The Co-operative Group Report of the Independent Governance Review Paul Myners 7 May 2014 The Co-operative Group Report of the Independent Governance Review Paul Myners 7 May 2014 4 | The Independent Review of Governance | May 2014 DISCLAIMER The Report has been prepared by Lord Myners who was commissioned by the Board of Co- operative Group Limited (the “Group Board”) to conduct a comprehensive independent review of the governance of Co-operative Group Limited (the “Group”). The Review’s Terms of Reference are set out in Appendix 1 of the Report. The views, findings and recommendations included in this Report are entirely those of Lord Myners and are based on an assessment of the information provided by the Group, the Group Board and others in response to requests for information and during the course of interviews. The Review has not conducted a forensic investigation or an audit of the information made available to it. The Review generally assumed the veracity of information provided. No representation or warranty is provided as to the accuracy of such information. Public information and industry and statistical data are from sources that have been assumed to be accurate without verification. No representation as to the accuracy or completeness of such information is given. Other individuals considering the same information could form a different conclusion. Similarly, the Review might have formed a different assessment had it considered other information. Accordingly, the findings of the Review should not be treated or relied upon as determinative of any fact, nor of the performance of, or compliance with, any legal or regulatory obligation, responsibility or function by any party. The Report is not for the purpose of guiding or influencing the conduct or decisions of any person other than the Group and its members, including any investment or other financial decisions or the decisions of any regulatory or government body. Accordingly, it must not be relied upon for that purpose by any party. In this respect and generally, the Review accepts no legal responsibility or liability for the contents of, or any omissions from, the Report or any actions taken or decisions made by any party as a consequence of the views, findings and proposals set forth in the Report. Any references to or comments on regulatory requirements, standards, or guidance reflect the view of the Review only and should not be relied on for any purpose. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this Report to reflect changes, events or conditions, which occur subsequent to the date of this Report. The Independent Review of Governance | May 2014 | 5 Contents Foreword .............................................................................................................................. 7 Introduction ....................................................................................................................... 10 Chapter 1: Summary of findings and recommendations............................................. 15 Chapter 2: The current governance structure ............................................................ 26 Chapter 3: How the Group’s governance system has evolved ................................... 38 Chapter 4: Weaknesses of the Group’s governance model ....................................... 52 Chapter 5: Proposals for reform ................................................................................. 68 Chapter 6: Proposed implementation plan ................................................................. 92 Chapter 7: Concluding reflections .............................................................................. 97 Appendices ........................................................................................................................ 99 1. Terms of reference .......................................................................... 100 2. Group Board effectiveness analysis ................................................. 102 3. The ownership of organisations ....................................................... 124 4. Distinctive features of the Co-operative Group’s constitution ........... 135 5. Duties of directors of co-operative societies under English law ........ 139 6. Evolution of the Co-operative Group’s governance structure ........... 144 7. The Co-operative Group electoral system ........................................ 149 8. Consultation questions and summary of consultation responses ..... 165 9. Frequently asked questions (FAQs) ................................................. 170 10. Glossary of terms ............................................................................. 179 6 | The Independent Review of Governance | May 2014 Exhibits Exhibit 1 – Independent Governance Review engagement activities ....................................12 Exhibit 2 – TCG Values and Principles .................................................................................14 Exhibit 3 – Current structure of the Co-operative Group .......................................................25 Exhibit 4 – Rules setting out the non-delegable responsibilities of the Group Board .............26 Exhibit 5 – Timetable of elections for Group Board directors under current governance structure ............................................................................................................33 Exhibit 6 – How points are earned by members ...................................................................35 Exhibit 7 – Voting turnout for Area Committee elections .......................................................37 Exhibit 8 – Co-operative retail societies merging with the CRS and CWS (1956-1995) ........39 Exhibit 9 – Co-operative retail societies in the UK (1903-2002) ............................................42 Exhibit 10 – Co-operative societies’ share of total UK retail trade 1900-2000 (%) .................42 Exhibit 11 – Long term market share for UK food retailing ....................................................42 Exhibit 12 – Two classic governance concerns ....................................................................46 Exhibit 13 – The need for financial discipline – a long-standing concern ..............................51 Exhibit 14 – Ownership structure is not enough – success depends on adapting to changing market conditions ..............................................................................................51 Exhibit 15 – Why a well-functioning board is critical ..............................................................53 Exhibit 16 – Peer comparison – NED experience .................................................................55 Exhibit 17 – Why compare the Group Board to large peers? ................................................56 Exhibit 18 – The limits of training in developing the requisite competencies for the Group Board ................................................................................................................57 Exhibit 19 – Peer comparison – Board size and composition................................................60 Exhibit 20 – Contestability of Group Board elections 2012-2013 ..........................................62 Exhibit 21 – Contestability of Regional Board elections 2012-2013 ......................................62 Exhibit 22 – Membership team structure ..............................................................................65 Exhibit 23 – Proposed governance structure ........................................................................69 Exhibit 24 – Professionalising the board ...............................................................................71 Exhibit 25 – Proposed approach to verify affinity of NED candidates with Values and Principles ..........................................................................................................73 Exhibit 26 – Illustrative NMC annual agenda ........................................................................80 Exhibit 27 – Profile of members by point accumulation in 2013 ............................................87 Exhibit 28 – Percentage of members voting by point band in 2013 .......................................88 Exhibit 29 – Transitional arrangements ................................................................................94 The Independent Review of Governance | May 2014 | 7 Foreword When I was a child growing up in Truro, Cornwall, my mother told me that I should always try to spend my pocket money in the Co-op in Kenwyn Street. I asked her why. She told me “Because they are different from the other shops. We own the Co-op. It’s for people like us.” I found this difficult to comprehend given our straitened circumstances, but I have never forgotten the message. I am a strong believer in co-operative ownership, the benefits it can deliver to individuals, the broader community activities it can support and the social goals for which it stands. I fully recognise the enormous strengths of the co-operative movement around the world. Co-operatives are a significant part of the global economy. That is why I care deeply about the future prospects for The Co-operative Group. My aim in carrying out this Review of the Group’s governance has been to develop recommendations that will strengthen its ability to recover from the traumatic shocks it has suffered over the last year and help position it for renewed success. The co-operative ownership model