The Co-op's woes suggest a weakness in business skills

Charities can learn from the reported management and governance failings at the mutual organisation, writes Peter Gotham

One way of improving governance is to have the right skill mix on a fully engaged board, writes Peter Gotham
One way of improving governance is to have the right skill mix on a fully engaged board, writes Peter Gotham

So what has happened at the Co-op? The press is having a field day, and it seems that there are fresh revelations each day. Is this evidence to support the view that those in the mutual sector (and, reading across, charities) are not able to manage a substantial business? As an auditor and insolvency practitioner, I take a particular interest in this story.

It will take time for a balanced, robust story to emerge, but I think the sector needs to be open to what seem to have been genuine issues. At the same time, it needs to head off some of the more florid conclusions.

The takeover of the Britannia Building Society has attracted a lot of comment, but the takeover by RBS of ABN Amro generated very similar comments despite the experienced City grandees on the RBS board. Weak oversight of a dominant chief executive, or a group mentality that "growth is good", is not a problem restricted to the voluntary sector. In fact, examples of long-term poor management abound in the commercial sector - for instance, a lack of investment in the core banking systems by many clearing banks, with the result that customers were unable to pay for food or their journey home, seems to me a worse example of corporate failure. However, operating in the sector does carry particular risks that might adversely affect good management.

Of course, sector boards don't always become complacent, uncritical, defensive and stodgy - but some do. To be voluntary but not amateur is an ambition that many or most have risen to, but the lack of the simple discipline of profit, together with a natural inclination to look at one's own charity with rose-tinted spectacles, can lead some boards to a group-think mentality. Cass Business School recently published research into corporate boards that concluded it was often difficult for members to raise questions. In the sector, the variety of targets and the difficulty of measuring outcomes can add to the possibility of woolly thinking.

Boards must be open to critical friends, whether on the board, among supporters or as advisers, and avoid confusing being a team player with suppressing occasional awkward discussions. One source of such questioning is an audit and due-diligence report, where the senior management is sensitive to what is being said and generally has significant power of patronage. It is difficult to speak truth to power. The board should therefore ensure that the reports are robust and be prepared to read between the lines and ask probing questions.

Returning to the Co-op, it is reported that due diligence was extremely cursory in the takeover of the Britannia, and the regulators made a similar criticism of RBS in the ABN Amro affair. The Co-op Group's takeover of Somerfield in the same year as the Co-op Bank took over the Britannia seems ambitious, and to consider taking on the Lloyds branches as well suggests a Fred Goodwin-like case of stars in their eyes. It does seem that many boards are guilty of allowing the staff to run their charities with insufficient critical overview.

Allowing the chief executive to operate unfettered by proper oversight is often a key factor in corporate failures in the sector as well as in commerce. One way of improving governance is to have the right skill mix on a fully engaged board. It's great if the skills come with an understanding of - and real sympathy with - the mission and ethos, and generally this can be achieved.

Nevertheless, the accusation that business skills were weak at the Co-op is a matter of concern and is a lesson for the sector.

Peter Gotham is a partner at MHA MacIntyre Hudson

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