All That Is Solid Melts into Air

Article by by Dominic Fox, Chief Executive, Association of Charitable Organisations
from Charity News Review
Issue 251 – May 2014

“Despite good news from the CBI that reports the mood in Britain’s factories is at its most upbeat in more than 40 years, the problems with capitalism seem to be in the news again. This autumn we mark twenty-five years after the collapse of the Berlin Wall, hailed at the time as a symbol of the triumph of capitalism over an oppressive and unpopular regime. Now that triumph is taken for granted.

Causing a stir among the chattering classes is Thomas Piketty, who the Wall Street Journal credits with reviving Marx for the 21st Century and that’s not a compliment by the way. “Capital in the Twenty-First Century” is M. Piketty’s exploration of the history of wages and wealth over the past three centuries. He presents a lot of data about income distribution claiming to show that inequality has widened dramatically in recent decades and will soon get dangerously worse.

A professor at the Paris School of Economics, Piketty likes capitalism because it efficiently allocates resources, but he does not like how it allocates income. There is, he thinks, a moral illegitimacy to virtually any accumulation of wealth, and it is a matter of justice that such inequality be eradicated in our economy. The way to do this is to eliminate high incomes and to reduce existing wealth through taxation.

Not to be outdone, the business secretary Vince Cable has claimed to be ending “the darker side of capitalism” by announcing he will press ahead with a new public register on company ownership to track the ultimate owners of UK companies, so making it more difficult for firms to evade tax or funnel corrupt funds. Vince also issued a stark warning to Britain’s leading boardrooms that they need to crack down on bonuses to restore public trust and avert the threat of fresh legislation to limit executive pay.

The Co-operative Group, a business seen by many as a genuine alternative to the plc model, has announced losses of £2.5bn for 2013, marking the worst results in the group’s 150-year history. The group said most of the losses stemmed from the Co-operative Bank, which amounted to £2.1bn. That included a trading loss of £1.44bn for the year to December, when the group lost control of Co-op Bank to US hedge funds. It is estimated that had the Co-op Bank not been rescued by its bondholders in December, the taxpayer would have been left with a bill for £5bn.

The reasons for the demise of this once highly thought-of ethical institution are varied and contested, but one overriding conclusion is the poor state of governance at the organisation. It is alleged that the Co-op Bank board did not have “their eye on the ball” during the takeover of the Britannia. It says that “due diligence”, the work done before a takeover is agreed, was “extremely cursory”.

The Co-operative Group, whilst preparing to lay off up to 5,000 employees, faced a new storm over plans to pay its chief executive more than £3.5m in his first year in the job, while massively boosting the salaries and bonuses of other senior staff. It emerged that the Co-op’s chief human resources officer, who joined in February 2013, left a year later with a proposed pay-off totalling more than £2m. This led to the sudden departure of the Group Chief Executive Euan Sutherland who described the troubled firm as ‘ungovernable’ and attacked the board in a resignation statement issued on Facebook.

At a time like this we need someone with a cool head. Graham Melmoth, dubbed “the Man who saved the Co-op” would be high on my list. In Melmoth’s six years at the helm, the Co-op shed its image as a “regional basket-case in need of professional management”. His achievements include the Co-op Bank reporting £100 million in pre-tax profits, a 10 per cent rise.

He scuppered Andrew Regan’s 1997 takeover bid with some well-deployed help from Warburg and Control Risks, the corporate detective agency. Described as one of the City’s most engrossing soap operas, the £1.2bn bid led to questions in Parliament, videos of Co-op employees giving secret files to their rivals, multi-million pound payments to mysterious off-shore companies, court injunctions and the condemnation of a judge who branded Regan’s antics as “iniquitous”.

And in the tradition of history repeating itself (add your own allusions to tragedy and farce) he said: “We have to guard against poor management. There have been examples of bad leadership in the movement. But these days, if people don’t make it in this organisation, they don’t survive.”

One wonders how things might have turned out differently if the Co-operative had worked at developing its own strengths rather than borrowing to fuel expansion as a ‘supermutual’ ready and able to take on the capitalists. The purchase of Somerfield cost £1.6bn and the plan to take over Lloyds now looks plain stupid. As Tesco’s recent dismal results show, retailing is a cut-throat sector. The Somerfield investment has been written down by £226m and 60% of the floor space is being sold off. The Co-op now has 645 shops either standing empty or rented out to others, some for less than the Co-op is handing over in rental payments.

With years of losses to pay off, a demoralised work force and management and board at war, the prognosis does not look favourable. It is a classic story of ‘what can go wrong, will go wrong’. Ethicality or charitable intentions are no good if an organisation is badly managed and poorly governed. We can all take lessons from that.”

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