MEC: The Success Delusion

Mountain Equipment Co-op was in the news for all the wrong reasons this week – insolvency, privatisation, and many disgruntled co-op members. But the story of MEC is instructive; from scrappy start-up, to novel retailing model, and on to iconic ‘success’. What does the story mean more generally to cooperatively owned businesses like credit unions?

MEC had become the largest and one of the most visible consumer co-ops in Canada, with more than 5 million members and 22 stores. Over the last ten years it had grown rapidly, adding 11 stores, and MEC had diversified into much more than hiking, mountaineering and other back-country gear – adding bicycles, yoga wear, running shoes, downhill skis and snowboards. The board’s email to members states that the problems were evident by 2016.

In my view, the business strategy was defined by management’s ambitions and a conventional mantra to ‘grow’ the business. Building the business empire confers status, better compensation, and enhanced career prospects to senior executives, which are strong motivators. The rationale was that the company would be better able to ‘serve its members’ and that it was no longer just serving ‘white males’. But in business terms it was ‘cross-selling’, pursuing new new markets, and adding new lines of business where there was considerably more competition.

The board of directors was seduced by the strategy; egos were stroked by the large profile the co-op built and by the savvy marketing commitments to conservation and environmental sustainability. In this sense, the outdoor equipment needs and interests of the core membership (BC back country enthusiasts) no longer defined the purpose of the co-op. The membership base was diluted to include a wide array of recreational ‘consumers’.

Within any co-op, the board plays a pivotal role in limiting management’s risk-taking and championing the interests of member-owners. A problem arises when the board is ‘captured’ by management. At MEC this proceeded on two fronts: flattering those on the board with the ‘success’ that sales growth represents, and by recruiting more people to the board who share this business oriented view of ‘success’.

The co-op adopted practices that are conventional in corporate governance, and these included carefully controlled elections to the board to limit real political contests, and restricting the powers of member-owners to bring proposals or special resolutions forward.

The following comes from the MEC Wikipedia entry:

In 2013, “the board required that director candidates have board or senior management experience ‘in a complex organization’. For the 2016 election, the board requires directors to have that experience ‘in an organization of comparable complexity to MEC’.” MEC CEO David Labistour said that pre-selection of board candidates “offers [the] membership an informed election” that is both transparent and “in line with the health of the organization.” Concurrently, the board was given a hefty pay raise. In 2015, the chair made more than $58,000, as compared to 2011 when he was compensated $30,500.[29]

Democratic remedies available to MEC members were curtailed during the same period. In 2013, “the board increased the number of signatures required to get a motion placed before the membership to 500 from five” It was noted that “now, even if a special resolution has the required number of signatures, the board can still refuse to put it on the ballot if two-thirds of directors are opposed.”[27]

In summary, the co-op’s purpose was obscured by redefining success as growth. More business oriented ‘professional’ directors were recruited. Ownership was diluted, and member-shareholder rights were constrained to make the leadership less accountable.

In general terms this is a principal-agent problem. The principal-agent problem is a conflict in priorities between a person or group and the representative authorised to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal. In this context, the ‘principal’ is the co-op member-shareholders and the agent is the board & management.

MEC did not fail because it was abandoned by the BC hiking and mountaineering community, but because, in a sense, MEC abandoned that community and made it harder for that community to hold anyone to account.

CREDIT UNIONS

The same mantra, ‘size matters’, is driving consolidation in BC credit unions. The strategy is similarly rooted in the ambitions of management teams and boards. Within large credit unions we have the same increased reliance on ‘professional directors’, dilution of member control (via mergers), and erosion of members’ democratic remedies and controls.

The failure of MEC portends similar stories in the coming years as large credit unions try to serve too many markets, lose their focus, and find themselves financially squeezed. Many big credit unions are now far too large for sister organisations to ‘bail them out’ if they experience financial problems. Invariably, these credit unions will be forced to sell out, or develop ‘hybrid’ approaches that will distort what it means to be a ‘co-operative’ in order to allow other investors in as owners. Coast Capital Savings converted to a ‘Federal Credit Union’ under the Bank Act in 2018, legislation which paves the path to novel ‘restructuring’ or sale.

Even if a risk of insolvency is not the issue, large credit unions will be acquisition targets. In Australia and elsewhere there are examples of mutual wealth in large credit unions being ‘expropriated’ by internal and external actors. The following comes from Kevin Davis’s Australian Credit Unions and the Demutualisation Agenda:

“This suggests that credit union “success” sows the seeds of its own destruction. Professional managers are required to provide expertise and manage risks. However, their personal ambitions are constrained by growth limitations imposed by the mutual structure, and by the limited range of traditional credit union activities. Because the mutual form gives managers a significant degree of entrenchment and autonomy (Rasmusen, 1988), they are able to pursue changes in the range of activities to include those not suited to a mutual form of governance. Achieving growth requires capital accumulation at the expense of current members (because terms and conditions on services provided become less favorable in order to generate profits and thus capital) and generates a larger pool of communal wealth ripe for expropriation.”

The intrinsic co-operative value of local democratic control, by ordinary people, struggles on in smaller credit unions. That was the ‘goal’ of the original credit union movement. I do not think credit unionists fully appreciate the the consequences of a lost sense of purpose over the last few decades, the principal-agent problem, and the downsides of growth. Demutualisation, or privatisation, may be the ironic result of being a business ‘success’, unless members and directors substantially reorient the game. (The long game…)

6 thoughts on “MEC: The Success Delusion

  1. Ross thank you for the terrific analysis. It’s also relevant for ‘social enterpirses’ where we have learned that rhow success is defined is the critical question and needs to be revisited and confirmed regularly.

  2. Ross, you forgot to mention the push (expectation?) from regulators to hire professional directors at credit unions.

    • Yes, I agree that credit union regulators have also wanted to see more ‘professional’ people sitting as directors.

  3. Ross, any agency-principal weakness is not good. Seems problematic to cooperative structures; inherent with organizational scale; and undermines moral hazard risks. As cooperatives grow and diversify then it’s not possible to please every member on every issue. But it seems appropriate that members have a voice on/to their board; that the board should be reasonably accessible by members; and that the board be ultimately accountable to their membership. Whether MEC board has been accountable to membership on this fundamental, if complex, corporate transaction seems subjective. Perhaps Board Chairs may consider embracing diversity by splitting board composition between membership representation and professional expertise?

    • Thanks for your thoughts Ross. I believe the problem arises as the enterprises scale up; too few members can be involved in governance and it becomes almost impossible to unseat sitting directors or champion proposals. So members play a less significant role, few vote. Notably in the Desjardins system (and in co-ops of Mondragon, Spain) large entities were split up when they reached a certain size. Mitigation along the lines that you propose might alter the dynamics slightly, but I think it would only be modest.

  4. Excellent article. As a MEC member since 1972 and a former lawyer with Board and CEO experience, this analysis rings true.

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