Trust was a real competitive advantage for mutual businesses. But the difficulty of meeting the conflicting expectations of different users and the slow adaptation to the requirements of changing technology explains why mutuality ceased to be a viable basis for stock exchanges.
However, if mutuality is not the answer to customers’ requirements for providers they can trust, the industry badly needs to find other answers.
Last week, Standard Life sent to its 2.4m members the heavy bundle of documents needed to secure their agreement to the flotation of the business. This marks the end of mutuality in Britain’s financial services sector: only a few minnows remain. All large building societies have already converted. Standard Life’s main rivals in the mutual life assurance sector were Scottish Widows, acquired by Lloyds TSB bank, and Equitable Life, which was forced to close its doors to new business. Even the London Stock Exchange itself has demutualised.
In the US, most thrifts and life companies shed mutual status long ago. Crédit Agricole, Europe’s largest mutual financial institution, now has its shares quoted on the French stock exchange although, with characteristically Gallic determination to have it all ways, it insists that its constitution is still that of a mutual.
Why was mutuality once so widespread in the financial sector and why did it disappear? Customers of mortgage banks and life companies have long-term financial relationships with their suppliers. This made it possible for them to run their businesses with capital provided by these customers. Mutual organisations had a competitive advantage in establishing trust, important in financial services: customers could more easily believe that the people who worked for a mutual business had their interests at heart. These advantages of mutuality – cheap capital and valuable relationships – remain valid. No single factor killed mutuality – an accumulation of minor ailments became terminal.
Different groups of customers may have different interests. As financial services became more complex, such divergences became more extensive. There is no simple means, within a mutual structure, of resolving issues such as the relative priority of savers to borrowers, or of guaranteed annuitants to other policyholders. And the needs of today’s customers may not be the needs of the customers the business must attract in future. Problems in meeting conflicting expectations of different users and slow adaptation to changing technology in the face of vested customer interests explain why mutuality ceased to be viable for stock exchanges. Other mutual companies encountered similar problems.
Trust was a competitive advantage for mutual businesses as long as they remained small. But the best of them grew large and their managers pursued growth and diversification. Once mutual companies became large financial conglomerates and gave sales targets to employees, they seemed indistinguishable from other financial institutions. Success eliminated the factors that had given rise to that success.
Success also undermined mutuality because it allowed the accumulation of reserves and created valuable goodwill. Conversion meant that the whole future value of the business could be handed to today’s customers. The size of windfalls this allowed made conversion difficult to resist.
Having too much capital became a problem for mutual businesses: but having too little was a more serious problem still. Undercapitalised companies found it hard to attract the profitable new business that was the only means of replenishing their equity. Within the space of three years, Standard Life moved from being pressed to convert because its goodwill was so large to being forced to convert because its capital reserves were so small.
Yet even if mutual businesses in the financial services sector have gone away, the issues that those structures once addressed have not. If mutuality cannot fulfil customers’ requirements for trustworthy providers, the financial services industry must meet these needs in other ways. This need for trust is equally important in activities such as health and education, where there is well-founded reluctance to hand over authority to agents whose financial interests may conflict with the interests of users. Mutuality died in the financial services sector because of a string of secondary issues which the law and practice of businesses run for their customers was inadequate to address. Answers to these questions still need to be found.