Institutionalised prejudice against co-ops will delay economic recovery

Institutionalised prejudice against co-ops by organisations like the Financial Services Authority will delay the economic recovery, writes Cormac Hollingsworth.

 

The week of January 19th 2009 will go down as an important week in the history of UK banking.

On the Monday, the government put in another £37 billion into the UK’s largest corporate failure, the Royal Bank of Scotland, but on Wednesday with banks failing around the world, the Co-operative Bank merged with Britannia Building Society to create a £70 billion new healthy and serious co-operative competitor for UK banking.

Three years on, and the Co-op bank’s team, after successfully completing the merger with Britannia, is bidding to buy the Cheltenham & Gloucester estate from Lloyds bank; and sadly RBS is still recovering from the largest corporate collapse in history.

Go deeper and RBS now represents everything in our current economic crisis: a public backlash against management boards that are seen more as plutocrats than the engines of economic growth the economy needs.

The evidence in a forthcoming book by Timothy Noah will show that a third of the rise in inequality in our economy over the last thirty years was due to board members paying each other huge wages.

Unfortunately today’s Financial Times story (£) about the Financial Services Authority’s scrutiny of the Co-op bank’s board suggests there are some serious prejudices against Co-ops that we still need to get over.

The FT reports (£) that the FSA is concerned that the member-elected non-executives on Co-op bank’s board include such non-banking backgrounds as a “Methodist Minister, a nurse and a plasterer”.

The problem is that this judgment on the Co-ops board has not come in a vacuum; two months ago the FSA published their judgment (pdf) on the RBS collapse and didn’t criticise a single non-executive board member.

What hope have we of economic growth when the non-exec board of the most successful bank (note: bank not just co-ops, best bank) of the last five years is being criticised, not for their role or behaviour but their class?

What hope have when at the same time the non-execs of Britain’s biggest corporate collapse are never criticised?

Look around: listed banks are struggling to explain why, at certain times in the cycle, they have to pay bonuses to successful employees. With such existential questions undermining the listed part of our modern market economy, it’s no surprise our economy’s not growing.

For the system to survive, we need to boost our Co-ops. It will take the heat off well-run private companies and give them the space to rebuild trust in their model. But when the FSA doesn’t criticise the board of our most unsuccessful company in British history, and in the same breath it criticises the most successful bank in the UK (Co-op or otherwise), we face an enormous problem achieving growth.

It’s incredible but the FSA said just two months ago that in the largest British corporate collapse ever, not a single non-executive board member was at fault. Even collectively they weren’t judged to have failed.

Worse than that the FSA didn’t even interview a single non-executive director for their report.

The regulator made no attempt at all to discover why not a single non-exec spoke up and asked “the stupid question” about what was going on in the bank. We can infer a reason for this judgment from the report itself: the RBS report conveys a sense of a company completely failing to understand the business they were doing – but that is exactly the point where a non-exec’s role becomes crucial.

The non-exec is supposed to apply the John Humphrys test of asking the management of the company for a short precise explanation of what the company is doing.

The only conclusion for the FSA’s silence on the RBS non-execs is that the regulator concluded the non-execs are just puppets and couldn’t possibly have understood what was going on (“poor dears”). To anyone who understands executive versus non-executive roles, this is a serious omission by the FSA.

While the executives of RBS have rightly been excoriated for their incompetence, the fact that none of the non-execs asked “the stupid question” means those non-execs should be banned from being directors.

Within the listed company sector, being a non-exec is a career – the idea is to have a portfolio of companies on which you’re a board member, and then you can get a good overview. This can be invigorating and enable cross-fertilisation, showing capitalism at its best. When it becomes plutocratic we have a systemic problem.

And yet without any sense of irony the FSA fails to criticise RBS’s non-execs and in the same breath they then criticize the Co-op for having elected member-elected non-execs.

To those who’ve never been on a Co-op board the FSA’s class-based criticism may seem a minor (but revealing) point, but for me it’s enormously important. At the board meetings of a large Tenant Managed Organisation (1,500 properties) that I have attended, the tenant elected members are the most powerful.

“Who elected you?” is the implicit power of these members over the executive of the Co-op. But more than that, what also empowers them are the words “I know I’m a nurse, so you’ll have to excuse me, but I don’t understand what you’ve just said”. These two threads enormously empower non-executive directors within Co-ops to do what non-execs in some listed firms have failed to do.

It’s impossible to imagine a career non-exec ever asking the “stupid question” in such a blunt and naked way, in a way that prompts the transparency that a board properly needs.

I understand the FSA’s failure to scrutinise RBS’s merger with ABN Amro means they should properly scrutinise the Co-op’s merger. But I would argue part of the reason the Co-op was so conservative during the past decade, and it’s why its strong enough to be so successful is because of the executive leadership team in the bank, but it’s also because of the nurse, the Methodist Minister and the plasterer elected to the board by its members.

See also:

How the Tories’ fake co-op friends are biting a chunk out of the NHSPete Jefferys, November 10th 2011

The case for the role of co-operatives in childcareDr Éoin Clarke, September 28th 2011

Chuka Umunna: My vision for One Nation LabourChuka Umunna MP, May 12th 2011

The progressive Left should support the Tory co-op policyThomas Haynes, February 15th 2010

Mr Blond’s words of fiction should be pulpedRobbie Erbmann, November 27th 2009

25 Responses to “Institutionalised prejudice against co-ops will delay economic recovery”

  1. Anonymous

    SO what about Brown and Balls. They were responsible for regulation and they didn’t. They were responsible for paying over the odds for the shares of RBS, resulting in a huge loss.

    Rewards for failure?

    Certainly, so long as you are a Labour politician.

  2. John Boot

    "@leftfootfwd: Institutionalised prejudice against co-ops will delay economic recovery,writes @CormacHolly: //t.co/VU5wi2VS"#Coops2012

  3. Cormac Hollingsworth

    Stonking piece by @CormacHolly on @leftfootfwd on Coops and FSA snobbery //t.co/03ijtNIK

  4. BevR

    Institutionalised prejudice against co-ops will delay economic recovery, writes @CormacHolly: //t.co/S2u7wMDn

  5. Graham Mitchell

    Very good in fact. @theboyler: Good piece by @cormacholly on class snobbery & stupidity of FSA re #coop bank //t.co/HazGBtA5 #coops

  6. Nigel Shoosmith

    Institutionalised prejudice against co-ops will delay economic recovery //t.co/hiGDsHPZ

  7. Dave Boyle

    @NilsPratley Have you thought of blogging astonishing FSA objects to Co-op & Lloyds? Bigger issue here, about non-execs //t.co/0cl8KSmX

  8. thePeoplesPower

    RT @leftfootfwd: Institutionalised prejudice against co-ops will delay economic recovery, writes @CormacHolly: //t.co/hutgltdX

  9. Brian Johnson

    While RBS escapes censure, Co-op bank suffers class prejudice for having Methodist Minister & nurse on its board. //t.co/qpsZLCJS

  10. Newsbot9

    Ah yes, ramble on about anything, divert from the danger of your portfolio not being boosted by the feral 1%

  11. Thomas Berlin

    Institutionalised prejudice against co-ops will delay economic … //t.co/soIviED5 #Economics

  12. Michael

    Institutionalised prejudice against co-ops will delay economic recovery I Left Foot Forward – //t.co/K8QSCN9L

  13. geordietoff

    RT @leftfootfwd: Institutionalised prejudice against co-ops will delay economic recovery //t.co/gbPlgM9p

  14. Blarg1987

    Don’t forgot the Conservative party at the time demanded LESS regulation of the banking sector saying it was over regulated so yes Labour did mess up but if the Conservatives were in power the question has to be asked how much worse would it be with less regulation and higher rewards for making short term profit at the expense of long term viability as Conservative policies tend to be.

    The big two parties are at fault as they did what their sponsors told them to, it will take a string willed party to bite of the hand that may feed them, or to get mass popular suport for lower funding levels but from a wider backround and group.

  15. Anonymous

    There are various problems.

    1. The lack of regulation. Like you, it was the wrong regulation, for a long time.

    However regulation itself doesn’t result in losses to the taxpayer.

    2. Bailing out failed banks.

    That does result in losses to the tax payer.

    So the question then is why should the banks have been bailed out? Let them go bust. Then people will be more careful with whom they bank, and the bankers involved will be jobless. Strikes me as the right approach.

    So what should happen with people who don’t want to take any risks with their cash?

    Very simple. Two sorts of bank accounts. The current sort, where your money is at risk, and a new sort, a custody account where it is ring fenced from any losses.

    The first will probably pay interest or have no charges, the second will have charges.

    However, the banking mess is a gnats bite on the back of an elephant compared to state debts. That’s the real issue. The UK government has and will continue to default on its debts.

  16. Blarg1987

    I do agree in principle to what you have said, however lack of regulation and the approach of free markets by both political parties resulted in organisations that were so big, that if they did fail they would bring down the country hence the bailout.

    I agree they should have seperated the two earlier which was an oversight by both political parties but also remember both parties were funded by the banks so self interest is also evident.

  17. Nick

    The problem is lack of free markets, and rent seeking.

    Two big examples.

    1. Green power. it’s uneconomical, so get the government to force people to buy your product and pay over the odds. Rent seeking.

    2. Banks and their bailouts – rent seeking.

    The critical point is the common factor. Politicians. When they have a finger in every rip off, they are the problem not the solution.

  18. Newsbot9

    Ah right, you want to strip deposit protection from tens of million of normal people, who rely on a bank account for their day to day lives. Or make them pay what amounts to extortion to ensure their cash won’t be stolen by you and your feral 1%.

  19. Newsbot9

    Politicians are small fry. The Feral 1% are the bigger problem. Deal with them first.

  20. Blarg1987

    That is a dangerious precendent as the free market is what is cheapest, so rent seeking may be necessary, as to otherwise could advocate destroying natural wildlife and communities, destroying peoples standards of living etc, as the markets demand things as cheap as possible.

    Green power lacks viability down to lack of investment, if you added up all the investment that has gone into fossil fuel technologies over the last 100 years and adjusted for inflation I think you will find that green investment would be less then 10% in comparison.

    Now I do not agree with a full free market economy as their are some things that are more important then money, such as quality of life, enviroments etc, to have a full free market could cause more problems then it is worth.

  21. Anonymous

    Very simple. If they are too big to fail, they are too big for competition. The solution is to insist on the split up into two entities.

  22. Anonymous

    as to otherwise could advocate destroying natural wildlife and communities

    ==========

    That’s not rent seeking. That is what is called the tragedy of the commons. ie. Rape the sea, because no one owns it.

    The problem currently is that the very things you are talking about is being destroyed by rent seeking. Both the failed banks, the greens are doing it. Vince Cable wants to give billions of your money to the failed bankers are RBS to ‘invest it’. What a plonker.

  23. winter

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  24. Blarg1987

    That is something which is beginning to be done now!!!, the only problem was, is Labour did it at the time they would have been labelled as Socilist by the Conservatives and media, of course the idea of a left wing goverment would be terrible according to the media, but we have not really had one for nearly 30 years.

  25. Anonymous

    We have a left wing government now.

    e.g Give lots of your money to the plonkers at RBS, so they can invest in what Vince Cable tells them to in.

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