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Co-op must reform to survive: Myners

Simon Dawson | Bloomberg via Getty Images

Britain's Co-operative Group must undertake a radical reform of its management structure if it is to survive, a former government minister said in a report commissioned by the 150-year-old customer-owned business.

Paul Myners, who served in Britain's finance ministry and was chairman of retailer Marks & Spencer, urged Co-op officials to back reforms at the group's annual meeting on May 17.

"Radical decisions on governance structure need to be taken very soon - and with resolution - if the Co-op is to be saved," he said in a 184-page report published on Wednesday.

Read More Co-op in crisis: ex-minister Myners quits board

Co-op, which has been hit by a 1.9 billion pound ($3.2 billion) funding gap at its bank, a drugs scandal and an exodus of top executives, made a loss of 2.5 billion pounds ($4.2 billion) in 2013, bringing its future into question.

Myners said the current management structure at the Co-op, whose businesses range from supermarkets to funeral parlors, is "not fit for purpose".

The Co-op's board is elected from regional boards and independent Co-operative Societies, and is entirely non-executive, meaning no director is involved in day-to-day operations.

"It places individuals who do not possess the requisite skills and experience into positions where their lack of understanding prevents them from exercising the necessary oversight of the executive," Myners said.

Read More Co-Op Bank seeks $660 million capital raise after review

Methodist minister Paul Flowers was appointed chairman of the Co-operative Bank in 2010 despite having little banking experience. The bank fell under the control of bondholders including U.S. hedge funds last year after a restructuring which saw the Co-op Group's stake fall to 20 percent.

Myners said the Co-op should create a new streamlined board led by a chairman with no previous association with the group, six or seven independent non-executive directors and two executive directors. He said the non-executive directors should have the same skills and experience as independent directors sitting on the boards of the group's main rivals.

Myners said a nominations committee should be set up to screen and propose candidates for the board.

Co-op's current board consists of 15 non-executive directors elected by individual regions and five non-executive directors elected from independent co-operative societies.

Myners has blamed the group's problems on an unwieldy structure that reflects its foundation in numerous local and regional co-operatives. As an alternative, he recommended that a National Membership Council be set up, consisting of about 50 individuals, including around 10 employees.

Read MoreCo-op Bank boss quits after debt rating downgrade

The council would elect a 'steering committee of 12 members including representatives from independent societies.

Myners also proposed that all Co-op members be given the right to vote on the election of board members, the right to attend general meetings and to approve significant transactions. That follows a similar model to ordinary shareholders of publicly listed companies.

"The challenge ahead is to achieve radical structural reform of the group's governance, and thereby to secure fundamental changes in its governance culture," Myners said.

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