Recovering from Financial Mismanagement
Weavers Way Co-op, like many co-ops, has always taken pride in a feeling of community, a culture of trust, and a way of doing things that was a little bit different from everybody else. But it wasn’t until two years ago that we began to realize just how differently things had been done.
On November 19, 2002, several hours before the scheduled closing of a construction loan for a prepared foods expansion project, our finance manager—an 11-year employee—excused herself to see a doctor about a vague foot pain. When she hadn’t returned a couple hours later, fellow staffers expressed concern about her whereabouts. A couple of hours after that, concern turned to alarm and a frantic missing person search began.
Over the next few days, while staffers maintained store operations and continued the search, our general manager struggled to make sense of the chaos and inconsistency he found as he took over the finance manager’s duties. By the time we got word the finance manager was alive and unharmed, the G.M. was convinced something was terribly wrong with the co-op’s finances. In the midst of the entire organization’s spasm of relief, the realization spread that the finance manager had grossly misrepresented the co-op’s financial situation, and it was much more dire than anyone had suspected.
In the following months, the tangled knot of Weavers Way’s finances would be unraveled enough to reveal that through hidden overdraft fees, late charges, unpaid invoices, neglected taxes, misappropriated 401k payments, and, most distressingly, funds diverted from expansion loans from members and others, the
co-op’s assets had come to be misrepresented by over $400,000.
It is still unclear exactly what the finance manager’s motives were. For some members, it is impossible to imagine there was not theft, although there has been no evidence of that. Others have speculated that what began as a coverup of a single error in a time of personal distress snowballed into an avalanche of lies, fraud, and misappropriation. There was unquestionably a deliberate falsification of documents and a coverup, but a forensic audit that might determine whatever else had happened would be prohibitively expensive. One thing that is clear is that both the board and management failed to provide adequate oversight to prevent what did happen.
The leadership of Weavers Way responded to the crisis with measures both immediate and gradual, short-term and long. Checkbooks were locked away and some CODs were refused. Meetings were held to explain the situation to staff members and member lenders; a letter was distributed to members and posted on the internet (followed by weekly updates); and press releases were sent out in an effort to get ahead of the story and keep the repetition of inaccuracies to a minimum. An accounting firm experienced with similar crises was hired to recreate our books, and a Crisis Committee was formed, later renamed the Recovery Committee. A “Save Weavers Way” fundraising campaign was started, certain fees were renegotiated, and a surcharge was instituted on all purchases.
In addition to the newly discovered debt, however, we were also faced with a sizable operational deficit; an austerity package of wage and benefit givebacks was accepted by the staff.
The huge hole in our institutional memory left by the finance manager’s departure complicated the recovery efforts, as did the sudden vacancy at her position, where most of the burden of the crisis otherwise would have fallen. The finance manager’s regular duties were absorbed by the general manager and other staffers, as was the additional work caused by the crisis itself.
The reaction throughout the co-op was overwhelmingly supportive, but there were other reactions as well: incredulity that this could have happened; resentment that staff had to pay for what some viewed as a management goof; distrust among the members over the organization as a whole; and, even among supportive members, a concern about throwing good money after bad. At a time when Weavers Way needed its members’ support the most, many members were understandably cautious with that support, or at least the financial aspect of it, waiting for some indication that the co-op would pull through before they lent it any more support.
But as the numbers came in, week after week, the short-term measures proved effective; for the first time in years, the co-op was unquestionably running in the black. Once the short-term viability of the co-op was established, the focus shifted to our long-term survival. The next challenge was to chip away at the debt. With the expansion project on indefinite hold, we sold one property and moved its functions into the recently acquired prepared foods property. Debts were restructured and loans refinanced.
There still remained the task of establishing solid financial numbers and figuring out, to whatever extent possible, how things had gone so wrong. To perform this last task, the co-op formed an Accountability Committee composed of highly qualified Weavers Way members (and one nonmember) previously uninvolved in the co-op’s governance.
In April 2003, we hired a new finance manager, but suffered another setback as his first day on the job coincided with the general manager’s resignation. For the next year, purchasing manager Norman Weiss assumed acting general manager duties (a role he had previously filled fifteen years earlier). Over the next twelve months, under Weiss’s deceptively laid-back leadership, the co-op continued to operate in the black as the accountants and new finance manager did their work, the accountability committee issued its report, and Weavers Way hired a new general manager.
As we approach the second anniversary of the inception of the financial crisis, the picture at Weavers Way is vastly improved. The new general manager, Glenn Bergman, has tackled his job with energy and vision. The financial picture looks healthy as we await the results of Weavers Way’s first full audit. The staff has regained a small portion of the benefits they lost and hopes to regain more. The board of directors has initiated a program to give its members the financial training they need. And expansion, which seemed so out of the question in the months immediately following the crisis, is once again being discussed.
Needless to say, we have all learned a lot over the last two years. Many of the practical lessons, especially regarding financial controls, probably wouldn’t be news to most people reading this. Unfortunately, to us it was. The root cause of most of these failures stemmed, ironically, from the culture of trust that had long been at the core of Weavers Way’s identity. It was something that the management and board had inherited from their predecessors but had not addressed as Weavers Way evolved from a basement buying club into a $5 million business. Still, as each failure of financial controls was recognized and rectified, there was a feeling of sadness, a feeling of loss, as if a small portion of our identity and our history disappeared.
Fortunately, there were happier lessons as well. We learned that improving the bottom line and following standard business practices is not inconsistent with the sense of community so important at Weavers Way.
We also relearned to listen to, learn from, and rely on our members, both in the day-to-day interactions between the members, staff, management, and board, and in the myriad ways the membership became more involved in the governance of their co-op. The best example of this was the Accountability Committee, which brought previously uninvolved but highly qualified members into active participation in their co-op. It is impossible to overstate the importance of this committee and what it accomplished for Weavers Way. No matter how much money we raised, no matter how hard the staff, the board, and other committees worked, we could not have succeeded the way we have without the Accountability Committee, the work that it did, and the report that it made to the members. It gave members confidence that our co-op was not beyond redemption, that healing was possible, and that our identity was secure.
Even as we learned from the failures that led up to our financial crisis, we also learned from the successes that followed it. From the beginning of the crisis, we went to great lengths to keep our members informed and our processes transparent through special meetings, published bulletins, our newspaper and website, and other means. By educating the membership about the facts of the crisis, we empowered them, and helped to remind some members that their ownership in Weavers Way is not just rhetorical but actual; more than just a slogan or an ideal, it is a practical fact: this is their co-op. As a result, many more members have become actively involved in the co-op’s governance, and that is a very good sign for the future.