The reputation of the UK’s Co-operative Bank is in tatters. Has it also bankrupted the whole cooperative movement’s credibility?
One customer of the UK’s beleaguered Co-operative Bank recently tweeted: “Obviously one can no longer pull the smug ‘I bank at the Co-op’ face but I remain stalwart in my love.”
It is an open question how many other customers feel similarly. Enough current account customers have jumped ship since the bank started to hit the headlines for the wrong reasons for it to make a statement to investors, admitting with supreme understatement that recent events “may have caused some brand and reputational damage”.
What is not clear is whether large numbers of customers are leaving because they feel their ethical values have been betrayed, or because they fear that the bank may be sinking and they worry it might take their money with them.
The latter eventuality became less likely with the high profile rescue measures, with a deal being agreed for a £1.5bn bailout – at the cost of handing 70% ownership of the bank to hedge funds. But for some this is the central point because, they assume, it is not possible to continue to be taken seriously as an ethical bank if owned by people that will push for higher profits and shareholder returns.
In response to such concerns, the Co-op has published new proposed articles of association to guarantee a continuation of its ethical policy, and to create an ethics committee. But some commentators, such as the magazine and campaign group Ethical Consumer – which has launched a “save our bank” initiative – are unimpressed, arguing that such a move will not be enough to withstand commercial pressures on the bank from private investors.
Ethical Consumer director Rob Harrison says the problem is not with the hedge funds. “Our feeling is that the hedge funds won’t be long-term owners. But whoever the owner is going to be, the issue around the ethical policy is going to remain.”
Ethics not the problem
Harrison believes that ethically minded customers should stick with the bank in the short term, and points out that it wasn’t the company’s ethics that brought it into disrepute. Before it made a bad decision to merge with the Britannia building society in 2009, it had been performing satisfactorily, with a service that was underpinned by the ethical policy.
And that bad decision should be seen in context. Harrison says: “The entire sector was making poor decisions around that time. It was more a wider problem with banking than something specific to the Co-operative, or to cooperatives in general.”
But then, despite reasonable performance until recently, the Co-operative could be said to have had rather a run of poor decisions, even before the current crisis. It has had to make an increased provision of £105m (over the £269m already made) to cover claims over the mis-selling of payment protection insurance. It has also suffered many complaints over the failings of its online system, with relatively small numbers of visitors resulting in site overload.
So arguably when the proposed purchase of hundreds of Lloyds branches collapsed as the balance sheet problems resulting from the merger with the Britannia building society became evident, it was just the last straw. (See box: Co-operative Bank – a history.)
Of course, a real fear is whether the high-profile challenges of poor governance at the bank might be taken as a criticism of how mutuals generally are run.
For all that the recent revelations about the former Co-op bank chairman Paul Flowers may have diverted media attention with its combination of sordid behaviour, corporate leadership and religious affiliations, there is still one question that really bites. How could somebody so unqualified for high level leadership end up in that position? And could we ever imagine such a thing happening at a well-run plc?
In other words – having been held by ethics campaigners for years as being the more socially responsible form of ownership – what if mutuals actually tended towards poorer governance because of the absence of checks and balances?
One former Co-operative Group insider, who asked not to be named, says governance had been a real issue over a period. “It is bizarre if you allow someone to be chairman, who signs off on the most important decisions, when they don’t know anything about the business. And if, added to that, the board had non-executives who also knew little about the business, it was easy for executive management to blind them and avoid proper scrutiny.”
He suggests that a certain amount of the company’s ethical image had been a veneer over what was already simply a profit-seeking machine. “The Co-op Bank was very clever at positioning, but at the end of the day it was a bank in the business of making money.”
In the early 2000s, the management at the time aimed to create a wider, more engaged consumer base, and focus was put on the bank to help achieve this.
“The merger with Britannia may have been dressed up as supporting mutualism, but it was purely about scale,” says the former Co-op source. “And the Co-op Bank may have an ethical policy about where it would invest, but that didn’t always translate into how it behaved itself. So, for instance, it used to have ridiculous charges to hit people who went overdrawn on their accounts. In that sense, it was no more ethical than any of the others.”
In spite of these criticisms, some observers are reluctant to attribute the challenges to anything inherent to mutualism.
Rory Sullivan, an independent adviser on responsible investment, acknowledges that the Co-op stands as a challenge to any proposition that mutuals are better run companies by default. “There are not that many examples of large, successful mutuals,” he says. “But I don’t think that any ownership model is inherently better than any other. It comes down more to the corporate objectives.”
Can the Co-op preserve its ethical positioning? Sullivan thinks it will be tough, but the opportunity is there. “It is going to be difficult to maintain the ethical brand given what’s happened. But they have the choice to really focus on reinforcing their credentials and there is a fair chance of success if they’re prepared to be brave.”
Were clues missed?
It is worth noting, of course, that right up until the moment of mishap, the Co-op continued to gain accolades and awards within the corporate responsibility community. The company’s sustainability report won the top award at the 2013 Ethical Corporation Responsible Business Awards, for instance. Respected commentator and environmentalist Jonathon Porritt, writing in response to the company’s report, described the company as “an inspiration”.
Have we all been asleep at the wheel? If a company is as committed to transparency as the Co-op, shouldn’t there have been some clues to alert the diligent that all was not well in the ethical heartlands?
Rory Sullivan thinks not. “Corporate responsibility awards measure what they measure. They don’t claim to be measures of a good company, and shouldn’t be condemned for not turning out to be so. The Co-op was caught out by its balance sheet, and the CR community is not focused on this.
What is certain is that the Co-operative faces an uphill battle in the coming couple of years. Its environment has changed overnight from one where it was surrounded by people giving it the benefit of the doubt and willing it to succeed to one where campaigners will be watching with a critical eye – looking for the signs that its new ownership is leading to backtracking.
What made the Co-operative Bank ethical?
The Co-operative Bank transformed itself from being a “dowdy anachronistic curiosity” to a 21st century “cool icon brand”, according to Derek Day and Helen Edwards who featured the bank in their book Creating Passionbrands.
They argued that the bank rediscovered long-suppressed beliefs under the leadership of former chief executive Terry Thomas and marketing director Simon Williams and made an important leap of faith in launching the marketing on the ethical policy.
Consumer research had shown that the bank was previously seen as “old fashioned, working-class, left wing and ‘not really a proper bank’”.
The new outlook that the ethical policy gave helped to drive the bank towards significant growth, going from retail customer deposits of £1bn in 1993 to £6bn by 2003.
The focus for the ethical policy was that the company would not invest money in damaging practices, such as human rights abuses, animal experimentation, and environmental pollution.
It drew the priorities for its policy from the beliefs of its own customers, through regular polling, and boasted that it had turned away more than £1bn of investment in firms that did not meet its ethical criteria.
Co-operative Bank – a history
The Co-operative Bank was founded in 1872 as the loan and deposit department of Manchester’s Co-operative Wholesale Society (CWS), becoming the CWS Bank four years later.
It first became a registered company nearly a hundred years later in 1971.
In 1999 it launched a separate internet bank Smile, which received good reviews for its service. Then in 2002, the Co-operative Bank, Smile and Co-operative Insurance Services were brought together under the Co-operative Financial Services group (CFS).
A key mis-step came in 2009, when CFS agreed a merger with the Britannia building society, creating a new “super-mutual”. The bad debt that was uncovered on the books of the Britannia led to the huge hole on the Co-op’s balance sheet that led to the eventual abandonment of its next scheme – a plan to take on hundreds of Lloyds Bank branches.
The Co-operative Bank was indirectly a co-operative through being owned by the Co-operative Group, which is itself a co-operative. Once the Co-op group becomes only a minority shareholder – when ownership of 70% of the bank is passed to hedge funds under the terms of the rescue package announced in November – it is no longer a mutual, by any definition.
Politically, it has been associated with the left – making regular donations to the UK Labour party – donations which may well stop in the future.Co-operative Bank CR disaster Ethical banking reputation