Transformation at
The Co-operative Bank

The crisis in co-operative retailing was the forerunner of a similar need for transformation at The Co-operative Bank. The first co-operative financial organisations emerged in Germany with the foundation of the people’s banks and credit unions of the late 19th century.28 Co-operative banking has traditionally focused on the safe keeping of communal surplus financial resources and the provision of borrowing facilities to members at advantageous rates of interest. The consequent emphasis on morality in financial dealings was to prove a valuable asset to The Co-operative Bank when it found itself, in company with many other UK banks, heading into difficulty in the late 1980’s.

Initially, however, The Co-operative Bank was unaffected by the changes which were causing the UK co-operative retail sector so many problems because of the generally conservative image of banking and by government regulation. The bank continued to grow and attained full clearing bank status in 1975, becoming one of only eight clearing banks in the UK. However, in order to become a clearing bank it was mandatory that The Co-operative Bank take on public limited corporation (plc) status. The notion of limited liability for the owners and directors of a company was introduced in the 19th century with the aim of encouraging enterprise by removing the threat of being held liable for all the debts accrued should a venture fail. By insisting that clearing banks are limited liability corporations the law ensures that customers are safeguarded against total loss, should the bank collapse, by holding the bank’s shareholders responsible for at least some level of recompense. This is attractive to shareholders since they can make their investment without risking destitution for life should the bank fail and leave them liable for all its debts – or, at least, those they can afford to pay.

However, for The Co-operative Bank becoming a plc without compromising co-operative principles required a rather unusual set of arrangements whereby the CWS wholly owned the bank and its equity shares. It is through this route that the bank remains independent of the stock market yet fulfils the legal requirement for plc status.

This arrangement also means that The Co-operative Bank and the Co-operative Group are strongly tied to each other, with interlocking and overlapping executive and senior management teams.

During the early 1980’s The Co-operative Bank was a successful, though relatively small, clearing bank. In particular, it was achieving a steady growth in the number of personal account customers using the bank, with the associated spin-off from cross-selling of savings, loans, credit cards, insurance and pensions to these customers. The bank had a reputation for innovation with novel ideas, such as free in-credit banking, interest-bearing cheque accounts and extended hours, proving attractive to potential customers.

However, the 1980’s saw the de-regulation of business spread to the banking sector. In particular, the current account market was opened up to building societies and other financial organisations thereby engendering significantly greater competition for The Co-operative Bank (and all the other banks) in this area. By the start of the next decade this competition was beginning to take its toll on the bank with a trend becoming established in which slightly more current account customers were leaving than joining. The falling off in public awareness of and support for co-operation, as evidenced by the fashion for the privatisation of mutuals and co-operatives, was also felt to undermine the bank’s position in the marketplace. Even the innovativeness of the bank’s products was a difficult advantage to sustain as competitors quickly followed their lead and adopted their ideas.

Terry Thomas, who was Managing Director of The Co-operative Bank at the time, was deeply committed to the values and principles of co-operation and was keen that this moral legacy should remain as a key part of the bank’s strategy. Simon Williams, then Head of Marketing, similarly felt strongly that the bank needed to mount a ‘charm offensive’29 if it was to put itself back into the public consciousness. It became clear to the board that an advertising strategy was required if existing customer loyalty was to be stimulated and new customers were to be attracted. Direct competition with the ‘Big Four’ high street banks was out of the question as The Co-operative Bank was too small to be a credible alternative and lacked their lavish marketing budgets. Nor could it hope to compete with small regional banks whose customers liked their local origins and personal service. The Co-operative Bank could, however, raise the profile of its organisational distinctiveness as a means of differentiating itself from all the other current accounts on offer.

In the early 1990’s the bank undertook a market research exercise which revealed that it had an ‘old-fashioned’ image among the general public which they associated with the working classes and left-wing political tendencies. Worryingly, it was often perceived as not even being a ‘proper bank’. The bank’s senior management at one stage even seriously considered a change in name to something with more resonance for the public. However, the bank’s provenance proved to be very attractive among its own customers so the ‘Co-operative’ name was retained.

Surveys of why Co-operative Bank customers had joined provided the bank’s marketing team with inspiration. In common with other banks, customers were mainly influenced by the proximity of a branch to their home or workplace, by parental recommendation, or by employer referral. For Co-operative Bank customers a further (albeit minor) factor emerged when 5% cited ethical reasons as being their main motive for joining. It was thought probable that this had been driven by the bank’s stance against investments in South Africa, whose government was operating the apartheid system of racial segregation (and, implicitly, institutionalised discrimination) at that time. A number of the larger banks were heavily involved in South African investments and were thus regarded by the ethically aware as tacitly supporting the politicians behind apartheid. Also, it seemed likely that some customers were motivated by a vague awareness of co-operative values. Whatever the cause, this minority of customers energised the bank’s marketeers in their quest for sustainable differentiation. Unfortunately, the research also indicated that customers had no clear understanding of what the bank’s ethics actually were – a state of affairs exacerbated by the bank not making public statements about their moral stance.30

The ‘free market’ philosophy of Margaret Thatcher’s government had resulted in a mood of public cynicism about the perceived erosion of business ethics once state control had been relaxed. In relation to banking morality in particular, a spate of well-publicised scandals, such the Barlow Clowes and BCCI affairs, had raised serious doubts about the security of moneys left in the care of banks. This concern about the ethical management of funds was especially heightened amongst the graduate and professional sector of the public, who were also the most attractive sector as far as the banks were concerned since they earned regular, sizeable incomes and tended to manage their finances responsibly. Picking up on the moral awareness of this group, The Co-operative Bank decided to market itself to these graduates and professionals using an approach which has led to it being popularly dubbed ‘the ethical bank’.

The bank embarked on a process of extensive quantitative and qualitative market research. The first exercise was to research amongst undergraduates who, as the graduates and professionals of the future, might have been expected to have the greatest interest in and support for the values and principles underlying co-operative banking. But in this, as in some of the other research conducted, there were clear signs of lack of understanding or awareness of the ‘cycle of money’ (where deposits are recycled as loans), ethical investment, ethical consumerism and concern with anything other than a lucrative career enabling the purchase of luxury goods. As is so often the case when researching radical ideas, the findings were dispiriting. The bank’s marketing management decided to take a giant leap of faith and chose to believe that, upon repeated exposure, a significant proportion of their actual and potential target population would warm to their ethical stance and prove to be like-minded.

The bank had developed a mission statement31 which echoes the Rochdale principles in its values: quality and excellence, participation, freedom of association, education and training, co-operation, quality of life, retention of funds and integrity.32 This mission was to influence the way in which the crucial early decision was taken as to which particular ethical issue the bank should take a stance on. In true co-operative, democratic tradition, the decision as to the precise ethical focus had to belong to the customers. Neither the bank’s management, nor the more reified institution of ‘The Bank’ itself, should be cast in the role of moral arbiter. Thus the bank sought a mandate for its decision through a lengthy consultation process. This started with focus group research to ascertain which ethical areas were in the forefront of potential customers’ minds. The findings revealed that the bank’s target customer group was most concerned about the following issues:

After considering the implications of these findings for the business of banking, the decision was taken that the Co-operative Bank would focus on the responsible sourcing and distribution of funds as its distinctive, ethical message. In order to unequivocally demonstrate that it was willing not to only espouse the values implicit in the concerns of its customers but also to enact them, the bank developed an ethical policy governing the organisations and projects in which it would invest. This policy directly reflected the concerns of the bank’s customers. However, expert though they may be at banking and marketing, the bank needed outside help when it came to drafting detailed and precise ethical policy statements. The willingness and enthusiasm of many charities and NGOs, including Amnesty International, the RSPCA, the League Against Cruel Sports, the RSPB and Christian Aid (amongst others), to contribute to this task came as a pleasant surprise to the bank’s management. The involvement of these specialist bodies helped the bank to avoid many potential pitfalls which could have resulted from loose wording. For example, ‘blood sports’, if left undefined, could have implied taking a stand against fishing, which was not the bank’s intention at all.

Next, 30,000 Co-operative Bank customers were contacted in writing and asked to ‘vote’ line-by-line on the draft statements. These statements were then modified in the light of the feedback from this exercise and preparations were set in train for the public launch of the ethical policy.

The Co-operative Bank’s Ethical Policy (1992)33

The Bank’s position is that:

1. It will not invest in or supply financial services to any regime or organisation which oppresses the human spirit, takes away the rights of individuals or manufactures any instrument of torture.

2. It will not finance or in any way facilitate the manufacture or sale of weapons to any country which has an oppressive regime.

3. It will encourage business customers to take a proactive stance on the environmental impact of their own activities.

4. It will actively seek out individuals, commercial enterprises and non-commercial organisations which have a complimentary ethical stance.

5. It will not speculate against the pound using either its own money or that of its customers. It believes it is inappropriate for a British clearing bank to speculate against the British currency and the British economy using deposits provided by their British customers and at the expense of the British taxpayer.

6. It will try to ensure that its financial services are not exploited for the purpose of money laundering, drug trafficking or tax evasion by the continued application and development of its successful internal monitoring and control procedures.

7. It will not provide financial services to tobacco product manufacturers.

8. It will continue to extend and strengthen its Customer Charter, which has already established new standards of banking practice through adopting innovative procedures on status enquiries and customer confidentiality, ahead of any other British Bank.

9 It will not invest in any business involved in animal experimentation for cosmetic purposes.

10. It will not support any person or company using exploitative factory farming methods.

11. It will not engage in business with any farm or other organisation engaged in the production of animal fur.

12. It will not support any organisation involved in blood sports, which it defines as sports which involve the training of animals or birds to catch and destroy, or fight and kill, other animals.

Although the ethical policy had been drafted, a lot of work had to be done internally before the bank could ‘go public’ and be considered credible. Every member of staff had to be trained and a new ethical screening function established. The bank’s existing customer base was reviewed to ensure that there were no clients whose activities breached the policy. This review resulted in a few clients being asked to move their accounts elsewhere, including fox hunts and a cosmetics firm that tested their products on animals.

In order to communicate its ethical stance and raise awareness of its activities amongst the graduate and professional group of potential customers, the bank took the decision to advertise. This course of action proved somewhat controversial with critics arguing that, if the bank advertises its ethics as a means to pursue its own ends, then it is, at worst, not acting from a pure moral duty or, at best, acting from mixed motivation to exercise its duties to others as well as behaving self-interestedly. Despite this questioning of the purity of its moral intentions, advertise the bank did, although their brief was a challenging one.

The idea of ‘responsible sourcing and distribution of funds’ needed to be conveyed to the potential customer in a simple yet challenging and motivating way. The bank’s values of honesty and integrity and its credibility with the public must not be compromised by either sensationalism, overt commercialism or any suggestion of taking the moral high ground. Four simple, human storylines with a moral twist in the tail were chosen, and portrayed using black-and-white images. The print and TV coverage was geared towards the target customer group by focussing on broadsheet newspapers and current affairs programmes.

    

Despite the controversy over advertising, the bank’s new strategy seems to have worked. Immediately the bank’s current account customer base strengthened and, because members of the business and managerial audience also saw the advertising, the number of organisational accounts, including customers such as charities, student unions and local authorities, also grew. There were early, strong indications that the bank was on the right track. Feedback obtained through in-house, pre-launch training revealed that there was a very strong positive reaction from staff, especially those who had most contact with customers and their reactions to the strategy. The launch itself brought a big postbag of customer letters, most of which could be summarised as saying, “Well Done!”, although a few disagreed with the bank adopting a moral position.

To this day, the bank continues to go from strength to strength by following the same basic strategy initially developed as a response to a need to compete in the current account banking arena. There are echoes of the past here, too, in that aspects of the strategy which originally set the retail co-operative sector on the road to success can be discerned in the bank’s new strategy. Firstly, just as the Co-op recognised that it had to work from within capitalism yet not take on its exploitative character, so the bank is working within capitalism’s re-incarnation as consumerism yet taking care not to use image marketing or advertising as public relations. Instead the bank has developed character marketing and advertising which demonstrates a genuine moral will34, an approach which has since been taken up and developed by others wishing to blend branding, core values and corporate citizenship.35 Secondly, just as the Co-op did not actually attract the desperately poor but, rather, the not-so-poor who had a regular though not extensive income, so the bank has built a substantial customer base among the new not-so-poor, that is, graduates and professionals whose incomes are more stable.

Ironically, the bank’s success, coupled with its link to what is now the Co-operative Group, was to prove a potentially dangerous one for UK co-operation. In 1997 the then CWS was subject to an aggressive takeover bid by Lanica Trust Ltd. Following the successful purchase, and subsequent resale at a £3m profit, of part of the manufacturing arm of the CWS in 1994, Andrew Regan set up Lanica with the aim of buying the CWS in its entirety. The mainspring for this move, it has been said, was not so much the acquisition of CWS retail itself, but the prospect of being able to asset strip the successful financial members of the group, that is, The Co-operative Bank and the Co-operative Insurance Society36. At the time many mutuals, especially the building societies, were passing into private ownership, their members being easily persuaded to take shares or cash in exchange for their continued adherence to founding principles. Lack of awareness of what it meant to be a mutual or co-operative organisation led to members agreeing to sell what, in effect, did not belong to them as it was the legacy from previous generations of members’ contributions and the inheritance of future generations of members.

Privatisation of this sort was not to prove so easy for the Lanica operation as they failed to appreciate the actively democratic nature of the CWS, the complexity of the democratic ownership structures, and the sheer determination of the board. Lanica had sought advantage by placing a ‘mole’ within the CWS, but he proved unhelpful as he did not understand co-operative principles. Not only did Lanica misread the situation, but also those fighting to keep the CWS as a co-operative uncovered their ‘mole’ within the society. Regan and his unethical plans were exposed for what they were and stopped, with the help of the legal system.

28 Watkins, WP (undated) The International Co-operative Movement: Its Growth, Structure and Future Possibilities Manchester: The Co-operative Union Ltd. Pp12.
29 Kitson, A & Campbell, R (1996) The Ethical Organisation: Ethical Theory and Corporate Behaviour pp66 London:Macmillan
30 Institute of Practitioners in Advertising (1994) Papers from the IPA Advertising Effectiveness Awards Ed Chris Baker, 'The Co-operative Bank "Profit with Principles"' pp 329-352
31 http://www.co-operativebank.co.uk/ethics/ethical_ethics_our_mission.html.
32 Kitson, A & Campbell, R (1996) The Ethical Organisation: Ethical Theory and Corporate Behaviour pp71 London:Macmillan.
33 Kitson, A & Campbell, R (1996) The Ethical Organisation: Ethical Theory and Corporate Behaviour pp70 London:Macmillan.
34 Webb, T (1996) 'Marketing the Co-operative Advantage' in The Journal of Co-operative Studies Vol 29 No 87 pp 15.
35 Willmott, M. (2001) Citizen Brands: Putting Society at the Heart of your Business Chichester: Wiley.
36 Melmoth, CJ (1998) 'The Lanica Affair - A Perspective from the CWS' in The Journal of Co-operative Studies Vol.31 No.93 pp9-14.

 

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