The Lowdown: 'The Co-op can't survive without profit. It doesn't deserve to without principle'

Can a customer-owned, ethically guided conglomerate thrive while still remaining true to itself? Heather Tomlinson asks the boss

The Co-operative Group might be more right-on than your average business, with its ethical policies and mutual ownership. But at its tall office block in the centre of Manchester, there's not a mung bean in sight.

The group's chief executive, Martin Beaumont, is dressed not in hemp and sandals but in normal office attire – an appropriate image for the boss of an expanding business with a £7bn turnover.

In contrast, the Manchester headquarters have an antiquated feel; some buildings date from the mid-19th century, when the foundations of the Co-op's retail empire were laid. Its first outlets were set up and owned by consumers fed up with having to buy goods ranging from the shoddy to the downright dangerous, including chalk-impregnated flour and tea bulked out with iron filings.

At its peak in the 1960s, the movement had 13 million customer members, but then a period of decline set in. Many of the struggling co-ops were brought together to form a single organisation, which in 1997 had to fend off a bizarre takeover bid. This collapsed after the Co-op found evidence that the bidder had received leaked documents from Co-op executives, who had been bribed and were later convicted of corruption. It was after this episode that the Co-operative Group was formed.

The group encompasses an eclectic range of businesses. You can bank at the Co-operative Bank, buy drugs from a Co-op pharmacy, buy holidays from Travelcare, put your investments in Co-operative Insurance Society (CIS) funds, buy food from Co-op supermarkets and even get buried by Co-operative Funeralcare. The Co-op is also the largest farmer in the UK, on top of which it delivers milk, sells cars, makes corporate clothing and owns investment properties worth £190m.

But the man at the top does not have to be an expert in all these fields. "It is not my job to run the individual businesses," says Beaumont, a 53-year-old former public schoolboy. "My job is to make sure we have the right management structure in place, with the right people heading up each of those divisions."

Beaumont's role differs substantially from that of most chief executives. His owners are not greedy investors but "members", comprising smaller co-operative societies and three million of the group's own customers, many of whom are active in the wider co-operative movement. Beaumont doesn't even sit on the board of the group, which consists of 27 elected representatives, from "entrepreneurs" to teachers and trade union officials. Most are connected with other co-operatives, like United Co-op, the largest independent co-op in the UK, where Beaumont was chief executive before moving to his current job last year.

He and his executive team report to the board, and must satisfy both their political and ethical ideals, and their desire to expand the co-operative movement. Profit and principle must work together. "This business can't survive without profit, and it doesn't deserve to exist without principle," he says. "For us, both are essential. What we do with our profits is very different to what a plc does. But the profits are vital to delivering our co-operative objectives." In the next few years the group plans to reintroduce the dividend given to its customer members, and hopes to set up a profit-sharing scheme for staff.

For the past 10 years, the Co-operative Bank has famously had an ethical policy, which means it will not do business with arms manufacturers, for example, or with companies that test cosmetics on animals. The bank also campaigns on ethical issues. This year, it will target the chemicals industry, highlighting the millions of tons of substances released into the environment to unknown effect. Meanwhile, the bank's sister organisation, CIS, is planning to cover its headquarters in solar panels to provide electricity for the National Grid.

In its supermarkets, the Co-op sells own-brand chocolate made with Fairtrade cocoa, as well as Fairtrade bananas at competitive prices. Beaumont is proud of such initiatives: "That stance struck an enormous chord with consumers who are concerned about the environment and about ethical and social matters."

The bank says a third of its customers joined because of its ethical stance, so it wins despite turning away £4.4m of "unethical" business every year. Its Fairtrade products are selling more than the equivalent products did before.

Although the organisation reported increasing sales and operating profits in 2002, it made an overall loss of £88m for the year. This was due to a £285m hit in its CIS investment business, which has suffered from the ailing stock market.

Leaner economic times haven't stopped CIS from remaining one of the most vocal of the activist investors. Unlike the Co-operative Bank, it does invest in companies such as arms manufacturers, but has a policy of "engagement" and says it tries to encourage companies to improve their behaviour.

But like any business that puts itself out on a limb in such emotive areas, CIS has its own dilemmas to contend with. It pays more fees to its auditors for non-audit work than for audit work, a big no-no in current thinking on corporate governance. Its head of banking, Mervyn Pedelty, last year received a bumper salary of more than £1m. But this was thanks to two incentive schemes then operating, and Beaumont says there is "absolutely no chance" Pedelty will enjoy similarly large benefits this year.

But it comes as a surprise to find that a creamery in Wales belonging to the Co-op has a contract to pack dairy products for Nestlé. The multinational has attracted fierce criticism for its promotion of baby milk in the developing world.

But if the Co-operative Group sometimes finds it hard to be whiter than white, it is still unusual in being accountable only to its members rather than to City investors. "I can get more satisfaction out of business [by pursuing] the ideals and objectives that we've got than from purely creating shareholder value for City institutions," says Beaumont.

Recently the Co-op has dipped its toe in the City, buying Alldays, a struggling convenience store company, for £133m earlier this year. Last week it bought Sunshare Vacations, an online travel business.

Beaumont is still interested in buying more outlets in the food, pharmacy and travel sectors. The group intends to move into the electricity markets and has been given planning permission to build a wind farm. Beaumont is currently in the middle of a strategic review, looking at the different businesses to see if they are well placed within the overall group. Under a particularly bright spotlight are the loss-making farming and dairy businesses and the clothes manufacturing operations.

"We are asking, are we successful and do these businesses fulfil a co-operative purpose?" Beaumont explains. "There may be some changes – but while we may go out of certain businesses, we may also go into certain businesses. But there is an argument as to how many you can successfully be in at any one time."

The divisions will be working together more closely in the future, and a brand strategy is being developed across the group. Not that there's anything wrong with the brand as it stands, Beaumont hastens to add, pointing out that his three daughters, aged 22, 20 and 13, "regard it as cool to shop at and work for the Co-op". However, he admits this is not the mainstream view. "The current perception is a mixture of positives and one or two elements of baggage from the past," he says. "We must convert that to a modern personality."

Such talk of brand strategies harks back to Beaumont's roots as a consultant for accountancy firm KPMG, when he worked with co-operatives and became attracted to the industry. "I was frustrated with the fact that it seemed to be a sleeping giant," he says. "The co-op sector has been through a period of decline but there's a renaissance going on. I think it will become progressively more influential."