Imagine that the chairman of your bank is arrested on “drug supply investigations”. Following the arrest, revelations emerge that the chairman, who also happens to be a church minister, quit as a councilor in one town two years ago after “inappropriate but not illegal material” (read into that what you will) was found on his computer. It may sound incredible – or not – but this is what Co-Operative Bank in the United Kingdom endured in the summer of 2013.
In a pun-filled article on the BBC’s online news portal headlined: “How did Flowers bloom at Co-op Bank”, it was revealed that Reverend Paul Flowers, the chairman of the Co-Operative Bank and vice chairman of the Co-operative group was caught on camera trying to buy cocaine and crystal meth from the front of a car in Leeds. The bigger question posed both by the article and the public in general was how the financial regulators ever allowed Flowers to chair the bank in the first place. “To state the bloomin’ obvious”, the article continues, “regulators at the defunct Financial Services Authority (FSA) and its successor body, the Prudential Regulation Authority, have a few questions to answer, about why they gave the thumbs up to Mr. Flowers. “
Flowers was a political animal in the co-operative movement and had pulled himself up by the bootstraps through rank and file to a senior position which helped him get the appointment to the movement’s flagship investment, the Co-operative bank. He had absolutely no banking experience as he chaired the board of a bank with £50 bn of assets (Kshs 7 trillion), £36 bn of customer deposits (Kshs 5 trillion) and 4.7 million customers. The same BBC article notes that his appointment as chairman came more than two years after the worst British (and global) banking crisis in 2008 which caused the regulator – the FSA – to pledge that they would take extra care to make sure that those appointed to chair banks had the appropriate skills and knowledge. But apparently Flowers did have an FSA interview when he became chairman in 2010 and he admitted to the FSA that he did not have the applicable experience in the financial services industry. However the FSA felt that Co-op Bank would compensate for this shortcoming by appointing two deputy chairmen who were also senior independent directors, which the bank did. The FSA apparently believed that Flowers’ political skills would be useful in managing the large and unwieldy 22-member Co-op Bank board.
And really that is where the gravity of the matter lies. Board members are recruited primarily for the skills that they bring to the table, which skills should bring diversity and widespread knowledge to the complex oversight and monitoring that a bank board is required to undertake. Co-op Bank satisfied itself (and the FSA) that it had sufficient independent directors with the requisite financial knowledge to provide the balance required on a board managing a significant amount of financial assets and liabilities. The fact that Flowers was not a financial wizard gave the media and the public enough ammunition to put the bank to task as to its choice of chairman. But as anyone who has chaired a board will tell you, managing internal and external stakeholders as well as the various interests represented on a board is a skill that requires political acumen and an unlimited amount of emotional intelligence.
The bigger governance issue that the scandal brought out was how a small group of powerful co-op movement political activists were allowed to control the commercial aspects of the movement. While the group publicly stated that it was looking to review this governance hiccup, it will be much easier said than done.
The scandal only exacerbated the bank’s problems following revelations earlier in the year that the bank required a £1.5 billion (Kshs 210 bn) capital injection following a merger with Britannia Building Society in 2009. Following the merger, Co-op Bank had to absorb losses on commercial property loans made by Britannia as well as write off an expensive IT project at the bank, both of which led to Co-op seeking a rescue agreement with creditors. The rescue by the bank’s creditors saw 70% of the bank’s equity move to its bondholders and an overhaul of management.
Several investigations have subsequently been launched into the operations of the bank including senior management members, and Flowers himself, appearing before a Treasury select committee in November 2013. The chairman of the Treasury Committee, Andrew Tyrie said that the regulator’s decision to put a “financial illiterate” in charge of its board was a “negligent decision, a very poor decision”. But the problems within the bank were more deep-seated than poor choice of a chairman. It had a moribund IT system and an IT system – described by the Telegraph newspaper – as one that could barely run a corner shop let alone a bank with nearly £50 bn of assets.
Flowers’ mistake was in getting caught with his pants down (figuratively of course). You cannot be a high profile executive of a high profile bank and expect that your nefarious predilections will not bring you into serious disrepute if ever exposed. Key lesson for Flowers: the higher your profile, the deeper the grave where your secrets have to be buried. Key lesson for the Co-operative movement in the UK: You can’t mix politics with business as the two are diametrically opposed. The bank’s board was quite likely populated with the co-operative movements’ senior membership rather than qualified and well-rounded individuals who brought knowledge diversity on the table, hence the need for Flowers’ skills in controlling the rabble that was likely to be a typical board meeting. The Co-op Bank debacle provides interesting food for thought for many of our own board dynamics in East Africa.