Cantillon

Inside The World Of Business

Glanbia vote calls restrictive co-op rules into question

TO SAY that yesterday’s defeat by Glanbia co-op members of a proposal to buy its Irish milk division throws up questions is an understatement. The much-vaunted deal, heralded as a “win-win” for both parties two months ago when first mooted, has left Glanbia plc battered and bruised, and with a major credibility issue.

One of the specific questions generated by yesterday’s defeat is the viability and relevance of the rules of co-operatives. A number of peculiarities of the system were highlighted in Kildalton – the need to have a 75 per cent majority; the prohibition of proxy votes; the requirement that one meeting, rather than various regional meetings, should take place giving rise to significant logistical issues; and the requirement, in the event that the deal was passed, that an identical meeting take place two weeks later.

Despite his evident disappointment, chairman Liam Herlihy was adamant that the co-op rules were sacrosanct. “The rule book is there to serve the needs of everyone. That rule book needs to be protected and respected. I want to make that absolutely clear.”

John Tyrrell, head of the Irish Co-operative Society (Icos) also strongly rejected any suggestion that the co-op system was to blame.

The role of co-operative rules in protecting the interest of members may well be laudable, but the reality is those same rules have led to an unsettling outcome for all stakeholders. As all affected parties embark on some serious soul-searching, the issue of whether the restrictive, and arguably archaic, rules of the co-operative structure have any relevance in a modern business may come to the fore.

AIB’s creeping nationalisation

WHILE BANK of Ireland ploughs ahead with its capital-raising plans – limiting future State ownership to a minority holding – rival AIB is only this week starting to feel the pain of creeping nationalisation.

Under the Government’s 2009 recapitalisation plan, AIB must pay an 8 per cent coupon or dividend to the State on its €3.5 billion in preference shares or else pay up by way of ordinary shares. The European Commission’s dividend stopper on banks in receipt of State aid led to Bank of Ireland ceding 15.7 per cent of its ordinary shares last February.

AIB faces a similar predicament on Thursday. Managing director Colm Doherty acknowledged as much last March when he said he expected AIB, like Bank of Ireland, to be “PIK-ed” (involving a “payment in kind” through shares).

The Government’s stake will be based on the bank’s average share price over 30 working days to Thursday. Under share prices over 30 days to yesterday’s price, this would give the Government a stake of 18 per cent in the bank.

Take into account the warrants that the State has over 294 million ordinary AIB shares and the State’s interest rises to what is in effect a 41 per cent stake. The bank is now facing a much higher capital bill following the “shock and awe” recapitalisation plan announced by the Financial Regulator and Minister for Finance Brian Lenihan in March.

Given that it has to raise €7.4 billion in capital to cover vastly more toxic loans than the €2.66 billion required at Bank of Ireland, the Government’s stake at the end of this week will just be the start.

It looks ever more likely that AIB will have to cede a much larger stake, most likely a majority one.

Meanwhile, Bank of Ireland appears to be well on its way to raising up to €3.56 billion to “bomb-proof” itself – taking out the State’s warrants and limiting Government ownership to 36 per cent after yesterday’s better-than-expected debt swap. Life is much more bleak over at AIB.

Time to step up to the task

BATT O’KEEFFE, who has now formally added innovation to the title of his enterprise and trade ministry, announced yesterday the formation of a “high-level implementation group” for the Innovation Taskforce’s recommendations.

In March, the taskforce published an ambitious set of recommendations which, if implemented, would turn Ireland into a global centre for innovation.

The report claimed that 117,000 jobs could be created by 2020 by implementing its 60-odd ideas which touch on everything from the education system to bankruptcy laws.

Given the taskforce spent close to a year looking at how to implement the vision of the Smart Economy, which itself was unveiled in December 2008, this latest committee could be viewed as another delaying tactic.

But its membership suggests otherwise. Three of those asked to oversee implementation (Lionel Alexander of HP, KPMG tax partner Anna Scally and Iona Technologies co-founder Chris Horn) have been very vocal on the need to act quickly if the plan is to succeed.

The taskforce report also mapped its recommendations to which Government departments or State agencies needed to act on them. The secretary generals of five key departments will sit on the group, while Forfás chief executive Jane Williams will represent the agencies.

That private sector members outnumber the public sector also suggests the body will move at the pace of business. O’Keeffe, seen as one of the more capable politicians in the Cabinet, also seems to be investing his political capital in the initiative and is going to chair the group.

We still hear an awful lot more rhetoric from Government circles about the Smart Economy than we see action. But with this latest development things are hopefully starting to change.

Today

Glanbia issues an interim trading statement today after seeing its plan to exit the Irish dairy business fall in a tight vote among farmers at Glanbia Co-op.

Online

For regular commentary on business and economic issues visit our blog, Current Account, at www.irishtimes.com/blogs/business

Twitter users can receive links to the latest business news and blog posts by following us at

twitter.com/IrishTimesBiz

Podcast

You can listen to our weekly business podcast at www.irishtimes.com/business/podcast