proposed £3.5m pay package was no doubt designed to undermine him.

But he is hardly alone in taking flak as the senior executive of an organisation with a troubled bank. Former Royal Bank of Scotland CEO Stephen Hester received constant grief about his bonus but managed to complete five years, while Lloyds CEO Antonio Horta-Osorio faced such an uphill battle in his early days that he was forced to take sick leave due to stress. He did, however, return to finish the job.

Co-operatives have been hailed as an alternative to the profits-driven culture of listed banks, which played a role in the troubles some experienced in the financial crisis. The reality is that both models are dependent on good strategic decisions and without them will face difficulties.

Mr Sutherland’s challenge was to keep the best aspects of the co-operative ethos while setting the group on a viable strategy. It is difficult to see how this could have been achieved either quickly or without conflict, especially given the particular governance structure of a co-operative. It is regrettable that he has thrown in the towel so early.

Brian Caplen is the editor of The Banker.

See The Banker’s video discussion on co-operative banking.

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