PIP

Mutuality

Mutuality is the process whereby a group of people can organise a social or economic activity so as to manage the activities to serve their mutual benefit. Such organizations, also referred to as co-operatives, are usually organized so that everyone involved is a member and thereby has a say in how the organisation is run. In economic activities members can receive dividends from any profits shared amongst members. Dividends can be proportinal to the contribution of each member to the mutual's activities. Today, the most successful mutuals are those building societies which did not demutualise. The Co-operative Wholesale Society (CWS) was also a very successful retail store and one of the first supermarkets. Portsmouth pioneered the first self-service Co-operative store in March 1948 in Albert Road, Southsea and for many years, following the Second World War, the Portsmouth CWS paid one of the highest dividends in the United Kingdom.

One of the difficulties facing mutual organizations has been a hostile commercial and political environment which has tended to dilute the message of the benefits of mutuals in terms of member benefits as well as the social benefits arising from an institution developed and refined over generations.

Mutuals or co-operatives have a very cost-effective basis for operation and therefore face two challenges. One is managers who wish to benefit in financial terms from the significant size of their organization as well as the willingness to abandon the mutual model in the name of personal gain. The other major pressure against mutuals is from non-mutual organizations in the same sector of operation as a result of the real competitive effect on the sector. This competitive effect benefits consumers relative to shareholders in competing enterprises.

Pointless legislation & changes

There are no examples of de-mutualisation resulting in increased efficiency. Indeed, the most notorious case of a mutual building society demutualising and competing in the medium term with mutuals was the case of Northern Rock. Northern Rock never had a sustainable growth model but was able to demonstrate "savings" and better deals as a result of cash flow operations which were in fact unsustainable. Shortly before the Northern Rock collapse, the management of Northern Rock, in Parliamentary evidence were critical of the mutual model and asserted that access to so-called wholsesale money markets and "asset-based securities" was a more efficient, profitable and effective way to serve customers. It is paradoxical that although the recent debacle in the so-called "sub-prime" US markets has severely affected financial institutions, few have actually pointed out that this has served as a demonstration that mutual organizations have been less risk prone and, in fact, better performing (see: The benefits of mutualization in mortgage lending)

The CWS switched from direct dividend cash payments to stamps some time back and as a result diluted the concept of membership receiving dividends; there was a broad loss of ownership and therefore loyalty to the cooperative movement. Following the demutualisation of some building societies the benefits promised did not materialise. The management of demutualised building societies became the main beneficiaries of the moves to plc status. Members who thought they had received "windfall" gains, that is the offers they accepted in cash terms to support demutualisation, ended up paying all of the "windfall" back to the plc in the form of higher fees and interest rates. Most plcs recouped their payouts within four years of demutualisation. On the other hand the windfall gains to the management involved in organizing demutualisation were extremely high. Many have regarded this whole process to have been a sort of confidence trick geared to the financial interests of the management. The membership and solidarity aspects of cooperativism or mutualism has been so poorly sustained in recent years that under demutualisation members took their cash incentives but ended up paying these all back. Those who profited were those who had no interest in the organizations concerned but who took the up front payments and sold their shares.

Mutuals & legislation

One of the most important benefits of mutuality is member oversight of activities or direct accountability. Mutual management tends to have less guarantee of continuous employment and they are less able to pay themselves performance fees in the face of membership opposition. A large part of the recent financial troubles in the economy could have been avoided if mutualization had been wider spread but the management of the larger financial institutions and indeed, the Labour government which has within its number in Parliament some 29 Cooperative party members, have been ineffective in promoting such a solution with more vigour. It would seem that a sensible option for the government would be to promote and provide incentives for a spread of mutualization in all fields. In this way there would be more transparency, a direct and tangible particiation in the economy and a greater convergence of business and electorate interests.

Updated: 11th July, 2008.