The Co-op’s mistake was to detach responsibility from power

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Any trading organisation faces issues of equity and governance. Who bears the losses when things go wrong – as, from time to time, they do in any commercial activity? To whom are managers who make day-to-day decisions accountable?

The public company has become the dominant form of business organisation because it seems to offer clear answers to these questions. Shareholders put up the money and control the executives. True, the reality often falls short. Shareholders are often diffuse and disengaged. The cost of bad business decisions may fall instead on employees, creditors and taxpayers. But, on balance, the corporate form works tolerably well.

Hybrid organisations that combine trading functions and social objectives need to develop their own distinctive framework of control. The modern economy has many such entities: privatised utilities, autonomous schools and hospitals, universities, charities, toll roads and the BBC. Some are extremely well run. The UK’s John Lewis Partnership, which operates high-quality department stores and a chain of supermarkets loved by its customers, is a shining example of an employee-owned business.

Mutuality is harder because customers are more numerous than employees. Accountability in an organisation with millions of members is achieved through exit (the ability of customers to shop elsewhere) rather than through voice (their attendance at public meetings). When I was a director of the Halifax Building Society – then probably the largest mutual organisation in the world – it was gratifying to be re-elected by millions of voters, and to meet the pensioners who turned up for a cup of tea at the annual meeting. But it would be dishonest to say that these votes or conversations left me feeling I had been properly held to account; effective accountability was really to my colleagues and my conscience.

It would also be dishonest to say I felt very differently when elected by shareholders to the board of Halifax plc after flotation in 1997. But the Halifax was – then – a well-managed organisation. The test of an organisational structure is not how it handles success but how it copes when things go wrong. And in Britain’s Co-operative Group they have certainly gone wrong.

The recent report from Lord Myners , an independent director of the group, reveals a governance structure awful in its complexity, dominated by a group of people too numerous to be held to account but too few to be representative. They enjoy power without responsibility. The corollary is that Co-op managers enjoy responsibility without power, a situation that last week drove Euan Sutherland, chief executive, to resignation.

I cannot say I felt held to account as a director of a mutual; accountability was really to my colleagues and my conscience

The Co-op’s governance problems were interlinked with its financial ones. Organisations without shareholders, dependent on debt and retained earnings, are often inhibited in expansion by shortage of capital. Yet feast can be as much a problem as famine. The success of Halifax Building Society, and some of its competitors, brought pressure to unlock the reserves for the benefit of those who happened to be customers at the time. The virtual demise of Britain’s building-society movement was the product not of any business imperative but of irresistible pressure to make members rich. In the last two decades of the last century, when greed was good, institutions as varied as Goldman Sachs and the Royal Automobile Club succumbed to such pressures.

If the goodwill of the business is not given away it can – as at the Co-op – be dissipated on foolish acquisitions or diversification. Public companies are hardly immune from this, as the fate of Halifax plc – which, as HBOS, collapsed in 2008 – shows. But at least they have the option of giving shareholders their money back.

The best model of hybrid governance is probably found in US private universities, and in entities such as the BBC Trust. Community accountability is achieved through a diverse representative body with a strong sense of the organisation’s financial needs and its social purpose. Operational authority is in the hands of a management board with experience and capability. That is what Lord Myners is proposing for the Co-op. As hybrids proliferate, it is time to learn more about which structures of their governance work – and which do not.

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