There is an interesting debate being conducted in the correspondence column of the Financial Times. Are mutuals inherently stronger institutions that are less likely to collapse? Or does the strength of an institution rely on the quality of its management, irrespective of organisational structure?
Relevant points have been made on both sides of the argument. Northern Rock would have been unable to pursue its course of self-destruction if it had remained a mutual. Yet mutuality failed to prevent some of our historic building societies from making unwise investments and, in effect, going bust.
The right answer, surely, is that both arguments are sound. Margaret Thatcher wanted the demutualisation of building societies to enable them to expand aggressively – and that is exactly why that course of action was wrong for a sector based on traditional (ironically ‘conservative’) building society values of low risk lending. Yet bad executives can also lead a mutual into ruin.
Anyone who doubts this should look at the example of the Irish Nationwide Building Society. Following the publication of the latest annual report from the people left with sorting out the mess left behind, more can be said about the mismanagement of this institution than the libel laws might previously have allowed us to say.
Irish Nationwide has published its latest results – and the last before it is merged with the (also state-rescued) Anglo Irish Bank. The loss for 2010 was €3.3bn (about £2.9bn), after a loss for 2009 of €2.5bn (£2.2bn). Its loan book is in the worst condition of any Irish bank or building society – worse even than that of the calamitous Anglo Irish Bank. The default rate on Irish Nationwide’s mortgage book is four times the rate of the industry average in Ireland (where default rates are, anyway, very high at present). Half the value of Irish Nationwide’s €11.5bn (£10bn) of loans have now been written-off – giving it the ‘status’ of possibly the worst managed substantial financial institution in the world.
Anyone who argues that mutuals are inherently better managed than joint stock companies should consider their case very carefully in the light of the Irish Nationwide example. The truth, says interim chief executive Gerry McGinn, is that Irish Nationwide did not operate with any sense of collective management, nor of proper board oversight. These pillars of corporate governance must be in place for any organisation to be well run – but this is especially true for a mutual.
In an interview with the Irish Times, McGinn suggested that Irish Nationwide’s office arrangements gave a clear hint of how decisions were taken. Former chief executive Michael Fingleton was in such total control of the organisation that all important meetings took place either in his office or the adjoining boardroom. “One guy made the decisions here – the layout of the building reflects that,” McGinn said. McGinn was definite about where the blame for two year losses of €5.8bn (£5bn) from just one institution should lie. Speaking on the day the latest results were announced, McGinn said: “What we are seeing today are the underwriting decisions of the former management team.”
As well as Fingleton’s dominance, the other factors that brought down one of the world’s largest mutual institutions were an unchallenged property mania that spread across Irish society and a plan to demutualise Irish Nationwide that was intended to enrich a few individuals, described by McGinn as an aggressive growth strategy that “fattened the calf for sale”.
Too many lending decisions were, in effect, taken by Fingleton, with little challenge from either other senior managers, nor the board. Not only were the underlying assets of less value ultimately than assumed, but a large proportion of the loans were made on ‘non-recourse’ terms – so there was no one, at the end of the day, to recover lost value from. And, just to underscore the errors of judgement, much of the lending was for the acquisition of land at inflated prices and involving very high risk of value collapse (which is what happened).
Only two other executives were engaged in lending decisions – and one of these was Fingleton’s own son. As well as there being “no orthodox management structure”, as McGinn puts it, the society’s financial records and documentation were of an “appalling” standard.
Although Irish Nationwide has now closed the last of its once extensive 49 branch network, the story does not end here. Ireland’s Central Bank and forensic accountants are carefully studying what records the society does have to establish whether there is further action – possibly including legal action – that might be taken and whether financial recovery is possible. The society has requested that Fingleton repay a €1m (£870,000) bonus paid to him after the state stepped in to guarantee Irish Nationwide, which initially, two years ago, he agreed to do. But the fact that the society has not received this and Fingleton’s failure to respond to recent requests for the repayment suggest, says Irish Nationwide, that he is not inclined to send the money back.
It would be pleasant to try to gloss over the failings at Irish Nationwide as a one-off. Sadly, I cannot be so complacent. It was a similar (if not quite so catastrophic) story at Equitable Life. I suspect that some former retail co-op societies collapsed because of the dominance of chief executives who, in reality, were not up to the job.
All mutuals should learn at least as much from the history of failure as from success. I hope that the Co-operative College, the Open University and various management colleges will study carefully the lessons offered by the Irish Nationwide. I say this not so that advocates of PLC style capitalism can gloat, but so that never again can a substantial mutual be allowed to so massively fail its members, wider society, its government and the movement as a whole.