Why Sugarcoat? British Conglomerate’s Chief Labels 2013 a Disaster

LONDON - Some chief executives like to sugarcoat bad results, but the interim C.E.O. of the Co-operative Group felt no such need when reporting the firm’s results on Thursday.

Richard Pennycook, the interim chief, called 2013 “a disastrous year for the Co-operative Group, the worst in our 150-year history.”

“Today’s results demonstrate that,” he said in a company statement, “but they also highlight fundamental failings in management and governance at the group over many years.”

Among the failings at the conglomerate, which manages a bank, supermarkets, pharmacies and funeral homes, were a bank that had to be rescued by hedge funds; a former chairman and Methodist minister who has been arrested on drug charges; and the sudden exits of two executives brought in to salvage the group.

On Thursday, the Co-operative Group reported eye-popping losses of 2.3 billion pounds for 2013. The results were largely driven by a £1.44 billion operating loss at the Co-operative Bank, as well as the cost of the stake it retained after its restructuring. There firm also took a £226 million write-down on good will from the Somerfield grocery chain that it bought in 2009. Revenue fell 4.5 percent, to £10.5 billion.

The Co-operative Group has careened from crisis to crisis since a £1.5 billion capital hole emerged at the banking unit last year. The bank’s debt was downgraded to junk status. A group of hedge funds led by Silver Point Capital and Aurelius Capital Management leapt into the fray, structuring a rescue that reduced the group’s bank stake to 30 percent.

The bank has a unique philosophy. Many of its deposits come from charities and community groups, and it will not lend to companies that do not meet its ethics policy. Yet, the bank has found itself in many embarrassing situations itself lately.

On Wednesday, Paul Flowers, formerly a chairman of the Co-operative Bank, was charged with possession of cocaine, methamphetamine and ketamine. He had been arrested in November after a newspaper photographed him purportedly buying cocaine. Mr. Flowers, a Methodist minister, has been nicknamed the “Crystal Methodist” by the British press and blamed for overseeing the financial implosion of the bank.

Before he was arrested, Mr. Flowers, who as chairman had no previous banking experience, testified in front the Treasury Select Committee in Parliament that the bank had £3 billion in assets, rather than the actual £47 billion it had at the time (he admitted his banking knowledge was “out of date”).

In April 2013, Euan Sutherland, an executive with retail experience, was brought in as chief executive to clean up the Co-operative Group. He walked out last month, calling the company, Britain’s biggest mutual firm, ungovernable.

Soon after, Paul Myners, a senior independent director and former Treasury official who was supposed to lead the banks reform efforts, also quit after his plans were opposed.

The Co-operative Bank has said it will raise £400 million in new capital, and the Co-operative Group needs to contribute roughly £120 million to avoid diluting its 30 percent stake. The group said it had not decided whether to contribute the funds, but added that it would need permission from its lenders. Debt at the company has risen from £600 million five years ago to £1.4 billion at the beginning of the year.

While group’s operating profit fell drastically - to £210 million in 2013 from £297 million in 2012 - earnings at the funeral business offered a rare bright spot, rising to £62 million from £60 million.

But Mr. Pennycook did not pull punches concerning the implications of the group’s losses, either.

“These results,” he said, “should serve as a wake-up call to anyone who doubts just how serious the challenges we face are.”