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.  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 which combine trading functions and social objectives need to develop their own distinctive framework of control.  The modern economy has many such organisations – privatised utilities, autonomous schools and hospitals, universities, the BBC and Network Rail, charities and toll roads.  Some of these are extremely well run.  The John Lewis Partnership, which operates high quality department stores and a chain of supermarkets loved by its customers, is today a poster child for employee owned business, and deservedly so.

Mutuality is harder because customers are more numerous than employees  Accountability in an organisation with millions of members is in reality 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 General 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 essentially to my colleagues and my conscience.  

     It would also be dishonest to say that I felt very differently when elected by shareholders to the board of Halifax plc.  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 Cooperative movement, they have certainly gone wrong.

Lord Myners’ report 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 status which Rudyard Kipling, writing for Stanley Baldwin, memorably described as ‘the prerogative of the harlot throughout the ages’. The corollary is that  managers of the business enjoy responsibility without power, a situation which last week drove the chief executive, Euan Sutherland, to resignation.

The Coop’s governance problems were interlinked with its financial problems.   Organisations without shareholders, dependent on debt and retained earnings, are frequently 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 the 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 Coop – be dissipated on foolish acquisitions or in ill judged diversification . Public companies are hardly immune from these diseases – as the fate of Halifax plc illustrates all too clearly – but at least they have the option of giving shareholders their money back. Hybrid organisations may easily alternate between feast to famine, as the Coop did.

The best model of hybrid governance is probably that illustrated in US private universities and mimicked by, for example, the BBC Trust.  Community accountability is achieved through a diverse representative body with a strong sense of both the organisation’s financial needs and its social purpose .Operational authority is in the hands of a management board with considerable business experience and capability.  That is the structure which Lord Myners is proposing for the Coop.  As hybrids proliferate, it is time to learn more about which structures of their governance work – and which do not.