Co-operative Group Limited Annual Report 2014 Strategic report Directors’ report Financial accounts Contents Strategic report 4 A Message from Group Chair – Allan Leighton 5 Headlines 6 Report from Former Group Chair – Ursula Lidbetter 7 Report from Group Chief Executive Officer – Richard Pennycook 9 Report from Transitional Council President – Lesley Reznicek 10 Strategy - Rescue, Rebuild, Renew 11 Key Performance Indicators 12 Finance Review 16 Business Review 16 – Food 17 – Electrical 17 – Funeralcare 18 – General Insurance 19 – Co-operative Legal Services 19 – Estates 19 – Disposals 20 – The Co-operative Bank plc 21 Our People 23 Sustainability Review Directors’ report 31 Executive Biographies 32 Board Biographies 34 Governance Review 47 Principal Risks and Uncertainties 51 Report of the Transitional Risk and Audit Committee 58 Remuneration Report 79 Report of the Transitional Search Committee 80 Other Statutory Disclosures 82 Council’s Annual Statement 84 Independent Auditor’s Report to the Members of Co-operative Group Limited Only Financial accounts 92 Consolidated Income Statement 93 Consolidated Statement of Comprehensive Income 94 Consolidated Balance Sheet 95 Consolidated Statement of Changes in Equity 97 Consolidated Statement of Cash Flows 98 General Accounting Policies 103 Notes to the Financial Statements The Co-operative Group Annual Report 2014 2 Strategic report Directors’ report Financial accounts Strategic report 4 A Message from Group Chair – Allan Leighton 5 Headlines 6 Report from Former Group Chair – Ursula Lidbetter 7 Report from Group Chief Executive – Richard Pennycook 9 Report from Transitional Council President – Lesley Reznicek 10 Strategy - Rescue, Rebuild, Renew 11 Key Performance Indicators 12 Finance Review 16 Business Review 16 – Food 17 – Electrical 17 – Funeralcare 18 – General Insurance 19 – Co-operative Legal Services 19 – Estates 19 – Disposals 20 – The Co-operative Bank Plc 21 Our People 23 Sustainability Review The Co-operative Group Annual Report 2014 3 Strategic report Directors’ report Financial accounts A Message from Group Chair – Allan Leighton Since my childhood, when my father managed Co-op Food stores in Hereford, Nottingham and Daventry, I’ve understood how the Co-operative can play a unique role in the fabric of British society. No other business is held in such affection by the communities it serves. Our job today is to hold on to everything that has served us well in the past and at the same time demonstrate our relevance to the future. It will be a challenge to get this right. But I have joined the Co-operative because I believe we have the vision and the talent to see this recovery through to long-term and sustainable success. I am delighted to be part of the Co-operative Group’s great revival story, which this annual report begins to chart, and look forward to sharing our progress with you in the years ahead. As Chair of the Board, I look forward to working with Lesley Reznicek, our President, and the Council as they develop their new role as a body to represent the views of our members. Allan Leighton Chair, The Co-operative Group The Co-operative Group Annual Report 2014 4 Strategic report Directors’ report Financial accounts Headlines Co-operative Group returned to profitability • Profit for the period of £216m compared with prior year loss of £2,301m Plans in place for three-year rebuild to return all businesses to sustainable growth • Food strategy being delivered with positive like-for-like sales increases and new Member-led strategy for General Insurance business established Repair of the Group’s balance sheet with net debt considerably reduced • Group debt down by 43% to £0.8bn (2013: £1.4bn) following successful sale of Pharmacy and Farms businesses Group continuing to implement far-reaching governance reform • Board strengthened with the appointments of Allan Leighton as Chair and Sir Christopher Kelly as Senior Independent Director Getting on the front foot with our campaigning work • 30,000 Member customers engaged to identify the right cause that fits with our Purpose and which will have both local and national resonance for our Members The Co-operative Group Annual Report 2014 5 Strategic report Directors’ report Financial accounts Report from Former Group Chair – Ursula Lidbetter Suitably qualified independent non-executive directors will comprise a majority of the Board, as well as two members of the Group Executive and three elected from the wider membership, who will also have to pass high standards of professionalism and demonstrate the requisite experience. We have already appointed Sir Christopher Kelly as our Senior Independent Director, who brings valuable experience and insight to the challenges we face. The new constitution gives us a national Members’ Council, replacing the previous seven Regional Boards, with the responsibility to hold the Group Board to account, and to protect and promote our co-operative values. For the first time in our long history all members of the Board will be subject to election or ratification by our mass membership through our new One Member One Vote constitution. At our first AGM under We are at the start of a three-year recovery programme for the new arrangements this May, our Members will also be able to the Co-operative Group that has at its heart our new statement of vote on motions put to the meeting by the Board, the Council or by Purpose: ‘Championing a better way of doing business ordinary Members. for you and your communities’. Everything we are doing – Although no corporate constitution can guarantee business success, from implementing our governance reforms and making business we have greatly reduced the risk of poor decision-making in the improvements, to reducing our costs and controlling our debt – is future and addressed the lack of proper democratic oversight. vital if we are to deliver on that promise. Implementing our governance reforms is still work in progress and In 2014 our Members voted overwhelmingly for a radical overhaul we expect it will take time before our millions of Members fully of our constitution. These changes, essential to our recovery, were understand the opportunities we have created for their involvement our response to the two reports, from Sir Christopher Kelly and in the business. Lord Myners, commissioned by the Group after the crisis year of What we do over the next few years must restore the Co-operative 2013. Both the Kelly Report and the Myners Review pointed clearly Group to its rightful place at the heart of communities up and to the need for us to address structural and cultural failures in our down the UK and revitalise our business for the next and future management and governance. We took these findings on board, as generations. painful as they were to hear, and set to work to reform our ways As this report shows, we have begun that journey, turning the huge of working. loss of 2013 into a modest profit in 2014. Our Rescue phase is At our Annual General Meeting (AGM) in May 2014 we agreed now over and we have created a stable and firm platform upon to make far-reaching changes to the way we will run our Society. which to build. We have a comprehensive plan that we estimate will Collaborating closely with our elected Members, and drawing on take three years to deliver. But we are up and running and we have expertise from the wider co-operative movement, we set about committed and talented colleagues to see it through, led by Richard writing a new Rulebook which was overwhelmingly supported at Pennycook, our Group CEO, and his Executive team. This new team a Special General Meeting of Members held in August 2014 and was instrumental in saving the Group during the crisis of 2013 and approved by the Financial Conduct Authority in the autumn. It was is now beginning the hard work of rebuilding every aspect of the culmination of a great deal of reflection, careful thinking and our business. intensive debate about what had to change to enable the long-term It has been an honour for me to serve as Chair during such a recovery of our Society to begin. Central to our reforms was the need challenging period in the Group’s history. I wish Allan and the new to strengthen the professionalism in the boardroom and to ensure Board directors, the Council and the Group Executive every success that we are truly accountable to our millions of Members. in implementing our Rebuild strategy. I also want to thank our Group I would like to take this opportunity to thank our Board directors colleagues and all our Members and customers for their loyalty. and elected Members for their commitment in seeing through With their continued support we are well positioned for recovery. the reforms and for their dedication in supporting the transitional structures that have been operating since last autumn. In February 2015 we announced the appointment of Allan Leighton as the Group’s first Independent Chair. This new role is one of the highly significant governance changes we have made. Allan brings Ursula Lidbetter the depth and breadth of experience that is essential in overseeing a Former Chair, The Co-operative Group business of our scale and complexity. As Independent Chair, Allan will Note – Ursula Lidbetter served the Society as Chair from November 2013 to 19 February 2015. lead our Board as it challenges and supports our Group Executive to She was therefore Chair throughout the financial period under review. deliver the Rebuild programme. The Co-operative Group Annual Report 2014 6 Strategic report Directors’ report Financial accounts Report from Group Chief Executive Officer – Richard Pennycook Having addressed governance and debt issues we have been able to focus on the details of our Rebuild agenda and give greater attention to a smaller portfolio of five businesses, all of which require investment.