I promised myself I wouldn’t return to the rotten story that is the Co-operative Group… well, at least not until it had divulged full details of the plan to stiff the bank’s bondholders and float the bank on the stock market.
But seeing as there’s so much muck flying – what with former directors hauled up in front of MPs, and others writing damning tirades for all and sundry to see – and seeing as I had, after all, suggested that some Co-op bonds were a healthy addition to an investment portfolio, I can’t hold my tongue any longer.
Today, I want to lay out some key points that seem to have been missed in the general public debate. This has been an ugly story so far. And though I probably ought to hold out until the full details of the Co-op’s offer comes out in October, I feel the need to set a couple of things straight.
A quick recap before I let rip
The Co-operative Group is a massive entity. Its retail business encompasses funeral parlours, pharmacies, car showrooms, and, of course, the supermarket chain that wears its name. Oh, and then there’s the bank – only thing is, it’s technically bust.
Well, never mind, says the Co-op. We’ll stick in a few quid from the central business and then stiff the bank’s bondholders for a load of capital to ‘un-bust’ it.
Of course, bondholders aren’t happy, not least because many are pensioners, reliant on the income from said bonds. “Tough” (or words to that effect), says the Co-op. There’s no plan B. You’ll be offered some shares in the bank when it floats later this year. Don’t call us. We’ll call you.
That’s the situation as it stands. And in some ways I can see why many say “Fair enough. That’s what the bondholders are there for – to provide the bank’s capital, and if the bank is bust, then the capital is gone.”
But I contend that there’s something missing in this résumé. A big something that perhaps most of the Co-op’s bondholders were relying on.
That is, the Co-op Group’s promise, not only to bondholders, but to everyone it deals with, that it will play with a straight bat. The term ‘ethical’ is plastered all over corporate documentation – and to my mind, that means that the group goes further than the law demands. What else can it mean? I mean, everyone has to follow the law – but if you claim to be an ethical operator, you go that bit further.
Commentators in both the media and the business world seem to think that the ethical pledge is just some hollow notion – some platitude that can be ignored when it comes to the harsh reality of recapitalising the group’s bank.
But I put it to you – and to the Co-op’s board of directors – that there’s a legal commitment here.
Though that commitment is a little vague, and was made many years ago, and by a different board of directors – it is still very much in play. The new bunch of guys in charge at the Co-op now seem to have changed the rules of engagement.
But this won’t do.
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This is corporate flim-flam
Unlike all those pesky ‘for profit’ organisations, this is an organisation that operates not just under the law, but “in accordance with co-operative values and principles.” As recently as 2012, the group’s accounts stated: “In line with our member-owned model, investment decisions are not driven by the purely financial demands of shareholders, but by the wider concerns of our members.”
Of course, you have to ascertain what the values and principles of the group are – and what the “wider concerns” of the members may be. But it’s surely not too much to assume that such concerns encompass making good on contractual commitments – including commitments to pay interest and repay any loans to bond holders.
Just because the central group can technically cut the bank loose and make the bondholders pay for the clear-up, it doesn’t mean that it should. Not if it’s made a commitment over and above the law, to deal fairly with all stakeholders.
As well as its ethical commitment, the Co-op Group constantly reassured bondholders that their money was safe. Only a couple of years ago, the group reported that the banking division “… continues to deliver stable operating profit while maintaining robust capital and liquidity levels.” And yet now, it suddenly seems the bank has been massively undercapitalised for years.
And as far as risk management goes, the group promised responsibility for “… overseeing the group’s risk management systems”. Now that’s important. It’s ‘the group board’ that’s responsible for managing the risk throughout the organisation. It was a group decision to take over the Britannia Building Society (which seems to be at the centre of the debacle at the bank), it was the Group that said it would make good contractual commitments to bondholders, it was the Group that promised ethical dealings with all parties. The Group cannot now simply say that it’s had a change of heart.
Let the battle commence!
As MP Jesse Norman (on the Treasury Select Committee looking into this debacle) put it, “You would expect them to bear full responsibility for their ownership”. “Them” being the Co-op Group.
Paul Tucker, deputy chairman of the Bank of England sings from the same hymn sheet. “As an owner of a bank, you should expect to stand behind the bank.”
Jesse Norman and Paul Tucker are right. And if by putting in a little cash, while hanging the bondholders out to dry, the Group thinks it’s done enough to satisfy these demands, then it’s hopelessly mistaken.
Not only is it flouting a contractual promise to bondholders, it’s not even operating under the clear principles laid out in the group’s manifesto.
And the main principle is that the group is owned and run by its members. But of course, the members haven’t even been asked about how they want to recapitalise their bank. Certainly the bondholders haven’t been contacted. And yet, the Group says, “We take responsibility for and answer for our actions.”
No, it doesn’t!
The goal posts have been shifted. If the new guys in charge of the Co-op think they can renege on past commitments and the founding principles of the group, then they’re wrong. If they go along with the plans to stiff bondholders, they’re going to have a massive fight on their hands.
OK, that’s it. I’ve said my piece. Now, let’s wait patiently for them to deliver their plans. Then let battle commence!
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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