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A bank worth backing

Christopher Hird looks at how the Co-op Bank has fared in the financial crisis

May 18, 2012
10 min read

Illustration: Cressida Knapp

At first glance, the 2010 annual report and accounts of the Co-op Bank is much like that of any other big business – the bank has assets of nearly £70 billion and eight million customers. There are pictures of the board members and senior executives (all white men, except for one woman), fulsome references to the community projects the bank supports and testimony from satisfied employees and customers. And the report has a justifiably triumphant tone to it – after all, in 2010 the bank (which includes the Co-op Insurance company) increased its profits by over 17 per cent in a year in which most banks made massive losses.

Even in the dark days of 2007, when the financial crisis broke, the bank was making money. This performance enabled it to merge successfully with the Britannia building society in 2009, making it the largest mutually owned financial services company in the world.

But there were two things that probably would not appear in any other bank’s annual report: the news that the company had turned down £1 billion of new business because the potential customers did not measure up to the bank’s ethical standards, and that in its mortgage business the bank’s policy was ‘lending to customers what they could afford to pay’. It is not every business that boasts that it is deliberately forgoing profits.

One response to these remarks is to feel a glow of pride that this is what a co-operatively owned business can do. Mine is rather different. I think it highlights the exceptionally complex position in which the Co-op finds itself, especially at a time when it is trying to take over more than 600 branches of Lloyds bank.

Red Pepper readers will probably be familiar with the origins of the Co-op – formed in the middle of the 19th century by working-class activists to provide decent food and provisions because the established retailers sold them overpriced rubbish. What the Co-op wrestled with for many years – certainly since the second world war – was how to survive as a business when consumers deserted it for a better offer from the capitalist providers. The Co-op Bank was probably the first part of the co-operative movement to spot that the solution was to serve the middle class – and to provide not just a decent banking service but promote the idea of being an ethical business too.

In other words, it embraced the market. There were always rumblings from some members of the co-operative movement that this wasn’t doing anything for the working class. But it got away with it probably because the bank was such a small part of the Co-op and it made no call on the resources of the rest of the movement. Now, with the banking industry in crisis and large chunks of it owned by the state, people from across the political and business spectrum are wondering whether it might be a model for a new form of bank.

Perhaps one of the most important people talking about a new form of ownership for banks is Andrew Haldane, the executive director for financial stability at the Bank of England. In a series of speeches and articles (all on the Bank of England website), Haldane has shown how the institution of the limited liability company – that’s the conventional shareholder-owned business – has become corrupted, so that in banking the executives were able to take massive risks with other people’s money, make excessive profits underwritten by governments and on the back of this pay themselves excessive wages.

It is Haldane who has pointed out that in 2007 the average pay of the chief executives of the largest four UK banks was 230 times the average household income. It is worth reinforcing the point – these men did not take any personal risk and the risks they took with other people’s money were underwritten by the government. In the same speech, Haldane estimated that the public subsidy to the big four British banks between 2007 and 2010 was $340 billion a year. (Yes, billion.) And remember this is all from a senior executive at the Bank of England. No surprise therefore, that he thinks we need to look again at the mutually owned co-operative as a model for banking – in his words, ‘the stakeholder democracy model’ rather than the ‘equity dictatorship model’.

What kind of co-op?

Co-operative Financial Services, the business that owns the Co‑op Bank and the Co-operative Insurance Society, is a mutually owned co-operative. But it is important to understand just what this means. It is not a workers’ co-operative and it is not run like a co-operative. It is mutually owned in the sense that there are no outside shareholders and it is run for the benefit of all of its members – the customers. But these customers exercise very little influence or control over the way the bank is run.

The structure of the Co-operative is one of indirect parliamentary democracy – the six million members of the Co-op elect representatives to their area committees, which send representatives to the regional committees, which send representatives to the main board, which also has on it the chief executive, who heads the executive, which runs the business day to day.

In the past decade the fortunes of the Co-op have been transformed, including in the highly competitive retail sector. It now accounts for 8 per cent of supermarket trade, compared with 4 per cent at its nadir ten years ago. It is making profits of nearly £250 million, after paying customers a dividend of more than £100 million – the amount each member receives being in proportion to their spending.

There is little doubt that the movement’s structure – which gives elected representatives responsibility for setting the overall strategy but no power in the day-to-day running of the business – has been one of the reasons for the Co-op’s revival. It has allowed the retail professionals to devise a strategy that worked, given the stores and brand image they had. In the recently published report of the Ownership Commission (PDF), there is an interesting chart of the life cycle of a co-operative, which shows that Phase 3 of ‘growth and glory’ is followed by a period of introspection. This is the critical time for the co-op because if it cannot reinvent itself, it will probably decline and eventually disappear. It seems clear that the Co-op has successfully reinvented and reinvigorated itself, which may herald a new sustained period of growth and success: increasing market share and profits can create a virtuous circle of growth.

But this brings with it a whole new set of challenges, which goes to the heart of the debate about capitalism that the Occupy movement has been so successful in provoking. And if we are to create new and better structures, we need to find a way of disentangling concepts such as markets and profits from an abstraction called ‘capitalism’. The Co-op’s success is a good starting point.

Competition, profit and ownership

The Co-op has succeeded in a highly competitive market. Even allowing for the fact that many of our demands as consumers are shaped by social factors (of which advertising is clearly a major one), markets have proved to be an effective way of meeting consumer needs. And in one sense the Co‑op is a capitalist institution – it owns large amounts of capital (in the form of shops) and its whole survival depends on it making a profit.

What makes it different is its ownership structure. Because there are no shareholders, the size and use of profits can be contested. In a large shareholder-owned business there is a simple clarity of purpose – to maximise the profits for shareholders. Customers need to be satisfied, laws need to be observed, corporate reputations need to be protected – it is a complex interplaying of forces, but it is, in the end, to the purpose of satisfying the shareholders.

For a co-op it is both simpler and more complex. Simpler because there are no shareholders; more complex, because there are not simple measures of performance. The competing claims of workers, the financial strength of the business, consumers, the values of the business and the wider world have all to be balanced – and in a structure in which some of these claims on the business’s profits have no formal voice.

Clearly the Co-op has had some success in recent years in managing these competing claims and using the money that in a conventional shareholder business would go to shareholders to support a wide range of other interests. But if the new enthusiasm for reviving mutuals (after they were almost killed off by the Thatcher government) does extend to the banking sector, there are several issues that need to be addressed.

The Co-op Bank is rightly proud of how it has weathered the banking crisis. One of the reasons why it has been so successful is because it has been conservatively managed – as its commitment to not encouraging people to borrow money they cannot afford shows. This means that the bank grew slowly in the boom years, in what turned out to be a good long-term strategy. Partly this was policy but partly it was necessity: as a co-op the bank was not able to get access to outside capital to expand its business.

This may be okay when you are small – and the Co-op is still a relatively small bank – but it is a substantial impediment if you want to grow. And growth may be necessary to compete with the shareholder-owned businesses. The Ownership Commission report highlighted this disadvantage, saying it had ‘serious consequences for financial service mutuals and co-operatives’, and recommended that the government should change the law to make it easier for mutuals to raise outside capital without threatening their mutual status.

This is not an arcane discussion about bank ratios. To be an effective competitor to the big banks, it is estimated that the Co-op would need to have about 6 per cent of the UK retail banking market. The Lloyds takeover would achieve that, but one reason the takeover is stalled is that the regulators are concerned about the capital base of the new bank. A private company could go off and get the capital; at the moment it is virtually impossible for a mutual to do this.

But it could be made possible. Last year the employee-mutual retailer the John Lewis Partnership raised £50 million from its customers through a bond offering. Because it is a bond, it gets a fixed return – it doesn’t share in the profits of the business and it doesn’t undermine the company’s mutual status.

Such a ‘crowd funding’ financing model could be adapted to fit the Co-op Bank if the government changed the rules. And it could be reinforced if mutuals – with their conservative banking policies – were required to have less capital than the riskier banks. You can be sure that the established banks will oppose such ideas, lobbying to keep things as they are. So it is important that all those who believe in the idea of a co-operatively owned bank fight back.

Christopher Hird is managing director of documentary film makers Dartmouth Films and executive producer of The Flaw, which tells the story of the root causes of the financial crash. His latest projects include the film of the book The Spirit Level, for which he is currently raising funds. You can back it by going to www.thespiritleveldocumentary.com

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