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Trouble at Co-op Bank raises questions about fitness of the mutual model

IT’S not all fun and games at the Co-op Bank. Just over a month ago, the bank was serious about acquiring 632 branches from Lloyds. Now its debt has been downgraded six notches to junk status, and veteran HSBC banker Niall Booker has been brought in as replacement chief executive after Barry Tootell resigned.

Inquests have begun, and it is only human nature to look for a scapegoat other than the large amount lost on the bank’s new IT system. Management has delved into its hat, and, hey presto, here is the old Britannia Building Society, merged with the Co-op in 2009. It is, we are solemnly told, the bad debts on the Britannia’s commercial property portfolio which are the problem.

But is there more to this than meets the eye? At a time when other UK banks are rebuilding their balance sheets, the Co-op’s has worsened. In 2009, in the depths of the recession, the bank made a profit. Its write-off of bad debt was only £112m compared to the £24bn impairment figure at Lloyds. This comparatively excellent result was claimed to be due to the “cautious approach taken by both heritage businesses”. Now, instead of being described as cautious, Britannia’s portfolio is portrayed as being very risky indeed.

It is hard to see, on the face of it, how a loan portfolio can survive 2009 in good shape and now be seen as a wreck. It does seem as if the Co-op has relatively recently taken a particularly gloomy view of UK economic prospects over the next five years or so. Commercial property values are sensitive to the state of the economy and, on a sufficiently pessimistic view of the next few years, almost every bank in the UK would be in serious trouble. Of course, the official Co-op view of this crisis could be completely correct. Only time will tell.

But the bank’s current predicament does raise the wider issue about the evolutionary fitness, as it were, of the co-operative structure as way of doing business. Co-ops have been with us since at least 1844, when the Rochdale Pioneers were founded, but have never come close to being the dominant species in the corporate environment. For well over a century, the shareholder-based organisation has reigned supreme.

Organisational structures do not spring fully formed into the world. Like almost everything, they evolve over time by a process of natural selection. In principle, any variant or any mutation might be thought to have a chance, however small, of becoming dominant. The weird and wonderful variety of things that have become Top Boy at some point suggests that this is true.

But a recent scientific paper in the august journal Nature on 16 May provides evidence against this idea. Some variants can indeed become successful and survive, but there may be inherent limits on how much fitness they can develop. The co-operative form of organisation may fit this bill.

As published in City Am on Wednesday 29th May 2013

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Co-operation and Competition

Ed Mayo, ex-head of the New Economics Foundation and now of Co-ops UK, has an interesting blog (here) on the importance of co-operation in our economic system rather than competition. This is a really challenging and difficult topic.

Co-operation is extremely important to the successful functioning of the market-oriented economies of the West. But this is not because of co-operation as an organisational structure. The dominant form of corporate structure for over 100 years has been the shareholder-based joint stock company, and not organisations based on co-operative lines. But nevertheless, co-operation between firms is essential.

The most important reason for this is very simple. Complex economic systems contain many linkages between the different component parts. In an evolutionary context, we can think of a competitive relationship between two firms being expressed by a negative connection between them. If one does well, the other is likely to lose out, and its fitness is reduced. In contrast, a co-operative relationship is positive. If one does well, the fitness of the other is increased, and vice versa.

Economic theory focuses exclusively on the competitive links. But these are dominated by the co-oerative ones. The structure of production is the reason why. Most economic activity does not involve the final consumer, the individual. It is business to business. So if a firm learns to produce something more efficiently, or if it innovates successfully, the companies to which it supplies benefit.

More generally, co-operation is needed to agree institutional structures in which economic activity can take place. And it is the basis of most contractual agreements. It is impossible to specify in complete detail most business-to-business contractual relationships – look at the massive difficulties caused by Brownite thinking on this in terms of the relationships between regulators and the regulated in the relevant sectors of the UK economy. A strong element of trust is required.

But all this co-operation, which pervades successful capitalist economies, has nothing to do with the organisational form of companies. It can, and indeed has, shown itself in a system dominated not by co-operative but by joint stock firms.
I have been interested in this for some time, and here is a very technical paper which examines what happens in an evolutionary system when most of the linkages are competitive and not co-operative.

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