Co-operative offers lessons for Board functioning and composition

Written by James Thomas on Tuesday March 11, 2014

Evidence published last week by the Treasury Select Committee (TSC) in connection with its Project Verde inquiry highlights again both the importance of good corporate governance and the fact that, for some in the financial sector, achieving it remains a struggle.

First the TSC published a classified review, undertaken by Boardroom Review in 2010, into the effectiveness of the Co-operative Bank’s board. The report makes for interesting reading. Two related issues crop up, time and again: challenge (or the lack thereof), and board size. Indeed, one headline statement from the report was that: “the board’s ability to achieve its objectives is reduced by its lack of debate and challenge” and, moreover, that “the board’s ability to work together effectively is greatly reduced by its size, composition and tenure, and its inability to develop constructive debate and challenge”.

With twenty one members, the Co-op’s board had over twice the number of individuals as the average FTSE 100 board. Balancing the need for independence with the need for competence, skills and knowledge is a difficult feat for the board of any financial institution. But the Co-op’s approach to finding this balance, it seems, resulted in a board so large that an atmosphere of effective discussion, debate and challenge was effectively stymied. Some voices simply were not heard.

The second interesting publication was the letter from former Co-operative Bank CEO Neville Richardson to the TSA. “A clear divide has emerged between the directors and Board members with financial services experience, and others with a retail or purely Co-operative movement background,” he writes... “It has to be said that the people with financial services experience were proved right by those events, and had issued clear warnings that they would happen, namely the failure of Project Verde and the near collapse of the Co-op Bank itself.”

His words point, again, to the delicate balance that boards must achieve if they are to function properly. The executive should be open to challenge, and the non-exec should be equipped to provide that challenge, while the balance of expertise on the board (both financial and non-financial) should facilitate and support this exchange. What appeared to be going on at the Co-op, however, was not an atmosphere of challenge, but begins to resemble one of conflict.

And this leads, of course, to that most intangible component of boards: individuals. A selection of quotes from board members interviewed within Boardroom Review’s report illustrates the random element that individual perspectives, politics and egos brings to the mix:

“Everyone is engaged, and the culture is businesslike, friendly, with people who get on with each other”
versus
“There is not enough mutual trust or respect: challenge is seen as personal, uncaring and not a common goal”

“The CEO listens, and deals with challenge in a comprehensive and respectful manner”
versus
“Challenge is perceived as an attack and destructive: everyone is defensive”

The question is, how typical is this of boards more generally?