Co-operative Group: banks could sway the vote on reform of the board

http://www.theguardian.com/business/2014/apr/10/co-operative-group-banks-vote-board-reform

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Get ready for the biggest vote in the Co-op's 170-year history. Amid the squabbles, resignations and rows over pay, the poll on 17 May on boardroom reform will take place with the organisation's finances looking ghastly.

This is where attention will soon be concentrated once the Co-op Group publishes its accounts for 2013. It is also why the group's lenders, who have remained silent so far, could yet influence the struggle for power.

Group debts were £1.2bn at the half-year stage. That was a reduction on six months earlier but achieved largely by mortgaging the swanky new head office in Manchester. Once the cost of meeting the Co-op Bank's call for an extra £400m is factored in, borrowings could soon be higher: the Group's share of that bill is £120m.

It appears as if Group debts could be about three times the annual top-line profits from the supermarkets, pharmacies and funeral service. That ratio would be considered aggressive even for a large retailer trading strongly. But Co-op's supermarkets profits fell 10% last year and competition is becoming stiffer. Aldi is even taking bites out of Tesco.

Remember, too, that trading profits for 2013 will be overwhelmed by huge write-downs from the Co-op Bank and a harder-headed appraisal of the real value of past acquisitions, such as the Somerfield supermarket chain.

All-in-all a bottom-line loss of about £2bn is on the cards.

So far the Co-op's lenders – led by Barclays, Lloyds and Royal Bank of Scotland – have stayed in the background. But they may feel obliged to act if the Co-op votes no to reform. They would be lending to an organisation that is spitting out reform-minded directors at a rate of knots – first chief executive Euan Sutherland and now Lord Myners.

Nor will Myners' verdict on Co-op finances have escaped their notice. In his interim report he wrote: "Debt has reached levels that are no longer sustainable without the sale of treasured assets. Sale and leaseback transactions represent an expensive addiction the cost of which does not appear, even now, to be fully appreciated by the board."

In that context, the Co-op board's decision to force a vote on reform in six weeks' time is sensible. This saga has run a long time already. For Myners, it's a tactical victory of sorts: having put a lot of noses out of joint at the Co-op, he has agreed to go in May but has ensured a vote will happen. It is baffling why a resignation was required to achieve that advance, but internal politics at the Co-op have long defied logic.

The board's public support of his review is also significant. Painted as a bunch of stick-in-the-muds who hadn't recognised the size of the Co-op's financial crisis, the directors have now acted. They will back the principles of a proposal that would pave the way for a plc-style board, complete with non-executive directors drawn from outside the Co-op. Instead of "back us or sack us", it's a case of "back us by sacking us".

Yet this is the Co-op and nothing is straightforward.

It remains possible that Myners' proposals will be diluted beyond recognition before 17 May. Note that Ursula Lidbetter, the Co-op chair, did not give exactly whole-hearted support for all Myners' ideas. She said his report "will provide invaluable stimulus for the changes we need to make". That's not quite the same thing.

It's also an open question where Thursday's drama leaves Ben Reid, the boss of Midcounties Co-operative and chief critic of Myners' plans. The Midcounties has voted to oppose the reforms, wanting "measured" changes instead, yet Reid is a member of the Co-op Group board that issued the statement on Thursday. There's another source of confusion.

The big question, of course, is whether the Co-op will actually choose reform, whatever the final version of the proposals. Until Thursday, no was the way to bet. The Midcounties lobby was making the running and the Group board seemed split at least three ways. There were Myners supporters, Midcounties sympathisers and waverers in search of a compromise, such as continuing to allow a few elected members to serve on a reformed board.

The waverers, at least, will now be obliged to get off the fence.

But that does not mean that traditionalists on the regional committees will be swayed, especially if the Midcounties grouping continues to oppose Myners-style reform. A majority of two-thirds is required and a yes vote still looks very hard to achieve.

Indeed, it looks as if the Myners camp, by forcing an early vote, is gambling that when push comes to shove the Co-op electorate will not dare risk a meltdown and trigger yet more resignations.

But that strategy could backfire.