CO-OPERATIVES

FINANCIAL TIMES SPECIAL REPORT | Tuesday July 3 2012

& Employee-Owned Businesses

www.ft.com/reports/cooperatives-2012 | twitter.com/ftreports

In accord with spirit of the age

The business model offers an alternative form of capitalism, writes Brian Groom
s the world looks for more stable ways to make a living after the financial crash, interest in co-operatives, employeeowned businesses, mutual organisations and other diverse forms of ownership is growing not least in the UK, where the Rochdale Pioneers created the worlds first successful retail co-op in 1844. Co-operatives employ 224,000 and their annual turnover has grown by 19.5 per cent in the past three years to 35.6bn, at a time when the countrys economic output has shrunk by 1.7 per cent in real terms, according to Co-operatives UK, the trade body. The coalition government is promoting mutuals organisations owned by their employees or customers particularly as a vehicle to deliver public services. Now Nick Clegg, deputy prime minister, wants the whole of Britain to become more of a John Lewis economy, with the idea of employees owning their company in its bloodstream. Norman Lamb, the Liberal Democrat employee relations minister, says: It accords with the spirit of the age, that there is this growing sense of anxiety

Inside this issue

Historical overview The Co-operative movement, founded by pioneers aiming to improve the lot of poor workers, needs to rediscover its roots Page 2 Share schemes The HMRC application process is proving to be a big disincentive to businesses Page 2 Healthcare Aim-listed company Circle squares up to the challenge of public sector services Page 2 Different approaches There are many variations on the co-owned, and one size does not fit all Page 3 Infinity foods The southcoast based food retailer has been driven by an ethical model for more than 40 years Page 3 John Lewis Partnership The owner of Waitrose is often cited as a perfect role model but its executive chairman says staff ownership does not guarantee success Page 4 Social enterprise The Big Society gets to grips with finance Page 4 Expansion How likely is the coalition government to realise its hopes of raising levels of employee ownership? Page 4

about irresponsible capitalism, and here we have businesses that are successful but also tend to be run responsibly, without excessive gaps between the earnings of the people at the top and those on the shop floor. Taking diverse forms of ownership into the mainstream will mean overcoming scepticism and formidable practical barriers. Co-ops and employee-owned businesses together account for less than 4 per cent of gross domestic product. The question is whether these can ever be more than niches alongside the shareholder-owned PLC. Mutually owned organisations, which include co-ops, thrived a century ago, particularly in food retailing and finance, but have had a tougher time since the second world war, reaching their nadir when 10 of the largest building societies were demutualised in the 1990s and ended up taken over or in state ownership. But a resurgence is under way. The mutual sector which includes National Health Service foundation hospitals, housing associations and mutual insurers has seen its revenues grow from 84bn in 2008 to 112bn last year, according to Mutuo, the umbrella body. The UK now has 5,900 co-operative enterprises, compared with 4,800 three years ago. They are owned and run by their members, who can be customers, employees or groups of

Mixed barrel: the Wine Society, founded in 1874, exists not to maximise profits but to provide members with high-quality, low-cost wine

businesses. They range from the mighty Co-operative Group, with 15bn turnover in food retailing, travel, pharmacy, banking and funeral care, to small co-ops of freelancers, taxi drivers, pubs and football clubs. Growth areas include renewable energy co-operatives and 242 co-operative schools owned by communities, teachers, parents and pupils. Ed Mayo, secretary-general of Co-operatives UK, comments: Ten or 15 years ago, particularly in the retail sector, you had a dusty, fusty brand and patchy service, dominated by a mosaic of local co-operatives

that were fantastic for democracy but not so effective for business. Since then, there has been a process of mergers between traditional co-ops that has reversed the decline. Co-ops share of food retail trade, for example, had shrunk over several decades from 30 per cent to 4 per cent, but has grown to 8 per cent in the past 10 years, notably through the Co-operative Groups takeover of Somerfield, the supermarket chain. Their resilience since the financial crisis is partly due to their strength in recessionresistant sectors such as food,

agriculture and pharmacy. There is also a less definable trust dividend or ethical halo, Mr Mayo says, as 79 per cent of shoppers expect co-ops to act fairly, compared with 18 per cent for business at large. Co-ops and employee-owned models are less suited to companies needing a lot of capital, such as infrastructure specialists, since they have limited access to external funds. In the past co-ops have been accused of poor governance and sleepy management, though Mr Mayo says these are now myths rather than reality. They tend to be steady busi-

ness that grow organically and are resilient: 98 per cent of coops are still in operation after three years compared with 65 per cent of all businesses. Often they have different objectives from PLCs. The Wine Society, for example, founded in 1874, exists not to maximise profits but to provide members with high-quality, low-cost wine. Mr Mayo thinks the sector can keep growing: For the co-operative sector to maintain its growth trajectory over the next three years would make co-operative businesses the fastest
Continued on Page 2

Mutual minnows at risk of losing out to big PLC fish

Public sector Sarah Neville asks if the private sector will prevail in the fight for contracts
Staff at Anglian Community Enterprise (ACE), Clacton-on-Sea, Essex, are revelling in new-found freedom. In 2011 they made the leap from the secure world of the National Health Service to life as a not-for-profit, public sector mutual, selling community healthcare services back to their former employer, the local primary care trust. The past 18 months have been a success, but it has not all been plain sailing. Managers have had to adapt to a flatter hierarchy in which all workers have a voice and staff have had to develop their competitive edge to win contracts. Ministers are convinced that, in an era of austerity, ACE and other mutuals offer a way of raising quality and efficiency in public services without the political perils of outsourcing to the private sector. But unions and others worry that the approach is little more than a Trojan horse that will result in outright privatisation, as the mutuals lose contracts to commercial rivals. The employee-ownership model for delivering public services has been growing since the 1990s. When the coalition government took office in 2010 it sought to introduce fresh impetus with a commitment to give public sector workers a right to bid to take over the services they delivered. Julian Le Grand, government-appointed head of the Mutuals Taskforce, and the Richard Titmuss professor of social policy at the London School of Economics, has coined the designations knights and knaves to connote those who are motivated by altruistic professionalism versus those whose primary driver is self-interest. Prof Le Grand believes investment-ready and then scale up and grow, it said. Mr Maude envisages a range of models developing, including joint ventures, in which a mutual brings in a partner either from the private, or the social enterprise or voluntary sector. He has cited as an example MyCSP, the organisation that delivers the public sector pension scheme, which earlier this year became the first mutual to spin out of central government. It is a three-way joint venture with ownership split between staff, the government and the private sector. But the PCS, the civil service union, protests it is a model imposed from above on an unwilling workforce. Along with Unison, which represents health workers, it believes that mutualisation in the public services may be simply a back door to privatisation. Services may be fragmented and accountability lost, the unions fear. Some observers are concerned ministers are mandating which models are best, rather than letting the market make that decision. Dale Bassett, of Reform, a pro-market think-tank, says: Yes, they can work and it is clearly desirable to increase how much public sector staff feel invested in what they are doing but the government is in danger of working against the market it is trying to create by putting so much emphasis on mutuals rather than allowing different models to compete with each other to provide best value for money. At ACE, however, Lynne Woodcock, managing director, believes its mutual status has incontestably empowered staff. She recounts a recent visit to a team working with special needs children. She says its members had: historically been rather negative, but they collectively said they felt they had more power in the organisation to unblock [obstacles]. I came away thinking Blimey, this is really starting to happen now.

Service message: unions fear backdoor privatisation

Getty

mutuals offer a blend of the two approaches. He cites lower staff sickness rates in mutuals absences have halved at ACE since it started generally higher productivity and, on average, higher wages. In a report published in June he noted that since 2010 the number of public service mutuals had risen from nine to at least 58, with some 40 in the pipeline. But he acknowledged the difficulties that stand in the way of meeting the governments aspiration that 1m staff 15 per cent of the public sector workforce will be employed in mutuals by 2015. These include inexperienced commissioners and risk-averse senior managers, who impede mutualisation. Existing mutuals, he warned, often operate on a playing field that is far from level when they seek to compete for contracts, with bidding requirements sometimes skewed in favour of large corporate organisations. The issue came to the fore when Central Surrey Health, a mutual established in 2006, lost out on a contract to deliver community services to Assura Medical, since renamed Virgin Care. Interviewed by

the FT last year, Francis Maude, Cabinet Office minister, said the government had learnt a lot from that tender process. When the public sector commissioned services, the contracts tended to be too big which militates in favour of big private sector organisations, which have a strong balance sheet and which have working capital, which make it much more difficult for social enterprises who may have a

Hospital trusts may be even more formidable opponents in the tender process
very thin balance sheet and wont have assets they can borrow against, he said. In fact, although some fear it is the private sector that will benefit if mutuals lose out on tenders, foundation trust hospitals may be even more formidable opponents. The department of health has boosted its Social Enterprise Investment Fund, launched five years ago, by 19m, with a view to helping mutuals become

FINANCIAL TIMES TUESDAY JULY 3 2012

Co-operatives & Employee-Owned Businesses

Red tape deters companies from giving incentives

Share schemes There is confusion about plans on offer, says Elaine Moore
Helping workers to buy a stake in the company they work for has been credited with boosting staff loyalty, but red tape and out-of-date rules have limited their appeal to employers and employees, tax experts say. Though many UK companies, including BT, Tesco, National Grid and Aviva, offer some form of share plan, the number of schemes being opened each year is small and critics say the incentives for employee schemes are inadequate. When the Office of Tax Simplification investigated the application process companies must go through to set up an employee share scheme, it found the approval process with HM Revenue & Customs (HMRC) caused multiple problems. John Whiting, tax director for the Office of Tax Simplification, says that although the schemes were of real benefit to employers, which saw greater commitment from employees, the current system was putting companies off with heavy paperwork and lengthy delays. We spent a lot of time looking at the benefits of schemes, asking if they are worth the tax benefits on offer and the evidence we received was yes, they are, he explains. Its about more than motivation, its identity. If employees have shares in their company they may not be glued to the share price, but they will identify more closely with the company and its fortunes, he adds. The Office of Tax Simplification has suggested that rather than make companies wait for HMRC to approve schemes, they should all be self-certified, which would cut the time required to set up a share plan. It has also recommended that the Company Share Option Plan (CSOP), a type of employee share scheme falling out of favour, should be phased out and merged with the newer Enterprise Management Incentives (EMIs), aimed at small, fast-growing companies and broadly similar to the CSOP. Merging the two would reduce confusion for employers. There are currently four approved share schemes in the UK that offer tax advantages. As well as EMIs and CSOP, there are Share Incentive Plans (SIP) and Save as you Earn (SAYE) schemes. SIPs and SAYE plans are suited to all employees, and have a lower bar for the amount that can be saved each year, a point that IFS ProShare, the industry body for the employee share ownership in the UK, has argued against. It wants the amounts to be raised in order to allow employees to put more in the schemes. But the government has opted to leave the maximum limits for these schemes alone and has instead focused on boosting engagement in the newer EMIs. Victoria Scott at RM2 Partnership, which advises companies on EMIs, says that increasing individual limits from 120,000 to 250,000 has increased their appeal, but many companies were hoping the overall limit would also be raised from its current sum of 3m. Most interest in the schemes is coming from information a great way to attract and retain the best employees. Some advisers have warned employees of the potential risk of investing in the same organisation that pays their wages. The danger was all too apparent when Northern Rock was nationalised, leaving staff in the share ownership scheme with shares that had become almost worthless at the same time as facing possible job losses. But the rewards can be great. In June, more than 17,000 Asda workers who participated in the companys SAYE scheme were told they would be dividing close to 51m between them. SAYE schemes allow workers to save between 5 and 250 each month, which they can then use to buy shares at a discounted price when the scheme matures. If the companys share price has fallen, they can instead take back the money they have saved plus a tax-free bonus in lieu of interest. In Asdas case, staff were able to buy shares in parent company Walmart after three years, so benefiting from the rise in the US companys share price from 27.45 to 42.72 over the period. On average, each employee who took part will receive more than 2,800 when the scheme matures, but employees who saved the maximum amount will receive 14,000. Many people dont realise these employee share schemes are widely available to the majority of private-sector UK workers, says IFS ProShare. Those companies that do not offer approved share schemes may instead have unapproved plans, which do not have tax advantages but give senior executives rewards in the form of shares. The Office of Tax Simplification plans to publish a report into the way these schemes work. We want to look at the most common arrangements, says Mr Whiting. Share-based rewards are prevalent for senior management, but we want to work out exactly what is being used and why.

In accord with the spirit of the age

Continued from Page 1

Employees may not be glued to the share price but they will identify more closely with their company and its fortunes
technology and recruitment companies at present, says Ms Scott. They are great for start-up companies, particularly in the current climate, she says. Companies for whom cash flow is an issue can subsidise wages with a percentage of equity in the company, which is

Circle squares up to challenge of public service

Healthcare Gill Plimmer looks behind the scenes at an outsourced hospital
This year, a turning point was reached in the National Health Service. Circle, an Aim-listed healthcare company, took over the running of an NHS hospital at Hinchingbrooke in Cambridgeshire, the first time a state-funded general hospital has been outsourced to the private sector. Transforming an underperforming NHS hospital that was failing to attract patients is no easy task, not least when the hospital has become a lightning rod for opposition to rising private sector involvement in the state-owned health service. But patients, staff and management are almost unanimous that, in just five months, substantial changes have taken place. Circle says the Department of Healths own performance data show that Hinchingbrookes accident and emergency department has gone from being one of the worst in the country to one of the best. City and Whitehall control more than 90 per cent of the nations assets. If you look at the most vibrant parts of our economy accountancy, management consultancies and hedge funds, all these people have opportunities to become partners, he says. I think the fruits of society need to be shared in a democratic way. Staff are divided into four layers, from associate partners, which include kitchen staff and cleaners, to executive partners, such as the head of hospital food services and medics. Staff are assessed in 36-degree performance reviews at the end of each year, with marks given according to Circles doctrine, which includes criteria such as the extent to which the employee puts patients first and the ability to work with colleagues. Shares are allocated according to the score, as well as rank. Despite this, Circle has its critics. Unlike the John Lewis department store group, where the entire company is owned by employees, at Circle staff own just 49.9 per cent of the company. The remaining 50.1 per cent is owned by investors, including some of the Conservative partys biggest donors, Paul Ruddocks Lansdowne Partners, Crispin Odeys Odey Asset Management, and Michael Platts BlueCrest Capital Management. Mr Parsa says this is necessary for a company that has built itself from scratch since 2004 and has 4,000 employees. The group already operates a day-surgery treatment centre for the NHS in Nottingham, as well as private hand and eye surgery clinics in Stratfordupon-Avon and Windsor. It also built and opened the privately funded Bath hospital last year, while another is due to open in Reading this August. The company has other expansion plans, which is one reason for the 47.5m recently raised in a stock market placing. But the bigger question may be whether the company can survive financially. Hinchingbrooke is saddled with 40m of debt, while Circle has racked up operating losses of more than 110m. Turning the lossmaking Hinchingbrooke round requires boosting income by increasing the number of patients, as well as substantial cost savings. Although the losses at Hinchingbrooke are capped at 7m, Circle can take the first 2m of profit, though this could be some way off. Circle Holdings, the Aimlisted vehicle, is lending money to Circle Health, the operational part of the organisation, at interest rates of 7 per cent. The loan is expected to be paid off before the shares issue dividends. Nevertheless, Mr Parsa is dismissive of the focus on debt. You call it debt, I call it investment. Have you checked the financial affairs of Facebook?
Ali Parsa: workers should be entitled to more of the profits

Glory days: the building in Toad Lane, where the original founders of the Rochdale society opened up shop, is now a museum

We empowered people to feel that they could conquer the world and run the hospital
Meanwhile, its overall performance is ranked at number six out of 46 hospitals in the Midlands and east England, quite an achievement for a hospital previously labelled a basket case by Earl Howe, health minister. Ali Parsa, the former Goldman Sachs banker who is the chief executive of Circle, questions whether the improvements could have been possible without the companys mutual structure, which incentivises staff through a share-owning scheme. Without this model of ownership we couldnt do what we are doing, he says. We brought in employee engagement and entrepreneurial drive. We empowered people to feel they could conquer the world and run the hospital. Direct nursing time with patients has risen from 51 per cent last year to 62 per cent now, while the hospital has met cancer targets for the fourth month running for the first time in four years, he says all as a result of the companys strategy of giving clinicians more control. Companies do need capital, but you also need employee engagement. When it comes to the masses, we dont tend to share profits. I think we should. While more an investment banker than a Marxist, Mr Parsa nevertheless says it is wrong that two single square miles the

Pioneers aimed to improve the world for poor workers

it became the model, says Gillian Lonergan, archivist at the Co-operative College. They had a big aim: to change the world. The guiding principles that the 28 weavers, shoemakers and joiners devised remain at the heart of the international cooperative movement today. These include reinvesting capital, distributing profits to members and helping other co-operatives. The building at 31 Toad Lane, on the main road from the town centre, was a disused wool warehouse. Dr Dunlop, the buildings owner, rented it out because he knew and trusted one of the Pioneers, and he had done so even after other landlords turned them away. No wholesalers in the town would trade with them, however, hoping to force them out of business. The Pioneers, who all had day jobs, had to push wheelbarrows between the town and Manchester, 14km away. In 1863, they combined with 300 societies to form the Co-operative Wholesale Society in Manchester, which enabled them to pool their buying power. Within five years, they had 1,000 members, including women, who were not allowed to own property or vote in elections at that time. They were helped in the promotion of their cause by a financial scandal of a type that is common today. A philanthropist, who had set up the Rochdale Savings Group to help poor people save money, died and was found to have kept two sets of books: the money was gone. Others saw the cooperative as a safer bet. In 1867 the Society built the New Pioneer, a large department store and head office, also on Toad Lane. Ms Lonergan, the archivist, calls it a big moment. In those days, working class people did not own property, even their house. So it was a huge achievement and a symbol to the whole town. The original store, which had an upstairs meeting room where classes were taught, is now a museum, and it became a tourist attraction as early as 1862. People from across Europe visited and took the ideas back home with them. By 1871 there were visitors from as far away as Argentina and Japan. The movement grew, expanding to farms, factories and even tea plantations overseas. In keeping with the self-help philosophy, an insurer was set up to look after Co-op property. to Andrew Regan, an entrepreneur. In 1997 he made a 1.2bn bid for the group but members resisted. That became a wake-up call. As the building societies in the 1980s were slowly taken over, the movement began to regroup. A wave of mergers, culminating in the 2007 combination of the Co-operative Group, the descendent of the Pioneers, and the United Co-ops of Yorkshire, brought 80 per cent of the sector together. And there is still room for development. Ed Mayo, secretary-general of Co-operatives UK, points out that 20 per cent of the EU banking system is cooperative. However, the UK has not produced the likes of Mondragon, a Basque co-operative with international interests in banking, retail and manufacturing, that is one of Spains largest companies. Mr Mayo says that continental-style rules to allow workers to use redundancy payments to buy failing businesses and a ban on demutualisation would help the movement further. The survival rate for co-operatives is significantly better than for business at large, he says. However, start-up and growth rates could be improved. The Co-operative Group and the John Lewis Partnership alone account for almost two-thirds of the sectors turnover. Jim Pettipher, deputy chief executive of Co-operative Futures, which advises co-ops, says the movement needs to return to the pioneering spirit of its forefathers. He adds: The sector represents 2 per cent of gross domestic product. As a return on capital over 150 years that is pretty poor. We need more entrepreneurial fire in the belly.

Historical overview The co-operative movement needs to rediscover its roots, says Andrew Bounds

tanding on the flagstone floor of 31 Toad Lane, Rochdale, looking through its dimpled glass bay windows, one is transported back to December 21 1844. It was on that cold winter night, at 8pm, that a queue formed around the cobbled streets to witness the opening of a revolution in retail the Rochdale Society of Equitable Pioneers. Samuel Ashworth, a 19-yearold weaver, stood behind a counter that consisted of a plank and two barrels, and served customers with just four staples flour, butter, sugar and oatmeal by candlelight. The gas company had refused to connect the premises for fear of non-payment. These who stood in the queue were not customers but members, subscribing tuppence a week to save the 1 that would qualify them for dividends from the society. The Pioneers wanted to free people from the money-grabbing habits of rent-seeking merchants, who adulterated flour with chalk and who cheated their poor customers on the weighing scales. Some merchants also offered victimclients payment in weekly arrears at usurious interest rates, which meant many families were always in debt. It was not the first co-op, but

growing business model in the UK. With regard to the public sector, Peter Hunt, Mutuos chief executive, has warned that the government will fail in its aim for 1m staff to be delivering public services through employeeowned mutuals by 2015, unless they are given greater support. The government-appointed Mutuals Taskforce says the number of public sector mutuals has increased from nine to at least 58 since 2010, with some 40 projects in the pipeline. But Julian Le Grand, a professor of social policy at the London School of Economics who led the taskforce, has said there is a long way to go, if the more ambitious aspirations of government for mutualisation across public services are to be met. Mutuals often compete for service contracts on a playing field skewed in favour of large corporations, he said. The report called for the government to press for temporary exclusion of new mutuals from European Union procurement rules, and urged the Treasury to explore ways to encourage investment through the tax system. In seeking to promote wider employee ownership, Mr Clegg has leaned heavily on the example of the John Lewis Partnership, the countrys best-known employee-owned business. But even Charlie Mayfield, JLPs executive chairman, worries that sometimes too literal an interpretation is placed on this. Our model isnt . . . the solution to all the different issues that some organisations are facing, Mr Mayfield says. There are more than 120 companies with significant employee ownership, according to the Employee Ownership Association (EOA). These include Tullis Russell, a paper and board manufacturer, and School Trends, a school uniform provider. Some are co-ops, where members have an equal say and share of the profits, while others have more varied structures. The Treasury is reviewing tax incentives, including ideas such as capital gains tax breaks for entrepreneurs who transfer businesses to their staff and changes to the rules on trusts. Graeme Nuttall, of Field Fisher Waterhouse, a law firm, has conducted a governmentcommissioned review of the barriers. The review is set to recommend a new legal model for employee-owned companies and flesh out Mr Cleggs controversial idea of a universal right for staff to request shares in their company. Some say it is risky for people to invest too much of their savings in their employer, as staff at Enron, Lehman Brothers, Bear Stearns and Northern Rock found out. That can be overcome if the shares are in trust, as at John Lewis, but tax advantages of employee benefit trusts were removed in 2003 after abuses by executives at some companies. Iain Hasdell, chief executive of the EOA, says that, given political will and support by entrepreneurs, the sector can grow rapidly as in the US. Others are more cautious, but William Davies, academic director of Oxford universitys Centre for Mutual and Employeeowned Business, says: The longer the current crisis goes on, the more open people become to alternatives.

Contributors
Brian Groom UK Business and Employment Editor Andrew Bounds Northern Correspondent and Enterprise Editor Sarah Neville Public Policy Editor Gill Plimmer Reporter Elaine Moore Reporter Paul Gould Contributor Adam Jezard Commissioning Editor Steven Bird Designer John Wellings Picture Editor For advertising details, contact: Robert Grange Phone +44 (0)20 7873 4418 Fax +44 (0)20 7873 4006 Email: robert.grange@ft.com or your usual representative All FT Reports are available on FT.com. Go to: www.ft.com/reports

The survival rate for co-operatives is significantly better than business at large
Ed Mayo, secretary-general, Co-operatives UK
This service expanded and a bank was added. Building societies were later formed, which pooled savings to lend to members. By the 1950s you could buy Co-op football boots endorsed by Sir Stanley Matthews and Federation bicycles. Every town and many villages in the UK had its co-op and the movement commanded as much as 30 per cent of retail spending. But complacency set in. Larger supermarkets, such J Sainsbury and Tesco, grew and the department stores suffered from a lack investment in comparison. In 1994 CWS sold its factories

FINANCIAL TIMES TUESDAY JULY 3 2012

Co-operatives & Employee-Owned Businesses

Movement still thrives in the internet age

Different approaches Andrew Bounds discovers there are many variations on the co-owned theme
Co-operative Group Tougher times ahead
The Co-operative Group, after five years of improvement, when it more than doubled its profit margin and raised turnover 80 per cent, is starting to find the going a bit tougher. The Manchester-based business, descended from the worlds first successful consumer co-operative founded in Rochdale in 1844, is the standard bearer of the movement. It prides itself on its ethics, recently retaining its platinum award from Business in the Community, the charity, and earning the Sustainable Bank of the Year award from the Financial Times. But a TV documentary exposed some poor practices in its profitable Funeralcare business, including a manager instructing staff to sell only more expensive packages. In response, the group said: We are . . . shocked and disappointed by the information provided to us by this programme, which goes against everything we stand for. We do not believe that the instances shown in the programme are representative of our many caring staff. We have, however, launched an immediate investigation . . . and will take any action necessary to ensure our high standards and our policy of enabling clients to make informed choices is maintained. The group is attempting to shake off a reputation for failing to keep up with competitors quality and service, and can ill-afford one for profiteering. Sales slipped in 2011 to 12.3bn from 12.4bn in 2010. Profit before tax and member payments the equivalent of pre-tax profit for a listed company fell 6 per cent to 373m. The profit decline was driven by a 21 per cent drop in underlying profits at the supermarket arm, which Mr Marks blamed on pricing pressure and investment in the business. It has refitted 3,000 food stores, opened 10 logistics depots, and invested heavily in IT systems at its finance arm, without disruptions of the type recently experienced by RBS. All staff are being moved on to the same pay and conditions structure, while Britannia and CFS its retail banking arms have a new combined system. These efficiency savings have led to 300 job cuts at the Manchester head office, testing staff morale. Mr Marks, who was appointed in 2006, when United Co-operatives merged with the Co-op to create the supermutual, has said the group must expand to get the scale it needs to compete. It can take the longerterm view because it is not prey to daily share price movements. Mr Marks points out that the Cooperative was a pioneer in UK supermarkets. In the 1970s, it had 25 per cent market share. However, it lacked scale, being split into hundreds of local societies, and was outstripped by rising competitors such as Tesco and J Sainsbury. He has attempted to recreate that scale through mergers while adopting a harder-nosed business approach. Some analysts believe it is too late, although the Clive Black, retail analyst at Shore Capital, says it was the soft underbelly of retailing. The group bought Somerfield, the retail chain, in 2008 for 1.6bn, and merged with Britannia building society, the second largest, in 2009. Now, its bid to more than double the size of its bank by buying 630 branches from Lloyds a move that could be agreed this week is testing its management and financial structure to the limit. Unable to raise equity and reluctant to sell shares to members, who join for 1, it relies on borrowing and profits to fund acquisitions. Regulatory issues could mean that the Financial Services Authority might insist the Co-op holds far more more cash to meet capital adequacy ratios, but Mr Marks was sounding more positive last week that a deal would go ahead. The Co-op says its governance structure is robust. The main board, which holds executives to account and sets strategy, is composed entirely of elected members, while it has subsidiary boards, which hold monthly meetings, for its three divisions the bank, supermarkets and specialist businesses. It also has the option of appointing up to three outside directors to the main board. Mr Marks says the model works: We have gone through the worst financial crisis in living memory, where most big banks run by bankers came a cropper and we didnt. The Co-op also aims to become the biggest provider of consumer legal services, which will include will-writing and conveyancing services.

hile John Lewis, the upmarket department store, is the image of a co-operative that politicians like to identify with, there are many others. Suma, for example, is a wholesaler for wholefoods and health products based in Elland, West Yorkshire and the countrys fourth-biggest workerowned business. John Lewis has a full structure of executive management we do not, says Bob Cannell, human resources member. We dont have a chief executive. Big jobs are split into teams of people. Decisions are made at the quarterly meeting of all 127 members. At Suma, everyone from the warehouse staff to the buying team earns 27,000 a year. Mr Cannell adds: The guys in the warehouse earn almost double the local wage while the finance teams earn a lot less. People said that we wouldnt keep commodity buyers but they like it here. There is a good pension, job security and hours are flexible Peter Teleha, the general secretary, can get to every Blackburn Rovers game. He works in credit control two days a week, drives a forklift on Thursdays and catches up on paperwork on Fridays. Everyone has stints in manual and office work. Theres no textbook. You cant go to Waterstones and buy a book on how to manage a co-operative, says Mr Cannell, a board member of umbrella group Co-operatives UK. To illustrate this point, finance partner Matt Pinnell wanders into the caf where lunch (vegetarian only), fresh bread and other snacks are available free. He has a folder with the latest accounts in one hand, a cup of tea in the other and is dressed in an orange Everton football shirt and shorts. The books are open to all, he says. So far this year, weve made 300,000 profit on 19m turnover. We are looking at 30m for the year. Our profit margin is 1.6 per cent. He says co-ops are often criticised for failing to maximise profit. But that is because the workers rather than shareholders reap dividends in the form of their pay. Suma aims to increase wages 5 per cent a year and business plans flow from that. Mr Cannell says it has had wage freezes in the past to cope with rough patches. As demand for organic food drops it has looked to export, which accounts for 10 per cent of sales. Fairtrade sales continue to climb and it is now sending Japanese-made soy sauce to China. There are disputes and members have left, said Mr Cannell. For example, it boycotts Nestl products but some members think this is not ethical enough. But he believes the spirit of the hippie commune founded in the 1970s will survive. Its been like that for 35 years and it seems to work. Other employee-owned co-operatives include the Edinburgh Bicycle Co-op, popping up in the centres of most large cities, and fast-growing Dulas, a

Wholesale ownership: employees at Suma in West Yorkshire share in all the tasks as well as the profits at the food company

renewable energy installation business in Wales. People trust Co-ops, says Ed Mayo, secretary-general of Cooperatives UK. The concept remains popular with farmers, with brands including Colmans mustard, Ribena and Birds Eye peas dependent on cooperative growers. However, the traditional retail member-owned co-operatives have chosen different approaches. The mighty Manchester-based Co-operative Group has consolidated 80 per cent of those inspired by the Rochdale Pioneers, who began the movement in 1844. But while all co-ops buy from its central purchasing facility, many remain independent. Areas such as East Anglia, the Midlands and Lincolnshire still have flourishing societies with more than 3.5m members. In 2011, East of England Co-operative recorded its highest pre-tax profits in five years at 11.7m. Midlands Co-operative saw gross sales increase to 7.2m and payments to its 933,000 members increased by 12 per cent. The Midcounties Co-operative increased operating profit by 15 per cent to 20.9m and increased sales 6.7 per cent. Ben Reid, chief executive of Midcounties in Warwick, says it entered markets such as childcare and energy supply that members told them needed greater competition. It now has childcare centres nationwide,

which are booked up as soon as they open. Co-op Energy, which provides electricity and gas to homes and is about to enter the business market, has a simple single tariff without tie-ins or penalty clauses. Any cuts in wholesale prices are passed on immediately, as are rises. And eliminating cut-price offers and marketing allows it to save costs compared with the big six suppliers, says Mr Reid. As it grows it will cut prices as its clout delivers lower prices from wholesalers. Mr Reid says Whichs Big Switch campaign this year, which classed it as the cheapest supplier, had been a big boost. We had hoped to get 25,000 customers in the first year and 25,000 in the second. We got 26,000 in the space of four weeks. We now have 52,000. It has also exceeded targets by sourcing all its electricity from renewable supplies, thanks to deals with wind and solar farms, many co-operatively owned. Ursula Lidbetter, chief executive of the Lincolnshire society, says it is at the heart of the community. It gave 1m to help found Lincoln University in 1992 and runs lossmaking post offices because members want them to stay open. It made 21.6m trading profit on 285.6m revenue in its 150th anniversary year of 2011, giving 3m in dividends to 205,000 members. With a spread of businesses, includ-

ing department stores, food stores, pharmacies, funeral homes and property, she says its closeness to local shoppers helps it fight off competition from the internet and supermarkets. We were formed by local people to provide services in this area. It is a very simple and clear mission. Mr Mayo says political changes will boost co-operatives. The government has promised to consolidate 17 pieces of law governing them. It is a commitment for the UNs 2012 International Year of Co-operative that should put the country back at the forefront of the movement worldwide, he said.

Andrew Bounds

Ethical model has driven food specialist for 41 years

Infinity Foods Paul Gould pays a visit to an eco-driven business where investment and profit are not dirty words
The Brighton enclave known as North Laine is an uplifting antidote to the chain-stores of Britains high streets. You will not find the likes of Asda, KFC or Primark here. Instead, there is a patchwork of quirky independent cafs and shops selling antiques, vintage clothing, cult comic books, handmade jewellery, vegetarian food and even footwear for vegans. Here, on a corner near a guitar specialist and a piercing studio called Punktured, sits Infinity Foods. With its bohemian location, its casually dressed staff and its shelves of organic veg, gluten-free bread and eco-friendly washing-up liquid refills, cynics might be tempted to dismiss Infinity Foods as faddish and unviable, catering to only to sandal-wearing hippies. Although you can see some sandals on Infinitys staff photograph on its website, the cynics would be wrong. The shop has occupied this site since 1973, having expanded from a stall opened a couple of years earlier and, in 2011, it marked the 40th anniversary of its inception. For most of those years since 1979 Infinity Foods has been a workers co-operative, owned and managed entirely by its nearly 100 staff. Its empowering for our members to know that were doing this for us, says Dexter Bailey, who handles public relations and organic certification. It motivates everyone theres a real sense of pride. Apart from increments according to occasionally makes for slow decisionmaking that sometimes feels like death by committee. The shop and nearby caf are Infinity Foods most visible faces, but the bulk of its business is its wholesale operation, launched in the mid-1980s and based at three adjoining warehouses in Portslade, just outside Brighton. Although only half of Infinitys staff work here, but it is a far bigger site than the shop and caf combined and accounts for 80 per cent of turnover, supplying health food stores, restaurants and cafs across southern England. According to Charlie Booth, whose duties include wholesale marketing, turnover grew from 14m in 2010 to 16m in 2011. Even this ethically driven workers co-operative, however, does have a place in its vocabulary for terms such as profit, expansion and investment. It is Infinitys profit that is spread, equitably, among staff, paying them a proper living wage although Mr Booth and his colleagues declined to say how much that was. The expansion of the wholesale operation and Infinitys rising turnover came thanks to an upsurge in sales of organic food from the 1990s onwards, says Scott Muir, whose role includes wholesale sourcing and buying. It was this upsurge in demand, he says, that drove Infinitys investment in packing machines that cost 150,000 each. In many ways, Infinity Foods wholesale site is, as Mr Booth puts it, a normal place of work. There are fork-lift trucks, safety notices at every turn and a busy office juggling orders and invoices. The one thing that distinguishes it from an ordinary warehouse, however, is the selection of fairtrade and organic herbal teas that are available on the warehousemens tea trolley.

Bean encounter: the Brighton caf P Gould

length of service, everyone earns the same basic wage. However, this is incentivised by a variable bonus that makes up 40 per cent of pay. Nor is there is any traditional business hierarchy: staff such as Mr Bailey also stack shelves and work on the checkouts. We, who own the business, are face-to-face with our customers and in touch with their ethical concerns, he says. Those ethical concerns mean that only organic, fairtrade, vegetarian and locally grown products make it on to Infinitys shelves. Better-known brands on display include Ecover washing-up liquid, Clipper tea, Provamel soya milk and Suma tinned foods. There is also a bias against multinational suppliers. Mr Bailey says, for example, that since Green & Blacks was taken over by US conglomerate Kraft, Infinity will gradually stop stocking G&Bs chocolate and instead favour local producer Montezumas. Such decisions are debated by Infinitys annually elected steering committee (usually about 10-strong), but then voted on by all members. This is commendably democratic but, as one staff member says,

FINANCIAL TIMES TUESDAY JULY 3 2012

Co-operatives & Employee-Owned Businesses

Reputation for quality: principles laid down early on in the companys history embodied by the slogan never knowingly undersold are part of the reasons given for its continuing success

Charlie Bibby

Ownership by staff no guarantee of success

JLP Brian Groom looks at the group that inspired Nick Clegg to discuss a John Lewis economy

harlie Mayfield, executive chairman of the John Lewis Partnership, has a delicate message to convey. His pride in the employee-owned retail groups commercial success, and in the interest politicians are showing in it as a talisman for corporate reform, is tempered with caution about how applicable its model can be to others. Our model isnt a panacea, he insists. While people have said some nice things about the partnership, and I am a great advocate for it, it concerns me that we can be painted into a position where it appears that we are terribly smug and have got all the answers. John Spedan Lewis, son of the retailers founder, created a model for a business owned by its staff and managed on democratic principles

that has grown in appeal, as people search for less volatile ways of creating growth after the financial crisis. The fact that it also has a firm hold on the affection of middle-class Britain, through the reputation for reliable quality of its John Lewis department stores and Waitrose supermarket chain, adds to its mystique. It is understandable, then, that politicians such as Nick Clegg, deputy prime minister, should use it as shorthand for the reforms they want to encourage. Spedan Lewis, a visionary who believed staff worked better if they had a stake in their company, transferred his shares in the business into a trust in two phases, in 1929 and 1950. All 81,000 staff, or partners, own the business. Its constitution states that its purpose is to ensure the happiness of all its members, through their worthwhile and satisfying employment in a successful business. It has an executive chairman and is governed under a set of principles, with policy influenced by an elected council representing the partners. Staff receive an annual share of profits according to a ratio, whereby the highest paid member cannot earn

more than 75 times the average wage of a shop floor salesperson. Partners get final-salary pensions and perks, ranging from holiday homes to sailing clubs. There is a weekly Gazette where staff can air concerns, anonymously if they choose, and senior managers are expected to respond. But, says Mr Mayfield: The ownership model on its own doesnt guarantee success, its how you use it. Our business has varied in its performance. Last year, pre-tax profits fell 3.8 per cent to 354m and the staff bonus was worth 14 per cent of annual salaries, down from 18 per cent. It is doing better than many companies in a tough retail climate, however. In the past decade or so Waitrose has doubled in turnover and trebled its profits, while John Lewis has both grown and built a successful online business faster than many competitors. Peter Cox, who wrote a history of the group after retiring from Waitrose in 2003, says the partnership was inward-looking from about 1960 until the late 1990s. JLP has had very sharp management in the past 20 years. Before then, it was liable to coast.

It concerns me that we can be painted into a position where it appears that we are smug and have got all the answers

Accusations thrown at it in the past that the management system can be bureaucratic and that employee ownership holds back expansion and productivity are now a canard, Mr Cox adds. It has very sharp trading teams. An example of critical decision-making, which surprised many inside and outside the business, was its acquisition of Buy-com in 2002 as the foundation of the John Lewis internet trading business then lagging, now massive. Mr Mayfield, a former McKinsey consultant, believes the company benefits from having a close relationship and dialogue with its shareholders, who work in the business and understand it. We have every incentive to build the capacity of our organisation over the long term, which feeds directly into competitive advantage over time. He also believes the lack of an option to sell the business spurs better performance and he denies the suggestion that decision making is slow. Mr Cox says that a crucial reason for the partnerships success is the combination of its ownership structure with the trading principles established by Spedans father, the original

John Lewis, who opened his store in Londons Oxford Street in 1864. These principles are: value, assortment, service, and honesty. Spedan Lewis codified them and added the slogan Never knowingly undersold. Mr Mayfield says the two sets of principles are complementary and create a multiplier effect. For example, their application to the Waitrose supply chain acknowledges that suppliers should have a viable business that they can develop as a result of the relationship. Waitrose now accounts for about 75 per cent of the UKs outdoor reared pigs, Mr Mayfield says, built up over 30 years of working with the same set of suppliers. As a result, we have a better product at a similar price to what other supermarkets are able to source. He adds that the partnership has lots of opportunity in what will be a more difficult market, because customers are looking for genuine value, or quality at the right price. Not only is it strong in online sales, he says, but the commitment of its employee owners will contribute to the personal shopping experience customers will increasingly demand when they do go out to buy.

Chief executives express caution about pace of growth in the sector

Expansion Brian Groom looks at the coalitions hopes of increasing staff participation
Some big claims are being made for employee ownership. When Nick Clegg called in January for the UK to become more of a John Lewis economy, he cited the belief of John Stuart Mill, the 19th century liberal philosopher, that it would help to resolve the standing feud between capital and labour. The deputy prime minister wants to see the idea of employees owning their own company in the bloodstream of the British economy. Those running such companies tend to be supportive but cautious about the pace of expansion. Philip Dilley, group chairman of Arup, the design and engineering consultancy, says: I dont think this is utopia, because its not going to be possible or credible for lots of publicly owned companies to become employee owned. There are opportunities, for example, for some public service organisations to become employee-owned. But it will not suddenly dominate the corporate landscape. The UK has more than 120 companies with significant employee ownership, turning over 26bn a year, according to the Employee Ownership Association. They include not only the John Lewis Partnership but companies such as Scott Bader, a polymer manufacturer, PA Consulting Group, Unipart, the logistics group, Childbase, a childrens nursery group, and Make, the architects. Supporters say such enterprises tend to have higher productivity, greater shareholder company tends to have a relatively shortterm approach to results. Employee-owned companies are, though, only as good as their managements and accountability systems. They can fail like any other enterprise, as seen in the US when United Airlines, once the worlds biggest employee-owned company, filed for bankruptcy in 2002. One danger is people can be doubly at risk if their savings are bound up in their employer. About a quarter of the shares in Lehman Brothers, the failed bank, were staff owned. That can be overcome if shares are in trust, as at John Lewis and Arup, but tax advantages of employee benefit trusts were removed in 2003 after abuses by executives at some companies. William Davies, academic director of Oxford universitys Centre for Mutual and Employee-owned Business, says employee ownership can be especially attractive to medium-sized companies built up by an entrepreneur who wants to retire. A lot of these people dont want to see their company turned into a financial asset to be played with by newcomers and outsiders, he says. It can be hard to achieve. Apart from tax obstacles, bankers and accountants often advise against models they do not understand. Iain Hasdell, chief executive of the Employee Ownership Association, thinks the sector can grow, given political will and support from entrepreneurs. The example is the US, where employee ownership is advancing with the help of federal and state incentives. In the US, more than 10m people work at companies that are majority employee owned, he says. Here, its less than 1m. The US is living proof that Nick Cleggs vision is achievable.

Social Enterprises Big Society comes to grips with finances

Peter Holbrook, chief executive of Social Enterprise UK (SEUK), the representative body, says new laws and funding, and the impetus given by austerity, will help to produce a 50bn sector. What we are creating in 2012 is a more fertile environment and 2013 should be good year for significant change, he says. He admits there has been a delay before government turned rhetoric into reality, while funding cuts from the state have hit hard. There are 62,000 social enterprises in the UK, employing approximately 800,000 people and contributing more than 24bn to the economy. According to Fightback Britain, a 2011 report from SEUK and the Co-operative Bank, these businesses main sources of income are trading with the general public (37 per cent), the public sector (19 per cent) and the private sector (13 per cent). It found that 58 per cent grew in 2010 compared with 28 per cent of private companies, although three times as many (39 per cent) worked in deprived communities. The new Localism and Social Value acts will require public authorities to consider not just price but how much money will be retained in a community and local jobs created when awarding contracts. Big Society Capital, launched in April, will be fully at work. Its mission is to create a new market that of social investment and so make it easier for charities, social enterprises and community groups to access affordable finance. Big Society Capital will have a 600m pot, 400m from unclaimed cash left dormant in bank accounts for more than 15 years and 200m from the largest high street banks, Barclays, Lloyds, HSBC and RBS. Research last year estimated that about 165m of social investments were made in 2010. Big Society Capital has about 79m of funds with more than 50m invested to date. Much of this is matched by others. It has put 1m in the FranchisingWorks Licence Fund, which helps unemployed people buy franchises in Greater Manchester, and 750,000 in the Community Generation Fund, which finances social enterprises in deprived areas. Sir Ronald Cohen, Big Society Capital chairman and the doyen of Britains venture capital industry, says: What weve done for business entrepreneurs, we must now do for social entrepreneurs. We must give them the resources to innovate in the way that we resolve social issues. Many are the same people. Sarah Dunwell sold a successful family catering business to found Create, business-to-business and business-to-consumer enterprise, he said. Mr Holbrook defines a social enterprise as one that has as its primary responsibility a social purpose and it invests at least half its profits in that. He says they employ more people, invest more in local communities and are more resilient during recessions. The rich are also looking to back social enterprise, expecting some return they can reinvest. Social impact bonds, where the state pays businesses that cut bills by, for example, rehabilitating prisoners, are one way to do this. A scheme at Peterborough prison is showing promising results after a year. Investors get paid by the government if the number of reconvictions falls by at least 7.5 per cent. The bigger the drop, the bigger the return, up to a maximum of 13 per cent annually over eight years. The programme is managed by Social Finance, which is responsible for the Social Impact Partnership which has raised 5m from 17 charitable foundations. Social enterprises have called for amendments to be made to the Financial Services bill in the Lords to make competition between them and public limited companies fairer. Mr Holbrook also welcomed a move by Big Society Capital to raise a 15m fund to pay the upfront costs of enterprises that would then be paid by the state for results, such as reducing unemployment. He says: Universities are building social enterprise into the curriculum and graduates are opting to establish social enterprises. Greece and Spain, where austerity has hit public services hard, have seen an explosion in social enterprise, Mr Holbrook says. This is not just a movement in the UK. There is a real appetite to rethink capitalism.

Mutual choice: Arups projects have included the National Aquatics Centre and the National Stadium in Beijing, both above. The company has put its workers shares into a trust

innovation, better employee engagement and loyalty, and more patient investors than public limited companies. In the post-crisis hunt for more diverse forms of ownership, their virtues have come to the fore, but they still account for little more than 2 per cent of gross domestic product. Norman Lamb, employment relations minister, says: There is strong economic evidence and a business case for facilitating an economy with diverse ownership, not just relying on one particular model. We are not claiming this is the model that must replace everything else; we are just saying it must have the space to grow. The Treasury is conducting a six-month review of tax treatment, which will consider ideas such as capital gains tax breaks for entrepreneurs who give businesses to staff, changes to the rules on trusts, and extending the Enterprise Investment Scheme from external investors to staff. The coalition also commissioned Graeme Nuttall of law firm Field Fisher Waterhouse to review the

barriers to wider employee ownership. He is set to recommend a legal model for employee-owned companies, which would be adaptable for different types. In some cases, shares are directly owned by staff; in others they are held in trust; and some are hybrids. There is a fundamental lack of awareness of this concept throughout the business community, Mr

People dont want to see their company turned into a financial asset to be played with by outsiders
Nuttall says. There is a resistance to considering alternative business models and I think this flows from the education process and everyone being steeped in the PLC monoculture. He will also flesh out Mr Cleggs proposal of a universal right for staff to request shares in companies, an idea that provoked

scepticism about how it would apply to a range of public and private businesses. Mr Nuttall sees virtues in allowing staff to put proposals, for example, when a business is about to change hands. Roger Barker, head of corporate govenance at the Institute of Directors, says: I dont think using the language of rights is necessarily appropriate here. I dont see it as some kind of inalienable human right to demand shareholding. The IoD does, however, support efforts to encourage the sector and would like to see the tax system made more neutral between different ownership forms. There is evidence employee ownership makes for a steadier type of company, more resilient to shocks. Research by Cass Business School found that, while employee-owned businesses grew sales more slowly than shareholder businesses in 2005-08, they performed much better when recession hit. They also created more jobs. Mr Dilley at Arup says: We can take a long-term view of things, whereas a

What weve done for business entrepreneurs, we must do for social entrepreneurs
which helps homeless people into work. It turns over more than 1.5m and has added a caf in Manchester to its busy Leeds restaurant, as well as outside catering services. We offer a future to people who want a hand-up, not a handout, Create says. Some 60m should next year be in the hands of community development finance institutions, which fund social enterprises. However, Mr Holbrook cautions that there is a huge degree of scepticism about whether social enterprises can play a role in services, where contracts are so huge they usually go to bigger companies. Several subcontractors in the governments welfare-towork programme have gone under because cash flow seized up as contractors squeezed margins. What we are seeing is massive innovation and growth in

Andrew Bounds