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

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