Structured investment vehicles losing millions of pounds to the sub-prime crisis, landmark acquisitions, OFT consultations, lucrative joint ventures in China, doubling shareholder dividends – the Co-operative Group is no less corporate than anyone in the City.

But perception being nine-tenths of reality, the company’s mutual model comes over a tad too cuddly for many in the business world; unlisted, owned and governed by millions of ordinary people united by a common aim of doing good, where possible, by doing well.

From the 12th floor of Manchester’s New Century House, Co-op’s chief financial officer Martyn Wates can glance across a patch of prime city real estate that houses the group’s central offices, its financial services HQ in the 25-storey CIS Tower over the way, clad top to bottom in solar panelling.

Against forbidding views of the Pennines, the ageing cluster of buildings serving as the Co-op nucleus looks a little worn. But the group plans to flatten the whole area and build a new office complex. ‘We’ll do it sympathetically, though,’ says Wates surveying from a great height.

The Co-operative Group is nothing if not sympathetic by nature, being wed to a core of social goals harking to its beginnings as a movement for the welfare of the poor more than a century ago. If you know anything about Co-op, you’ll know it for those little local supermarkets whose owner is some sort of socialist organisation – though you’re sketchy on the details – or as the owner of that internet bank, smile.

Co-op’s financial services business posted a slight increase in profit for the first half of 2008, reporting ‘shareholder profit’ before tax, significant items and short-term investment fluctuations of £73.4m, up from £35.4m at the same time in 2007. The group reported 2007 operating profit ‘before significant items and chan-ges in valuations of investment properties’ of almost £323m, a 35.2% year-on-year increase.

Co-op members enjoyed dividends (Co-op calls it ‘total share of profit payment’) of £38.1m in 2007, compared to £19.6m in 2006. Where Co-op has been a poorer performer is in pushing its brand as a group and among its business units.

As Wates concedes, there has long been a lack of any cohesive message, but this has merely reflected how much change there has been as today’s group has emerged as a mothership to countless minnow mutuals across the UK, and the world’s largest consumer co-operative society.

‘We haven’t been able to project ourselves in the way that, say, Tesco has,’ says Wates. Indeed, Tesco doesn’t own 311 separate business subsidiaries or societies, as Co-op does.

The strategy has been fruitful: the company’s purchase of convenience store chains Alldays, in 2002, then Balfour in 2003 helped it quietly grow its estate to become the UK’s number five food retailer. On top of this, the group is also the UK’s biggest farmer with an estate of 700,000 acres of farmland across England and Scotland, and operates a £250m car dealership. Between absorbing smaller co-operatives and buying up portfolio-boosters like Alldays, the group has been one of the most acquisitive in the UK’s business landscape. So clarity has been difficult.

This has been changing since the group enlarged following the merger with another mutual, United Co-operatives, in May last year, the owner of United Norwest Co-operative where Wates had been CFO since 2002 (he was made CFO-designate to succeed Co-op’s retiring CFO Brian Portman).

A year later, this May, came the pivotal £1.5bn Somerfield acquisition, bumping Co-op’s 5% share of the UK supermarket business up to 8%.

By the time you read this, Wates will have the Office of Fair Trading’s decree on if, and how many, of Somerfield’s 3,000 stores it must dispose of to satisfy competition criteria; he will then add to his £1.5bn budget to revamp Co-op’s existing network of 4,300 stores (as well as its other retail-based businesses, such as its 90 banking sites and 374 travel agency operations) to include those it retains.

‘We’ve been waiting for critical mass within the business before we got out the big guns and now we’ve got it,’ says Wates. ‘In the past, people probably viewed us as a bit quaint, old-fashioned, safe, solid and trustworthy, but not as exciting or modern as our rivals. We’re doing a lot of work to overhaul our offering now. Our shares would be significantly up if we were a listed business, because I know the Somerfield purchase is a value-enhancing transaction.’

As CFO of an organisation that can never unpick its financial targets, speaking with Wates is more akin to speaking with a CEO who can talk about why his baked beans are the best, then switch to the forensics of discounted cash flow. A good man to have around.

‘I’ve met a few FDs, blue-sky men, who consider themselves above the nitty-gritty. But what makes this business great is the detail; the customer going into our shop and buying something, leading to profit and we never forget that. And I like to think I can argue with anyone strategically. But if you don’t know what’s going on, you’re just throwing the dice. You’re gambling.’

Not a strategy that would sit well with an ethics-based model.

Active engagement in companies and regions where the group believes money and positive change can be made is underpinned by Wates who backs the group operating, for example, local supermarkets in areas its rivals shun because it is too deprived, too dangerous, and deemed not worth the time.

Co-op, Wates says, will stick with these often loss-making operations because they make real the group’s social policies.

The group made a £20m investment in July 2007 in a joint venture with Chinese pharmaceutical generics manufacturer Tasly Group, to build and staff a production plant in the country. Many will wonder how Co-op’s strict ethical pol icies will be effected in a country also noted for its relationship with sweatshop labour.

Wates argues that engagement is better than avoidance. ‘A lot of plcs are not venturing there yet and I suppose it does raise ethical issues: why should Co-op trade with China? Because we will work with this company which already has high standards, to raise standards in that country. We are commercially focused and we can make the ethics in that deal work, having done a lot of social auditing on employee conditions and manufacturing practices over there.’

Social responsibility

One area in which Wates seems uncomfortable is talking about the group’s use of structured investment vehicles, on which it lost £31.8m in 2007 as the sub-prime crisis took hold. The group’s last Responsible Business report said Co-op was founded on working for ordinary people who were fed up of ‘profiteering shopkeepers selling adulterated food’.

Are SIVs socially responsible? And if so, are those investing in SIVs not party to profiteering from adulterated loans, as we now know they frequently are?

In his defence, Wates wasn’t yet CFO of Co-op when these investments were made. ‘But there were so many layers to these products, weren’t there? Someone sold a standard mortgage and then built a mortgage book and an income stream from that, which was sold to another institution. This was then aggregated with others and bounced on again; but by then they’re just traded assets, aren’t they? What we were picking up was a financial asset.

‘That income stream I am paying £35m for will give me £3m a year for the next 20 years. Had that asset been traceable to arms manufacturing or something like that, you’re right, we would not have been there. But it was divorced from that.’

This seems no less profit-minded than any regular corporate’s attitude to investment. Which only serve to illustrate the rather unique position that Wates, as CFO of a company that sells products on the back of ethics, is in.

Co-operative but still corporate

Accusations that Co-op isn’t under the same economic pressure as other companies disappoint Wates, who cites some figures – doubled dividends in 2007 and the intention to double profit in 2008/09 – and his dual responsibility to make the business as profitable as possible while handing out millions each year to the long list of social, ethical or charitable groups it funds.

‘We’ve looked at distribution strategies among our competitors, asked ourselves what returns our shareholders expect and what we can afford to pay, and we’ve benchmarked our distribution policies along with the best of them,’ he says. ‘Instead of paying dividends to some faceless institutional shareholders, our dividends go to our members, the people who shop with us, our employees, various charities and the local communities we trade in.

‘Some people can use ethics as an easy excuse to hide behind [for lack of profits or dividends]. If you’re ethical, you can’t shy away from being efficient, challenging and driving hard. We approach investment and shareholder return on capital the same way anyone else does. Being a one-person, one-vote organisation we’re certainly different. But we’re a part of the corporate world.’

The full version of this interview appeared in the October issue of Financial Director