The Rochdale Pioneers to Paul Flowers: how the Co-operative dream died

A Co-operative supermarket ? pioneering the new self-service method.

In February 2009, the Co-operative Group announced that Bob Dylan had allowed it to use one of his most treasured songs in a UK TV advert. The work of London agency McCann Erickson, the commercial in question was soundtracked by his 1962 classic Blowin' in the Wind, and was a self-consciously epic affair: two-and-half minutes long, voiced over by the Scottish actor John Hannah, and first shown on ITV at 7.40pm on a Monday night, mid-way through Coronation Street.

It began with a boy launching dandelion seeds into the breeze, which then floated over windfarms, arctic glaciers, Fairtrade coffee plantations, and other symbols of the Co-op Group's supposedly towering ethical standards. "From community projects to a share of the profits, renewable energy to Fairtrade products, the Co-operative believe that when the benefits are passed around it's good for everyone," went the simpering script.

The use of the Dylan song – reportedly approved by the man himself –was said to have brought the Co-op Bank 120,000 new customers and the advert was hyped up as a token of the Co-op's new ambition. "We felt the sentiments expressed in Dylan's masterpiece summed up the optimism we have for the Co-operative," said Patrick Allen, the group's executive head of marketing. He missed the song's prevailing air of troubled bewilderment, but people like him often do.

Back then, the financial crash was in full effect, and over-excited journalists were wondering whether western capitalism was in crisis. By contrast, buoyed by its ambitious managers and the sense that being owned by its own customers set it apart, the Co-op seemed to be brimming with confidence.

In the summer of 2008, its banking wing had begun talks about a merger with the Britannia Building Society, which would double the size of its balance sheet and create a "super mutual", offering an alternative to the financial institutions that had caused the crash. By 2012, thanks to a sell-off scheme known as Project Verde, the new bank would be moving towards the acquisition of 632 branches of Lloyd's Bank, which would guarantee a hefty new presence on the high street. And in March 2009, the wider Co-op group had completed its buy-out of Somerfield supermarkets. Its then chief executive, Peter Marks, said the acquisition provided "rocket fuel" for the group's expansion plans, allowing it to finally compete with the UK's big supermarkets.

Now all this looks like monumental hubris. With close inspection of the deal to take over those Lloyd's branches having revealed huge holes in its balance sheet, the Co-op bank is seen as an incurable case, and the Co-op group has been forced to sell 70% of it to the very interests – among them, hedge funds and private equity outfits – that it once seemed to set itself against. The big numbers tend to dance in front of your eyes: though it has already received a capital injection of £1.5bn, the bank somehow needs to raise another £400m, despite its total value being put at a mere £735m. And then there are the telling details – such as the fact that the bank's IT systems have long been miscalculating the number of days in a year.

To give things a darkly comic twist, its travails are symbolised by the Rev Paul Flowers, the so-called "crystal Methodist" and former chair of the bank, who once told a Commons select committee that its assets totalled £3bn, when the true figure was well over 10 times that amount. The allegations against him read like an end-of-the-pier version of Breaking Bad: he now faces three separate drugs charges, relating to possession of cocaine, methamphetamine and ketamine.

The entire Co-operative Group – which spans supermarkets, funeral services, insurance, travel agencies, pharmacies, farms and more – is in a similarly grim position. The Somerfield buy-out eventually led to £226m of Somerfield's value being written off, and 60% of what the Co-op acquired will soon be sold off. The Group recently announced losses for 2013-14 of £2.5bn. Its debts total £1.4bn. Of its shops, 645 are either empty, or being rented out to other companies. Even its acting chief executive says that 2013 "was a disastrous year for the Co-operative Group, the worst in our 150-year history".

A dividend queue outside a Co-op in 1960. Photograph: Picture library

John Mann is a high-profile Labour MP who sits on the House of Commons' Treasury select committee. His ancestors include one of the Co-op's original founders, and his father worked as a Co-op butcher in his native Leeds. When the former Co-op chief executive Peter Marksappeared before his committee in October last year, Mann did not exactly mince his words: the group's management, he seethed, had overseen a "catastrophe"; they had "reached for the sky ... [and] got nowhere near it", and then left "someone else to inherit the mess".

Eight months on, Mann sounds just as fired-up. "The Co-op got too big for its boots," he says. "Instead of being a membership organisation, it decided to start speculating – first with Somerfield, and then the Britannia. And it didn't have the expertise or the structures to cope."

When the Co-op expanded in the past, he says, its growth was always based on new co-operative organisations growing out of the existing business – not quickfire buy-outs. But, as he sees it, the Co-op's sense of its innate goodness meant that the people at the top eventually thought anything they did would turn out to be similarly virtuous. "They were playing with the Co-op, and its history and traditions," he says. "And what they did was contrary to all the principles the Co-op had in the past."

What we now know as the Co-op was born on 21 December 1844 when a group known as the Rochdale Society of Equitable Pioneers opened a shop on a road called Toad Lane. As well as selling a small selection of very basic foodstuffs (and candles), they came up with the so-called Rochdale Principles, which emphasised the new organisation's democratic structure, as well as a belief in distributing profits among the membership.

Former Co-op Bank chair Paul Flowers. Photograph: Lynne Cameron/PA

Within a decade, there were more than 1,000 such co-operatives spread across the UK. What we now know as the Co-op bank was founded in 1872. In 1917, the increasingly huge Co-operative movement spawned a political party, which 10 years later affiliated to the Labour party, and began running joint candidates. Modern "Labour and Co-operative" MPs include Walthamstow MP Stella Creasy and shadow chancellor Ed Balls.

Over the past decade, the Co-op has loaned the Labour party around £18m on low-interest terms; in 2012, it gave Balls' office a £50,000 donation. A review of the Co-op Bank's crisis commissioned by the Co-op group will be published next week: already there have been suggestions – plainly politically motivated – that it may somehow highlight Balls' ties to the Co-op, and his supposed role in the passing of legislation that, in retrospect, opened the way to the merger with the Britannia (though just to balance things up, there have also been suggestions that Tory Treasury ministers assisted the Co-op's attempted acquisition of all those Lloyd's bank branches).

To say that the 170-year history of the Co-op Group is complicated would be a howling understatement. The modern group is essentially the result of a 2002 merger between the huge national Co-operative Wholesale Society and Co-operative Retail Services, and the group is also an umbrella for an array of local and regional organisations, based in such diverse places as Chelmsford and Penrith. In the Co-op's old industrial heartlands, you occasionally see shopping parades so dominated by their outlets that they seem to provide for people, as socialist folkore would have it, from cradle to grave.

The governing structure that sits behind the Co-op's activities looks rather like the pyramid-shaped model that operated in the Soviet Union. At the base are around 48 area committees, each with 10 to 12 elected members who put in three-year terms. These people, in turn, elect seven regional boards – which duly elect 15 of the 21 members of the national group's board of directors. Of the remaining six, five come from big regional Co-ops, and there is also an independent director.

Co-op dividend stamps and milk, bread and coal tokens Photograph: Don Mcphee

The board currently includes a plasterer, a tax official, a farmer, a telecoms engineer, a gardener and a nurse – which, according to your view of things, may either suggest a shining example of economic democracy, or a group of people in grave danger of being in over their heads. As many of the Co-op's critics see it, such people also highlight an inbuilt danger of the group's bureaucratic structure: the fact that it favours those who are prepared to devote endless hours to rising up the pyramid, rather than the best people to be overseeing such a large organisation. "If you're super-active, you can get to the top, like Paul Flowers did," says Mann. "But we're talking about a tiny activist base.Minute."

Much the same view of things is held by Paul Myners, the non-aligned member of the House of Lords and former City minister in Gordon Brown's government, who was appointed to the Co-op's board in 2013, and charged with putting together a review of what had gone wrong. As he saw it, the Co-op's machinery had "consistently produced governors without the necessary qualifications and experience to provide effective board leadership". And much good it did him: in the face of loud opposition within the Co-op to such proposals as a more professionalised board overseen by a 100-strong "national membership council", he handed in his resignation in April.

The Co-operative bank. Photograph: Johnny Armstead/Demotix/Corbis

In a recent interview with the Guardian, Myners said that though he had observed "bad governance" at British banks, what had happened at the Co-op was "on an altogether worse level".

His thoughts were phrased slightly more colourfully in a piece for the Daily Mirror. "Former managers were allowed to run amok like kids in a sweet shop," he said. "They bought up businesses willy-nilly – from Britannia Building Society to Somerfield supermarkets, and made catastrophically inept decisions over and over again. In the process they crippled the group with huge debt. It was growth for growth's sake. You wouldn't run your household budget like that, but that's how they were running a business with sales of more than £10bn a year … The board couldn't control them. It wasn't just Paul Flowers at the Co-op Bank. The governance system across the group was not fit for purpose. It was that simple and it can never happen again."

This Co-operative store was opened in Newmarket in March 1899. Photograph: Co-operative Group

On the face of it, Myners' take on the Co-op's problems and the best way out of them might seem reasonable enough. But long-standing believers in Co-operative ideals think his proposals are tantamount to wanting to turn the Co-op into a standard-issue PLC, and have been rattled by the sceptical noises he has made about the group's treasured social goals and political aspects. The same plotline defined the recent story of Euan Sutherland: the chief executive who joined the Co-op in May 2013, and then resigned just 10 months later, in a blizzard of controversy over a £6.6m pay deal covering 2013 and 2014 and his alleged lack of understanding of the Co-op's traditions, claiming the organisation was simply "ungovernable".

One of the loudest voices in the current debate about the Co-op's future belongs to Jo Bird, a Manchester-based advocate of Co-operative businesses who has been involved in them for over 20 years standing, and is campaigning for drastic changes. She puts much of the ongoing disaster down to what she calls "a severe case of management capture", the puny powers possessed by the Co-op's members to hold anyone at the top to account, and its hopelessly complicated structure. "There's no real democracy in the Co-operative Group at the moment," she says. The dire state of things, she says, is symbolised by the fact that anyone can join the Co-op by paying £1 for life membership. "That's meaningless," she says.

What Myners has proposed, she says, is simply "the PLC model, which has been roundly rejected". Her vision is of some of the Co-op's board resigning to make way for "new blood", direct elections to its board, activist groups based around local Co-op stores, and the belated embrace of member involvement via the internet.

That wouldn't necessarily get over the problem of people at the top being out of their depth, I suggest.

"That's true," she says. She then talks about a "comprehensive programme of member education and training, to equip directors with the skills and understanding they need to fulfil their role".

That may sound rather idealistic, in the context of a failing organisation haemorrhaging billions of pounds.

"Show me a capitalist organisation that has a better solution," she says. And then things slightly take on the tone of the aforementioned TV commercial, so much that I can imagine John Hannah voicing what she says next. "Co-operatives by their very nature put people first, and put the community before the motives of private companies. If you organise a business on those principles, it's going to be a better business than one organised solely for profit."

Bird reckons that from an ethical perspective, the Co-op Bank is effectively a write-off: "It is no longer a co-operative bank, and shouldn't be called that," she says. But she thinks the wider group will survive. "The last few months have shown lots of goodwill and support towards the Co-operative group and co-operation in general," she says. "And there's less of a question about any kind of existential threat."

Co-op hearses gathered together at a funeral trade fair in Glasgow. Photograph: Murdo Macleod

Mann's view of things is much more complicated. He says he's comfortable with what Myners has proposed "as an interim measure", but also thinks the group needs to be decisively returned to its members, and get used to once again thinking locally, rather than in terms of huge business ambitions. The bank, he reckons, can only be saved with the help of the government, which could recreate what it used to be. "It could, but I don't think it will," he says. "So I think the Co-op bank will disappear." The supermarket wing, he says, is "now in tremendous danger", as is the Co-op's travel business. But with sufficiently drastic remedies, some of the Group will live on. "If the Co-op is torn apart at the top it will survive," he says. "But if that doesn't happen, the Co-op will simply implode."

The Co-op group's AGM will take place on 17 May in Manchester, where those present will vote on a resolution ("motherhood and apple-pie stuff," according to one Co-op insider) broadly in line with the kind of democratic overhaul plenty of people would like, though there is continuing unease about the possibility of a last-ditch lurch towards the structure of an ordinary company. At least some of Myners' proposals are then expected to be put to the entire membership of the Co-operative group. Meanwhile, the Co-op is in the process of selling off 18,000 acres of farmland in England and Scotland, and its pharmacy chain is also set to be put up for sale.

Behind all this lurks an array of absolutely fundamental questions. Given that things went so horribly wrong, how will the Co-op ensure nothing similar ever happens again? Can its ideals survive in the midst of such a huge crisis? And if they don't, what would that mean not just for shops, supermarkets and bank branches, but Britain's politics and public life?

As someone said all those years ago, the answers are blowing in the wind.