$500 and four reasons and why every Mountain Equipment Co-op member should vote in the 2018 election before May 24th Steve Jones Follow May 9, 2018 · 7 min read

I’m running in the 2018 Mountain Equipment Co-op Board of Directors election. I’d like to ask for your vote to let the Board know that you share the concerns that I’ve outlined below. As a bonus, all voters are entered into a draw to win a $500 gift certificate and it only takes a minute to vote online.

The common theme in these four areas is that MEC is a member owned co-operative and members have the right to expect a basic level of transparency, accountability, and democratic control.

1) There should be more visibility into the projected financial impacts of the “transformational period”

The co-op has embarked on a multi-year investment project but members have very little visibility into how long the project will continue, how much will be spent, how the project will be financed, or what the expected return on the investment will be.

This is how the multi-year project is described in the CEO letter in the 2016/2017 annual report:

The letter mentioned that operating expenses will be higher during this period but it’s unclear how long the period will be or why operating margins have been in a general state of decline for a decade.

The chart below shows the total sales and the operating margin for each year going back to 2006. The operating margin is calculated using the earnings from operations (sales - cost of sales - selling and administration expenses + other income.) Note that the 2016/2017 year was two months longer than normal due to a shift in the fiscal year-end and so it is not directly comparable to prior years.

Chart prepared by the author using MEC financial reports

In 2006, the co-op had sales of $222.8 million and operating earnings (earnings before patronage return and income taxes) of $19.5 million. Those were good results.

In 2016/2017 (14 month reporting period), the co-op had sales of $464.9 million but an operating loss of $1.6 million. Although the Board has spoken very positively about the increase in sales, the co-op makes less profit today than it did when it was a smaller and more focused organization.

As another reference point, REI reported sales of $2,623 million in 2017 and an operating income of $186 million.

After starting 2016/2017 with $23 million of cash, the co-op ended with $0 of cash and had to draw $28 million from an operating loan during the period. Going back as far as 2006, this is the first time the co-op has ended a fiscal year with $0 in cash and $28 million is the largest amount the co-op has had to draw from an operating loan. Members are in the dark about how much additional money will be borrowed through the operating loan to fund these investments.

Many members are concerned about this spending because they feel that other recent investments (the high-end new headquarters building and the re-branding) were not prudent uses of the co-op’s limited funds.

Although 2018 financial results have not yet been released, the co-op has recently posted a notice to members that there will be no share redemption in 2018. For many members, there is no point of shopping at the co-op vs other retailers if they will not consistently receive a share redemption.

The lack of information from the Board is becoming unacceptable. How long of a drought do they anticipate on share redemptions? When do they expect a return to healthy operating margins? How long will it take to pay down the operating loan?

And at a higher level, why is there so much focus on becoming a larger organization? What was the problem with being a smaller and financially healthier organization that held a strong and defensible position in a number of niche categories? How big is big enough?

2. The Annual General Meeting policies are insufficient for a national organization

In a co-operative, a number of important issues are decided by a vote at the AGM instead of through the general election. One example is member approval of Board compensation.

Online voting during the AGMs: With members across the country (and even the world,) it is unreasonable to continue to require members to attend the AGM in person in Vancouver if they wish to cast a vote on those issues. It makes it basically impossible for anyone East of the Rockies to participate in this important part of our democracy. Forward-thinking organizations are now shifting to AGM formats that allow votes to be cast online. MEC already has an electronic member verification system and so this would be an easy and appropriate way to modernize the AGM.

The AGM recording or transcript should be available online: The recording of the AGM should also be made available for online viewing for a reasonable amount of time after the meeting has ended. Many members who are not able to view the live-stream due to a scheduling conflict. The recording exists (a member can make an appointment to view the recording at the headquarters building), but the co-op has not been willing to put these recordings online.

Financial statements should be released at least three days before the AGM: My final concern with the Annual General Meetings is that the co-op does not release the financial statements until the day of the Annual General Meeting. This does not provide reasonable time for members to review the statements prior to the meeting and I find the practice to be quite insulting to the members (shareholders). In 2017, the financial statements for the year ending Feb 26th 2017 were not made available until the day of the Annual General Meeting on June 22nd 2017.

3. Significant governance policies are out of line with the International Co-operative Association Guidance Notes

In 2014, the co-op proclaimed that they follow the international co-operative principles.

Today, you can see that commitment through the use of the International Co-operative Alliance logo in the footer of every page on the MEC website.

However, a quick audit of the governance practices at the co-op and the Guidance Notes for the International Co-operatice Principles reveals significant gaps.

One of the most meaningful gaps is in how Mountain Equipment Co-op manages the nomination committee. At MEC, the nomination committee is controlled by the Board.

The terms of reference for the committee can be found here: https://www.mec.ca/media/Images/pdf/BOD_NC_Job_Desc_v2_m56577569836390504.pdf

The Guidance Notes to the Co-operative Principles from the International Co-opertive Alliance (https://ica.coop/en/blueprint-themes/identity/guidancenotes) very clearly spell out that electoral committees should not be controlled by the Board.

“ Where electoral committees are established it is important that electoral committees are responsible for establishing the qualifications required for members standing for office rather than the elected board. The ability of existing office holders on boards or other committees to set and approve qualifications for office is one of the major mechanisms used by elites to maintain their hold on office. It can also be a mechanism used by those who seek to demutualise a co-operative and privatise its assets. Electoral committees ought not to be appointed by, or accountable to, the current elected board or committee. Members serving on electoral committees should be elected or approved by, and accountable to, the general membership for ensuring that elections are carried out in an open and transparent manner and represent the sovereign will of the membership.”

Additionally, the co-op currently refuses to disclose CEO compensation or even the methodology that is used to determine CEO compensation. This comes as a surprise to many people because it is so far out of line with best practices for a large democratically controlled and member owned business. The lack of transparency is also inconsistent with the Guidance Notes from the International Co-operative Alliance which states that:

Where remuneration committees are established to advise on senior executive and board pay, their recommendations about how executive pay should be set and by whom should be subject to approval or endorsement by members in general meeting.”

4. The co-op does not report on performance against the purpose

Unlike a traditional corporation which exists to deliver a financial return to shareholders, a co-operative may exist for a wide range of purposes. As a result, the BC Co-operative Association Act requires the purposes to be recorded in the Memorandum of Association and it can only be changed by a vote of the membership.

The purpose provides the true-north for the Board of the co-operative.

In the case of Mountain Equipment Co-op, the purpose is as follows:

a) designing, manufacturing, purchasing, selling and renting products for self-propelled wilderness oriented recreational activities, and b) marketing goods and services produced or supplied by members, and c) any business which may conveniently be carried on in connection with those businesses.

For years, members have raised concerns about whether or not we are delivering on the purpose. What trade-offs are being made between self-propelled wilderness oriented recreation and other categories? Is the co-op doing enough to support locally made goods by members?

The co-op should record and report metrics that allow the membership to verify that performance against the purpose is increasing year over year. This should include revenue and profit in the self-propelled wilderness oriented recreation category.

In conclusion:

These are very reasonable requests. If I receive a meaningful number of votes in this election, I hope that the Board will take them to heart.

Thanks for reading and happy hiking,

Cheers,

Steve