Co-ops Should Put Members First, Not Profits

The Co-operative Bank debacle is a wake-up call for those in the movement who think continuous expansion is always a sign of success. The focus must always be on members, argues EDGAR PARNELL.

Many people will have been shocked by Friday’s news that the Co-op Bank chief executive Barry Tootell had resigned following the downgrade of the bank’s debt, a sequel to its aborted plan to take over 632 branches from Lloyds Bank.

Ostensibly, these events have their origins in the financial downturn, problematic loans and increases in the capital required to meet new regulations in the banking sector. However, the underlying issues run much deeper than this.

The management of the Co-operative Group appear to believe that they are running a conventional business, with the aim of profit maximisation, which just happens to be owned by members rather than by investors, whereas they need to be clear that the function of all co-operatives and mutuals is to intervene within the marketplace in the best interests of their members.

The Group’s management either do not  fully understand, or choose not to adhere to, the underlying essentials of the model of enterprise required for any form of co-operative or mutual to be successful.

Chasing growth to the detriment of the real interests of the membership has proved to be the downfall of major consumer co-ops in many countries in Europe, such as Coop Dortmund-Kassel in Germany and Konsum Austria, both of which went bankrupt.

Liquidated

Founded in 1902 with 349 members, one shop and two employees, Coop Dortmund grew through mergers to become Coop Dortmund-Kassel with 500,000 members, 350 supermarkets, 16 department stores and 74 business centres, employing 15,000 staff and with a total turnover of DM 2.5 billion. In 1989 approximately DM 45 million was invested in shop modernisation, 31 new shops with a surface of 25,000 square metres, and the expansion of 12 shops. In 1998 Coop Dortmund-Kassel collapsed and was eventually liquidated.

The reasons for this failure include the management seeking to follow practices and methods more appropriate in investor-driven organisations, such as excluding members from goal-setting and policy decisions; giving full autonomy to the professional board; measuring success by growth, market share, volume of turnover, profit and shareholder value; and introducing corporate methods of fundraising to attract investor-members (promising high return on invested capital in the form of share dividends). One result of this strategy was to reduce members to passive shareholders and ordinary customers.

Similarly, Konsum Austria slipped from being the ‘Red Giant’ on the retail scene, with 25 per cent of the Austrian population as members to going bankrupt in 1995. In 1978 all Austria’s consumer co-operatives were merged into a single national society, leaving the management to run the new super co-op, which began chasing market share with little regard for its position as a member-controlled enterprise.

Executives often seek to pursue a growth strategy because it means a bigger empire, more status and higher pay for them. The correct response to expansion proposals, including merger proposals, should always be to focus upon what is best for the membership and what is most likely to achieve the purpose of the enterprise.

When co-operatives grow, in terms of the number of members and/or turnover, they are frequently beset by multiple problems. They lose sight of their original purpose, are prone to switch towards serving the interests of senior executives or cliques rather than the bulk of their members. As a consequence, they come to be regarded as irrelevant to the lives of their members and, in the worst cases, they are hijacked by self-interested groups.

If co-operatives and mutuals are to carry out their function and achieve their purpose then it is vital that all involved have a clear understanding of:

• the member-controlled enterprise model
• the organisational risks inherent within the model
• their economic basis
• the specific requirements of member-controlled enterprises (MCEs) in terms of their leadership, organisation and governance, management and accounting, financing, human relationships, and the public policy framework required.

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A 12-minute video explaining the ‘Member-controlled Enterprise model’ can be viewed here: http://s.coop/1myuo

More information is available at the Member-Controlled Enterprise website at: http://s.coop/1bcyi