MEC governance changes spark dissent among long-time loyalists

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When Steven Jones tried to run for a spot on the board of Mountain Equipment Co-operative last year, he didn't get very far.

On paper, Mr. Jones seemed like an ideal candidate for the Vancouver-based retailer, which is one of Canada's best-known co-ops, with more than four million members. He is a Vancouver-based software executive and a loyal MEC member, having spent $23,000 at the chain since 2009.

But Mr. Jones, 32, was disqualified from running by the board of directors' nominations committee. He was told he did not meet the minimum criteria, which included having senior management or board experience "in a complex organization."

He is one of nine candidates rejected for that reason in the past two years, something several members say is a reflection of how MEC is losing its way.

"If we start to place aggressive limits on which members are allowed to stand on the ballot, … it represents the erosion of the democracy of the co-op," Mr. Jones says.

The concerns raised by Mr. Jones and others have touched on a broader existential crisis that has befallen one of Canada's most admired retailers. Over the past four years, the board of MEC has made it increasingly tough for members to put their names and resolutions to a vote by their peers in order to set the direction for the 44-year-old institution. The board has so tightened the rules that even former chairman Anders Ourom, a nine-year board veteran, was deemed unqualified to stand for election three years ago.

The tension is part of a larger issue facing the iconic Canadian merchant, as it increasingly collides with fast-growing rivals and grapples with weakening profits. While it has grown to 18 stores across Canada and $336-million in annual sales, many rivals now stock merchandise similar to MEC's outdoor equipment and sporting goods, and emulate MEC's feel-good environmental and social responsibility slant.

MEC's leaders have responded by reinventing the retailer's business model, broadening its product lineup with more mainstream items such as road running shoes and downhill skis, and aiming to better serve a different set of customers: younger, more multicultural and female.

But as MEC drives to modernize and beat back new competitors, the company's governance changes have prompted a stiff rebuke from some long-time loyalists. MEC chief executive officer David Labistour characterizes the opponents as "a few disgruntled members," but their ranks include founding members, former directors and governance experts.

"Any intelligent person should be able to get on that board and do a good job," says former chairman Chris McNeill, who is among the opponents. "It's a values-based organization and that's what things should be based on. If there are too many people with sophisticated backgrounds, they will have a mindset or bias there because of the type of person you're asking for."

It is common for corporate boards to vet who can run for election. But MEC is a co-operative, a democratic institution in which all customers are members and each has a right to vote, although few do. "If you lose accountability to the owners, … you don't have that safety feedback loop of calling the board out from time to time to make sure that they're not driving us off in the wrong direction," says Mark Latham, a Vancouver governance expert who has advised the U.S. Securities and Exchange Commission and publicly criticized MEC on board issues. "I don't think members' interests are well protected by the governance as it is now."

It's a charge that MEC's leaders reject. "This is not a role that anybody can fill," because of the skills needed to govern an increasingly complex retail business, MEC chair Margie Parikh says. Adds Bill Gibson, MEC's former chair and CEO, who helped to enact many of the changes: "You can't have nine people who have just come out of the woods from a hike trying to run a $350-million business. … I guess you can ask, 'Does a democratic organization entitle … every member to run for the board?' I don't think it does."

To some, the organization has become a co-op in name only – and barely so, after reducing its brand name to the acronym MEC and replacing the mountain in its logo with a green box. In that way, it's similar to many other co-operatives that have struggled to reconcile their core founding mission and commercial exploits. "The goodwill of being a co-op is being diluted," says David Kincaid, founder of branding consultancy Level5 Strategy Group.

Roots in a borrowed van

MEC's early days are the stuff of retail and co-operative legend. In the late 1960s, a group of young Vancouver-area mountain climbers grew frustrated with the poor selection, lack of quality and high prices of gear at local retailers. They regularly crossed the border to buy their sleeping bags, tents, ice axes, stoves and other gear at outdoor specialist Recreational Equipment Inc., a co-op based in Seattle.

In 1971, some of those climbers decided to establish their own retail co-op based on the principles of offering quality, affordable gear for back-country adventurers. The man who did more than anyone to set up MEC was Jim Byers, a surveyor who was enamoured with the co-operative model, where members are shared owners with one vote apiece and eligible for dividends. Mr. Byers wrote MEC's constitution and started the operation, which sold memberships to customers for $5 apiece, still the cost today.

At first, MEC operated out of a borrowed van; Mr. Byers would drive to local outdoor clubs with a one-page catalogue of items from Recreational Equipment Inc., collect money, then pay the helpful U.S. retailer wholesale prices and bring the items to Canada. He and other volunteers established a modest 20-per-cent markup to keep prices low.

MEC opened its first retail space in a cramped room in a building on Vancouver's West Hastings Street in 1972, and eventually moved to increasingly larger venues around the city as sales and memberships grew. By 1981, the co-op had opened a location in Calgary and had 57,000 members.

The MEC of that era had a pioneering spirit and zealous devotion to catering to serious back-country adventurers. For example, staff fretted over a move to sell narrower cross-country skis, fearing that they were pandering to those who preferred groomed trails to bushwhacking.

Its early directors were seen as part of a "working board" who were "expected to help in the store, help design product and make suggestions," says Chris McNeill, an early member who served on MEC's board for 20 years. Directors were acclaimed every year at chummy get-togethers until 1985, the first year there were more candidates than positions.

But as the co-op grew, there was rising "strife, chaos, dissension and muddle" between staff and directors, says Sara Golling, an early member who served on the board for 15 years starting in 1992. MEC "needed more governance and less hands-on work from its board members," she says.

By that point, with sales topping $35-million and the membership swelling to 330,000, board policies "were pretty sparse … and some of the ones in existence then were inappropriate for running a business," Ms. Golling says.

The co-op began to grow up. In 1992, it reached outside its ranks and hired Bill Gibson, a retail veteran from Hudson's Bay Co., as CEO. He was a decade older than many of the climbers and cyclists on staff and "he didn't have a lot of the cultural fit for MEC," says Mr. McNeill, who was chairman at the time. "We hired him for his experience, and he was a goldmine for that."

Within a few years, MEC expanded to Ottawa and Edmonton and saw its membership swell to more than one million. The board instituted governance policies meant "to recognize the difference between governing and inter-meddling, and to understand that an individual director had no right to go off and tell staff what to do or how to do it," Ms. Golling says.

By the 2000s, MEC's continued growth brought fresh concerns. In 2006, Mr. Gibson's successor, Peter Robinson, told the annual meeting that some staff feared that the co-op, which topped $200-million in sales that year, was getting too big. Ms. Golling felt some staff lacked "any real understanding of what a co-op was" and that some "senior managers felt it was just an unfortunate accident of history."

Meanwhile, there were concerns that the board was not adequately equipped to oversee an ever-expanding retail empire. Mr. Gibson, who by then had become a director, said some fellow board members "were not just unqualified – they were disruptive" – spending hours at a time pushing "totally irrelevant … and esoteric" issues.

Invasion of the competitors

Just as MEC was changing in the 1990s, so too was Canada's retail scene. American retailers, such as low-cost titan Wal-Mart Stores Inc., arrived here and intensified competition. Others followed in the ensuing years, including e-commerce powerhouse Amazon.com Inc. In 2011, Canadian Tire Corp. bought Forzani Group Ltd., the country's largest sporting-goods chain. And SAIL, an aggressive discounter in the outdoor category, began to expand across Canada from its Quebec base.

By the time Mr. Labistour took the top job at MEC in 2008, these major shifts and other changes were well under way, putting pressure on the co-op.

His research found that the MEC membership was increasingly university-educated, opening the way for far more female and culturally diverse shoppers as more members of visible minorities moved to Canada – and driving a need for change at the co-op. "Our traditional business was based on a white Anglo-Saxon male approach to the outdoors," he says.

Meanwhile, MEC was losing its female customers; in 2011 alone, female membership declined by 8 per cent, he says. "We changed the mission of the organization."

David Gray, a Vancouver retail consultant who advised MEC on a new strategy, says the retailer needed to adapt to a shifting consumer, who was doing more front-country running, biking and yoga in cities, rather than back-country activities. And younger shoppers, 20 to 35 years old, were becoming MEC's most important customers.

"There are going to be some politically oriented to the co-op movement who are going to say that something is lost," Mr. Gray says.

Mr. Labistour responded by broadening MEC beyond its core outdoors goods to such categories as bicycles, yoga wear and, this week, downhill skis and snowboards. MEC's big bet on its revamping has not come cheap as it invests in new systems: In 2014, its operating profit (or its surplus, which is earnings before "patronage" dividends returned to members and income taxes) fell to $8-million from $10.3-million the previous year. That represented 2.4 per cent of its sales in 2014, compared with 3.2 per cent a year earlier. And profit is expected to be close to break-even next year, Mr. Labistour says. "We're going to be running tight surpluses for the next two years."

The CEO faced hurdles in some of his strategies. When MEC entered the bicycle segment, independent retailers quickly mobilized, persuading many of their suppliers of high-end bikes and parts to boycott MEC.

To this day, major North American bike vendors snub MEC. "We're still shut out of a lot of product, from helmets to parts to bike brands," Mr. Labistour says. "Whenever we go into a new activity, we get a lot of resistance from our competitors."

The strains with suppliers go back decades. In the earlier days, vendors boycotted MEC often because it would not agree to their suggested retail prices but rather offered lower rates as a co-op. That forced MEC to eventually produce its own in-house goods.

Rivals also accuse MEC of having an unfair advantage because, as a co-op, it does not pay corporate income tax on surpluses that are returned to members. "I have to compete with them as everyone else does, but we're not on the same playing field," says David Russell, co-founder of retailer Sporting Life, whose expanding high-end business overlaps increasingly with that of MEC.

But in other ways, MEC is becoming more like other retailers. It now offers items for higher, manufacturers' advertised prices, and also engages in more discount clearance selling than it ever did, critics say.

"They've become captured by the very retail structures that we fought against," says MEC founder Jim Byers, who accuses the company of becoming "another part of blatant consumerism."

Mr. Labistour acknowledges that MEC adheres to suppliers' minimum advertised pricing. "We are today a different organization in many ways, but are still a co-op and still transparent, to a fault sometimes. … I have had many personal meetings with disgruntled members who don't like our changes and direction and have often walked away agreeing to disagree."

Some marketing experts and rivals say MEC is drifting too far afield from its roots. Its strength was built on it selling outdoors sporting goods, consultant Mr. Kincaid says. "As soon as you start confusing that community, you start diluting that brand."

Some rivals find the rebranding an odd fit. "It just seems there is no stopping them," says Kevin Senior, co-owner of Bow Cycle in Calgary and president of the Canadian Independent Bicycle Retailers Association. "It seems they want to get into every market they can.… They're just becoming a big sporting-goods store competing with independents as well as big-box stores."

Mr. Senior has told his bike suppliers that if they ship merchandise to MEC, "we've got choices – we're not going to buy from you."

"Our business was built on independent bicycle retailers," says John Williams, president of Live to Play Sports, which produces bikes such as Norco and distributes others and doesn't ship to MEC. He even dropped the upscale Ridley bikes a couple of years ago when MEC started to stock the Belgian brand. The expertise of small cycling shops "is difficult to replicate in the big-box stores," he adds.

Competition on feel-good front

Rival retailers have been eating away at another one of MEC's long-standing distinguishing advantages: a feel-good reputation for environmental and social responsibility.

MEC directs 1 per cent of its gross sales to environmental causes. But many other retailers, including Wal-Mart, have embraced corporate social responsibility as well, making MEC a little less distinctive.

Meanwhile, the co-op's dedication to being transparent about its operations and supply chain has revealed some inconvenient truths. For example, in 2014, just 38 per cent of its factories "met or exceeded" its expectations, albeit up from 31 per cent in 2013, while five factories had "unacceptable violations," according to its 2014 annual report.

On employee satisfaction, a telling measure for a co-op, MEC also divulges more than many other companies, although it has not met its targets. MEC's employment "engagement" peaked at 72 per cent, three percentage points over the national average, in 2009 and then fell to 63 per cent four years later, failing to hit its goal of 68 per cent, according to the co-op's reports.

It's "not where we wanted it to be from our original target, but an important context here is that our scores have always been at the top end of best in class for retail," Mr. Labistour says.

Long-time loyalty

Despite the strains, shoppers are still drawn to MEC. On a bright and sunny Sunday afternoon this month, a steady stream of people visits the MEC superstore in downtown Toronto. Among them, Katherine Zeltner and Jonathan Skinner are inspecting a Volt 2 tent that their salesman, Anibal, has just set up for them on the floor.

After Anibal, a 10-year MEC veteran, provides step-by-step instructions on how to build the $299 tent – on sale from a regular $369 – Ms. Zeltner and Mr. Skinner crawl into the two-person shelter, spreading out to test it out. Anibal reminds them that they can return the tent if they buy it and don't like it.

"The salespeople here are just awesome and outdoorsy," says Ms. Zeltner, 46, who along with Mr. Skinner, 47, are avid campers and expect to buy $1,000 worth of gear this day. "You don't get any attitude. I don't know if that has anything to do with it being a co-op."

Mr. Labistour points to signs that the new strategy is working. MEC sales rose almost 5 per cent to $336-million last year and are expected to reach $350-million in 2015. Back-country gear makes up just half the sales, with emerging new categories, such as cycling and running goods, taking on more importance.

But it's other changes that have prompted much of the current rancour.

In 2013, the board increased the number of signatures required to get a motion placed before the membership to 500 from five. That happened three years after a volatile annual meeting, at which police were put on alert when protesters confronted the retailer over its sourcing of goods from an Israeli company that also supplied that country's military. Now, even if a special resolution has the required number of signatures, the board can still refuse to put it on the ballot if two-thirds of directors are opposed.

The board always had the right to prevent members from running if they did not meet certain criteria, such as being a Canadian resident or passing a criminal record check. But Mr. Gibson said the board needed more.

First, it began endorsing selected candidates, a practice previous boards had vanquished. Then in 2013, the board required that director candidates have board or senior management experience "in a complex organization." For the 2016 election, the board requires directors to have that experience "in an organization of comparable complexity to MEC."

The board blocked two members from running in 2014, and seven more, including Mr. Jones, last year, saying they lacked the required experience. The changes inspired a 600-member group, calling itself MEC Members for a Democratic Co-op, to send an open letter of protest in 2013.

Along the way, directors got a raise: The basic retainer for the board chair is now more than $58,000. Four years ago, it was $30,500, though MEC executives say this is below that of comparable organizations.

Management and the board defend the changes. Curating the candidate list "offers membership an informed election" that is both transparent and "in line with the health of the organization," Mr. Labistour says. And members have approved the changes.

But opponents say the MEC board controls what is communicated to them in their annual meeting materials, tipping the scale in favour of the board's proposals. The net result, governance critic Mr. Latham says, is a board that can make itself less assailable from the outside. With the board able to disqualify candidates and disregard resolutions it doesn't like, "those are our two main governance mechanisms, gone," he says.

Mr. Latham warns that this is a situation that has played out at other co-ops that have become more like corporations, empowering the few at the expense of the many and grinding down the power individual members have.

"You want people on the board that represent a cross-section" of the membership," Mr. Jones adds. "There's nothing that says in the rules of the co-op that we need to be a big corporation. The question for MEC and a lot of co-ops across Canada is, 'Is the democratic nature of co-ops a strength or has it been a liability?' I'd argue the reason MEC has been so successful is because of the diversity on the board."