Co-op Group loses £2.5bn after 'fundamental failings in management and governance'
17 Apr 2014:
Interim chief executive Richard Pennycook describes the financial losses, mostly due to Co-op Bank, as a 'wake-up call'
Interim chief executive Richard Pennycook describes the financial losses, mostly due to Co-op Bank, as a 'wake-up call'
Co-operative Group reveals £2.5bn losses. Photograph: Nick Ansell/PA
The Co-operative Group has revealed losses of £2.5bn after the most "disastrous year" in the mutual organisation's 150-year history.
The group, which has lurched from crisis to crisis and lost a string of bosses along the way, admitted that the huge losses were due to "fundamental failings in management and governance at the group over many years".
Richard Pennycook, the Co-op's stand-in boss following the resignation of Euan Sutherland last month after less than a year in charge, said the catastrophic mismanagement of the Co-op Bank was just one of a series of blunders by senior management. "The headline this morning is a comprehensive loss – the worst in the history of the Co-op after 150 years," he said on Thursday. "We're not trying to sugar-coat that in any way. This disastrous result reflects the crisis that emerged at the bank in 2013."
Pennycook, a turnaround specialist who joined Co-op as finance director last year before being elevated after Sutherland's shock exit, said the scale of the disaster had shocked the Co-op's 90,000 staff and eight million members.
Despite the massive losses, the Co-op is still paying Sutherland £2,700 a day on top of the £2.1m he collected for his 10 months running the historic mutual, which faces losing control of its ethical Co-op Bank.
Sutherland, who quit after details of his pay package were leaked to the Observer, has given up a £1.5m "retention" bonus but is clinging on to long-term share bonuses that could pay out up to £1.5m.
The Co-op said Sutherland – who quit complaining that the group was "ungovernable" – is still negotiating his final payout and said his exit arrangements would be "finalised in coming months".
Pennycook was paid £1.27m, including a £750,000 retention bonus for six months' work last year. He is also in line for long-term share awards of up to another £750,000.
The Co-op's 10-person executive team together collected retention bonuses – which have enraged staff and members because they are not performance-related – of more than £4m last year. A spokeswoman pointed out that, from next year, payouts will be subject to performance targets. However she refused to provide any details of the metrics of the targets.
Pennycook said the organisation must fundamentally change its management structure to ensure its survival. "We have found a period of poor management," he said. "It was not just an accident at the bank." He implied senior managers had, in the past, been able to run roughshod over the board.
"I don't think there's been enough transparency: when I've taken discussions over the financial health of the organisation to the board, in some cases it's been a revelation [to them]," he said.
"The credibility, trustworthiness and financial strength of the group, built up over nearly 150 years, have been stripped away over the past five years. And yet if ever there was a time for the revival of a campaigning organisation owned by its members, all of whose profits can be put to work in the communities where they live, it is now.
"If we had the next five years like the last five years, this is not going to be a healthy organisation."
Pennycook said the Co-op's terrible year, in which it has been forced to sell 70% of the Co-op Bank to investors including aggressive US hedge funds, should serve as "a wake-up call to anyone who doubts just how serious the challenges we face are".
Most of the group's losses stem from the bank, which was found to have a £1.5bn capital hole last year. Total losses related to the lender came in at £2.1bn.
He warned that Co-op could lose even more control of its lender if it is unable to stump up another £120m to maintain its 30% stake. The wider organisation already needs to pump in £263m before the end of the year, and must stump up more to meet a fund to pay compensation for mis-selling.
The former chair of the bank, Paul Flowers, who has been called the "Crystal Methodist" by the media, was charged with drug offences on Wednesday.
Ursula Lidbetter, the Co-op's chair, agreed that senior management had "fallen far short" of acceptable standards and said the group must introduce fundamental reforms "with urgency".
Lord Myners, the former City minister who was drafted in to review the group's governance, dramatically quit last week after he said it had become clear that the Co-op's complex regional board structure would not accept his reforms.
Myners has accused former Co-op management of making "catastrophically inept decisions over and over again".
"The reason the Co-op is in such a mess is because former managers were allowed to run amok like kids in a sweetshop," he said in the Daily Mirror as the row over the group becomes increasingly bitter.
Myners wanted to replace the Co-op's complex board structure and replace it with that of a more traditional listed company. That proposal has been opposed by the Co-op's regional boards, which will lose a lot of power if his reforms – which remain on the table despite his departure – are made. Members will be asked to vote on reform at the Co-op's AGM on 17 May, when Myners's proposals will be published. But a specific vote on implementing his suggestions will not be made until the organisation has comprehensively consulted with members.
Both Pennycook and Lidbetter said the vast majority of Co-op's members wanted fundamental change. "The overwhelming passion from members is: 'Sort yourselves out. We want the Co-op to succeed – go and fix this'," Pennycook said.
Britain's largest union, Unite, which represents 1,200 Co-op employees, said the results should leave people in no doubt of the need for reform to save jobs and secure the group's future.
Unite's Adrian Jones said: "Today's figures are deeply disappointing and do not reflect the hard work of ordinary Co-op workers who have been working hard to make the group a success against a backdrop of uncertainty.
"The vast majority of our members embrace the unique ethos of the Co-op, but feel that their livelihoods are playing second fiddle to the internal power struggles of whether to reform the Co-op Group's structures.
A third of the shops, which are spread across the country, are lying empty and the others are sublet to other retailers – many of which are paying less in rent to the Co-op than it is shelling out to landlords.
Rental payments on the 645 shops – more outlets than Lidl or Poundland have in the UK – work out at £443m. And the Co-op is employing an army of people to manage the shops.
"We have a team that have to scurry around the country to keep them maintained. It's not productive," Pennycook said."In many cases we don't necessarily cover our own costs.
"When I made that clear to the board there has been an element of surprise – 'surely it can't be that big'."
Pennycook said it was just one example of the lack of transparency between executives and the board and members, to whom they are meant to be accountable.
"I don't think there has been enough transparency for members to see precisely all the decisions that were being taken," he said. "That's probably why we ended with 650 surplus properties, predominantly shops, ones that we don't need. Look at the rent liability we face for properties we don't even want."
The Co-op, which is selling 200 supermarkets in favour of opening up more convenience stores, wrote down the value of its Somerfield supermarket chain – bought for £1.7bn – by £226m.
Profits within food dropped to £247m from £269m last year.
The group, which has lurched from crisis to crisis and lost a string of bosses along the way, admitted that the huge losses were due to "fundamental failings in management and governance at the group over many years".
Richard Pennycook, the Co-op's stand-in boss following the resignation of Euan Sutherland last month after less than a year in charge, said the catastrophic mismanagement of the Co-op Bank was just one of a series of blunders by senior management. "The headline this morning is a comprehensive loss – the worst in the history of the Co-op after 150 years," he said on Thursday. "We're not trying to sugar-coat that in any way. This disastrous result reflects the crisis that emerged at the bank in 2013."
Pennycook, a turnaround specialist who joined Co-op as finance director last year before being elevated after Sutherland's shock exit, said the scale of the disaster had shocked the Co-op's 90,000 staff and eight million members.
Despite the massive losses, the Co-op is still paying Sutherland £2,700 a day on top of the £2.1m he collected for his 10 months running the historic mutual, which faces losing control of its ethical Co-op Bank.
Sutherland, who quit after details of his pay package were leaked to the Observer, has given up a £1.5m "retention" bonus but is clinging on to long-term share bonuses that could pay out up to £1.5m.
The Co-op said Sutherland – who quit complaining that the group was "ungovernable" – is still negotiating his final payout and said his exit arrangements would be "finalised in coming months".
Pennycook was paid £1.27m, including a £750,000 retention bonus for six months' work last year. He is also in line for long-term share awards of up to another £750,000.
The Co-op's 10-person executive team together collected retention bonuses – which have enraged staff and members because they are not performance-related – of more than £4m last year. A spokeswoman pointed out that, from next year, payouts will be subject to performance targets. However she refused to provide any details of the metrics of the targets.
Pennycook said the organisation must fundamentally change its management structure to ensure its survival. "We have found a period of poor management," he said. "It was not just an accident at the bank." He implied senior managers had, in the past, been able to run roughshod over the board.
"I don't think there's been enough transparency: when I've taken discussions over the financial health of the organisation to the board, in some cases it's been a revelation [to them]," he said.
"The credibility, trustworthiness and financial strength of the group, built up over nearly 150 years, have been stripped away over the past five years. And yet if ever there was a time for the revival of a campaigning organisation owned by its members, all of whose profits can be put to work in the communities where they live, it is now.
"If we had the next five years like the last five years, this is not going to be a healthy organisation."
Pennycook said the Co-op's terrible year, in which it has been forced to sell 70% of the Co-op Bank to investors including aggressive US hedge funds, should serve as "a wake-up call to anyone who doubts just how serious the challenges we face are".
Most of the group's losses stem from the bank, which was found to have a £1.5bn capital hole last year. Total losses related to the lender came in at £2.1bn.
He warned that Co-op could lose even more control of its lender if it is unable to stump up another £120m to maintain its 30% stake. The wider organisation already needs to pump in £263m before the end of the year, and must stump up more to meet a fund to pay compensation for mis-selling.
The former chair of the bank, Paul Flowers, who has been called the "Crystal Methodist" by the media, was charged with drug offences on Wednesday.
Ursula Lidbetter, the Co-op's chair, agreed that senior management had "fallen far short" of acceptable standards and said the group must introduce fundamental reforms "with urgency".
Lord Myners, the former City minister who was drafted in to review the group's governance, dramatically quit last week after he said it had become clear that the Co-op's complex regional board structure would not accept his reforms.
Myners has accused former Co-op management of making "catastrophically inept decisions over and over again".
"The reason the Co-op is in such a mess is because former managers were allowed to run amok like kids in a sweetshop," he said in the Daily Mirror as the row over the group becomes increasingly bitter.
Myners wanted to replace the Co-op's complex board structure and replace it with that of a more traditional listed company. That proposal has been opposed by the Co-op's regional boards, which will lose a lot of power if his reforms – which remain on the table despite his departure – are made. Members will be asked to vote on reform at the Co-op's AGM on 17 May, when Myners's proposals will be published. But a specific vote on implementing his suggestions will not be made until the organisation has comprehensively consulted with members.
Both Pennycook and Lidbetter said the vast majority of Co-op's members wanted fundamental change. "The overwhelming passion from members is: 'Sort yourselves out. We want the Co-op to succeed – go and fix this'," Pennycook said.
Britain's largest union, Unite, which represents 1,200 Co-op employees, said the results should leave people in no doubt of the need for reform to save jobs and secure the group's future.
Unite's Adrian Jones said: "Today's figures are deeply disappointing and do not reflect the hard work of ordinary Co-op workers who have been working hard to make the group a success against a backdrop of uncertainty.
"The vast majority of our members embrace the unique ethos of the Co-op, but feel that their livelihoods are playing second fiddle to the internal power struggles of whether to reform the Co-op Group's structures.
Systemic failure
Richard Pennycook, Co-op's interim chief executive, highlighted the scale of the systemic mismanagement by revealing that the company has 645 shops "we don't need and don't use".A third of the shops, which are spread across the country, are lying empty and the others are sublet to other retailers – many of which are paying less in rent to the Co-op than it is shelling out to landlords.
Rental payments on the 645 shops – more outlets than Lidl or Poundland have in the UK – work out at £443m. And the Co-op is employing an army of people to manage the shops.
"We have a team that have to scurry around the country to keep them maintained. It's not productive," Pennycook said."In many cases we don't necessarily cover our own costs.
"When I made that clear to the board there has been an element of surprise – 'surely it can't be that big'."
Pennycook said it was just one example of the lack of transparency between executives and the board and members, to whom they are meant to be accountable.
"I don't think there has been enough transparency for members to see precisely all the decisions that were being taken," he said. "That's probably why we ended with 650 surplus properties, predominantly shops, ones that we don't need. Look at the rent liability we face for properties we don't even want."
The Co-op, which is selling 200 supermarkets in favour of opening up more convenience stores, wrote down the value of its Somerfield supermarket chain – bought for £1.7bn – by £226m.
Profits within food dropped to £247m from £269m last year.
COPY http://www.theguardian.com/uk
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