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Co-op Bank Shines Light on Risks of Corporate Governance Failure

Wednesday, 28 May 2014

The unusual corporate governance systems at the Co-op have received significant attention since the UK’s largest mutually owned business hit the skids last year.

Variously described as eccentric, complex and ineffective; the Co-op’s corporate governance structure is destined for a huge shake up after members recently voted in favour of reform. Lord Myners, the former City Minister and independent Co-op board member who carried out a review into the way the Co-op group was run, concluded that the old structure had “lamentably failed”.

Despite the Co-op’s failings, there was strong internal resistance to alternatives proposed, drawing attention to the difficulties of bringing about change to established organisations. Lord Myners even quit his position, citing issues that hinted at corrosive internal politics.

The challenges of corporate leadership in the face of crisis reinforce the need to implement sound systems of corporate governance before crisis hits.

The Co-op’s Corporate Governance Failures

In 2013 the Co-op reported the worst results in its 150 year history, having racked up £2.5bn in losses. At the heart of these losses were ill fated takeovers of other businesses including Britannia Building Society and the Somerfield Supermarket chain.

In a wide-ranging report carried out by former civil servant, Sir Christopher Kelly, he stated that "The roots of the shortfall lie in a merger between the bank and the Britannia building society which probably should never have happened. Both organisations had problems. Bringing them together exacerbated these problems. It might have worked if the failed management team had received first-class leadership. Sadly it did not."

On a practical level the Kelly report pointed to issues such as a lack of proper due diligence, IT failures and optimistic accounting treatment. More importantly, it highlighted how the organisation maintained a flawed culture with, “failings in management and governance at many levels.”

Reforming Management Structures

Despite the Kelly report showing deep rooted problems within the Co-op management structure, the reforms proposed by Lord Myners’ received a broadly unwelcome internal response when first aired. However, the magnitude of the Co-op’s failures led to sustained pressure from both inside and outside the organisation meaning that major change is now on its way.

While the Co-op is an exceptional case due to its size and the unique complexities of its democratic system of governance, it is hardly the first business to suffer from corporate governance failures. Even small businesses must have clear governance systems in place with people appointed to major roles on the basis of skill and experience.

Board members must be competent, i.e. have the relevant skills or experience, to perform the duties expected of them, and understand their responsibilities. This means that they must not only be able to make considered commercial judgements but also be aware of the legal and regulatory environment in which they operate.

For specialist advice contact Peter Gourri today by email or telephone 0207 611 4848.

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