Ownership structures matter. It is not merely a matter of fairness or politics – structures influence and drive behaviour.
If anyone doubts that, think about one of the statistics quoted in Jonathan Michie’s just published study on financial mutuals*. Twenty five per cent of senior managers at the Woolwich Building Society left within a year and a half of it being acquired by Barclays Bank. “Culture has been the biggest change at the Woolwich over the last year to 18 months,” said group chief executive John Stewart. “A building society culture is wonderful in terms of customer care, but it isn’t particularly good at identifying where the value is in the business. We need a different type of person in the future.”
It was, of course, that different kind of ‘value seeking’ culture that was responsible for the collapse of the banking industry in the UK, which was only rescued because the UK government stepped in with an £80bn rescue package. This, in the process, wrecked both public finances and the political consensus on the structure and character of society. As Michie goes on to stress, while some building societies and other financial mutuals also collapsed in the financial crisis, the big difference is that it was the ‘too big to fail’ PLCs that actually caused the credit crunch.
Other illustrations of the reality that ownership structures matter are quoted by Michie. One study found that PLC banks characteristically have higher risk profiles than do mutual banks. Another study reported that joint stock companies are exposed to higher total risk than are mutuals. Insurance PLCs were found by other reports to be more willing to remove themselves from activities offering lower returns, yet incurred higher losses than do mutuals pro rata for the level of premiums.
By comparison, financial mutuals report much higher levels of consumer satisfaction by a variety of measures and are consistently at the top of best buy tables.
None of this should be any surprise. The structure of PLCs is geared to maximising returns to shareholders. In the process, they are also orientated to producing very high returns to executives as incentives to produce those shareholder returns. The result of this is the cocktail of speculation and risk exposure that brought the capitalist system to the point of collapse. It is not merely that the banks made substantial mistakes in their activities, it is the reality that their position is so dominant that governments had no alternative but to bail them out. Michie makes the persuasive point that even if politicians are not convinced that the mutual model is fundamentally better and fairer, than at least they should recognise that a plurality of ownership structures is good for society and for the effective operation of the financial services market.
In this regard the UK fares very badly, despite the strong history of co-operation and mutuality. More than half of Irish citizens are members of credit unions, as are more than 30% of people in the US. While 5.3% of the UK insurance market in 2008 was served by mutual insurers (up from 3.9% the year before), the figure in much of Europe, the US and Japan was 30% or more. Co-operative banks play a key role as lenders to SMEs in much of Europe: there is no such equivalence here.
Michie also stresses that for many policy reasons, mutuals can play a central role in achieving government objectives. They did this, for example, with the previous government in supporting its delivery of child trust funds (sadly being abolished by the coalition). Historically, friendly societies laid the foundations for the welfare state. Mutuals are also less footloose (several PLC insurers are in the process of restructuring and moving headquarters overseas to reduce their tax payments to the UK Government). They are more committed to their localities in terms of how they allocate spending and more generous with charitable donations to local good causes. In many cases (as with credit unions), mutuals provide services that would otherwise not be provided.
For all these reasons, a growth in the mutual financial sector is desirable. Yet the regulatory structure is discriminatory against mutuals – and is becoming increasingly so with the tougher capital adequacy requirements being imposed both globally and within the UK. Regulators tend to underestimate the importance of mutuals and overlook them in their policy considerations.
Michie suggests that with the restructuring of regulation in the financial services sector, this is an opportune moment to create a specific responsibility for fostering diversity in provision, including through the promotion of financial mutuals. Within the regulatory bodies, a senior person should be appointed who has an expert knowledge of mutuals and whose role will be head of mutuals policy. The impact of regulation must also be considered, recognising that smaller organizations (such as small building societies) are less able to cope with a compliance burden, yet need less rigorous oversight than does a major PLC that genuinely is too big to be allowed to fail.
At a political level, too, mutuality must operate as a significant part of the system. Michie’s proposal is for a ‘minister for mutuals’, whose position is equivalent to the existing minister for the City. A mutuals minister would lobby for the sector as a whole and not just for financial mutuals – the minister would also support the welfare of co-operatives and other mutuals operating in the retail, manufacturing, sports, health, education and other sectors. (This presumably includes agriculture as well, though this is not mentioned in the Michie report.)
Perhaps this idea will be given a fair wind. Encouragingly the influential Liberal Democrat Danny Alexander, chief secretary to the Treasury, wrote the foreword to the report. He welcomed the report “as a contribution to [the] debate as to how we can best deliver a stable and diverse financial services sector”, also saying “we want to ensure that there is room for diverse providers of financial services to flourish in a fair and competitive market”.
Jonathan Michie is correct in his belief that this report needs to be regarded as important and not just for the co-operative and mutual sector. “The Government must not allow the UK’s financial services sector to return to the ‘business as usual’ model that has proved so costly to the economy and to public finances,” he said. “Already we have seen a return to the bonus culture, which is fuelled by profits boosted by the increased market power of banks which have been rescued by the taxpayer. It is vital that the banks face competition from mutuals, which would also reduce the risk of the credit crunch being repeated.” He is, of course, completely right.
* ‘Promoting corporate diversity in the financial services sector’ is written by Professor Jonathan Michie, who is director of the Oxford Centre for Mutual and Employee-Owned Business, part of Oxford University. The report is published at www.kellogg.ox.ac.uk and was commissioned by the Mutuo think-tank.