The dividends that we do not pay to shareholders are devoted to the future development of our business, but also to our members and staff...we do not wish to play yo-yo with our personnel.
Jean-Claude Seys, président of the French mutual insurance group MMA, see Le Monde 13 June 2007

The current wave of demutualisations and the accompanying arguments supporting the trend have led many industry observers to conclude that it is natural for mutuals to evolve into companies owned by stockholders. History suggests otherwise....As long as a mutual is well run and responsive to the needs of members, it can provide a measure of stability that members would be hard-pressed to find elsewhere.
Swiss Reinsurance Company, Are Mutuals an endangered species? in Sigma (Zurich, 1999), issue 4

It is not surprising that many businesses have failed to survive the Thatcherite whirlwind in their mutual form. It is all part of the abandonment of "gentlemanly capitalism".

Mutuality in decline

Mutuality - the ownership of an organisation by those who use it - is an ancient principle which till recently throve in Britain, but which has been largely swept away by the Thatcherite bulldozer. Not so long ago we bought our houses with building society mortgages, we did a good deal of our shopping in Cooperative stores, we insured our lives with mutual life offices; even the London Stock Exchange was a mutual institution, owned by the stockbrokers who traded there.

Today, that mutual culture has withered. Most of the building societies have converted into banks; the Coop hangs on to a mere 5% of the grocery market; almost all the big mutual insurers have demutualised; the Stock Exchange has become a public limited company quoted on the Stock Exchange, a move which recently put it at risk of being taken over by the American stock exchange NASDAQ.

How does a mutual organisation differ from a normal business? One way to answer this question is to compare a particular type of mutual - the members' club - with a hotel or restaurant.

The traditional club

The traditional town club, such as the Athenaeum or the Carlton in London, is a legendary part of British city life; it has its country counterpart too at Wimbledon, Hurlingham and many other places. The famous old-established clubs own very valuable properties, elegant clubhouses with impressive rooms, occupying prime sites in the smartest parts of London's West End. Some clubs own buildings worth tens of millions of pounds and have a few thousand members; the capital value per member may thus run into tens of thousands of pounds. But the joining fees payable by new members are generally very much less.

A members' club is owned by its members in equal shares. So, for a relatively small payment, one acquires a "share" in the capital of the club, which may technically be worth a great deal more. But one cannot sell this "share" to anyone else, one receives no dividends, and one cannot generally get one's money back on leaving. As compared with the normal capitalist scene, the club is a foreign country; they do things differently there (1).

A club resembles a business in that it is a trading organisation owned jointly by a number of people for their own benefit. Yet this ownership is clearly very different from owning shares in a company. It is indeed a rather strange investment. Why buy it? Well, plenty of people want to become members of clubs, some of which have long waiting lists for admission. The reason is that club membership offers advantages that cannot be measured in normal business terms.

"No place like club" (2)

Members of a club enjoy benefits which are handed on from each generation of members to the next. The original benefactors were the founding members, who put up the funds to buy the club building, perhaps in the nineteenth century or even the eighteenth. They, or their heirs, did not get that money back on resignation or death. The value they provided stayed in the club for the benefit of current and future members. Every member contributes to the club's ongoing value by paying a joining fee which is not recoverable; but every member enjoys the use of the club's inherited patrimony. Often that means a splendid building; few new members could pay today's full price for a share thereof. Moreover, since a members' club has no outside shareholders, any running surpluses or profits can be retained to pay for improvements; they do not have to paid out in dividends.

A club generally provides rather better value for money than a hotel or restaurant of similar quality. Moreover, a good club has an ambiance that is subtly different from that of a restaurant or hotel. Partly because by its nature it seeks to be an association of like-minded people. Partly because many clubs are "of the old school" and make a point of holding on to their traditions. Partly, again, because clubs are simply less commercial than most restaurants and hotels. They are not trying to make maximum profit from their users for the benefit of third-party owners; there is no point in doing so, since the users are the owners. They are not strongly motivated by the need to compete (3) and expand. On the contrary, most clubs limit the number of their members because they do not want to become overcrowded and thus diminish their amenity.

Asset-strippers at bay

A club, unlike a public company, is not normally in danger of being taken over by a greedy predator who might "asset-strip" it, or "improve its efficiency" by cutting down its staff. After all, ownership of a club belongs personally to the members; a "share" can only be acquired by becoming a member, and that provides only one "share".

Nevertheless, it is not impossible for members to sell out. If a majority of them wish to sell the club building to a property developer, and take the cash, they can agree to do so. And if they do, they stand to make a handsome profit. For, as we have seen, the proceeds of sale of the clubhouse will probably be far more (per member) than what each member paid to join. But that would mean the end of the club. Not what its members normally want!

Demutualisation

Mutual businesses such as life assurance offices, building societies and co-operative stores work on basically similar principles. They are owned by their customers, not by external shareholders. Customers do not pay joining fees like members of clubs, but normally they pay charges high enough to allow the business to accumulate profits, building financial strength to provide a cushion against adverse contingencies, thus giving the customers the advantage of dealing with a solid, secure, reliable business; which is especially important in the case of life assurance (4). This accumulation corresponds to the inherited assets of a club. Since there is no need to pay out dividends to shareholders, the mutual can often offer better value for customers than the non-mutual bank, insurance office or store.

But, just as with a club, the possibility exists that members may choose to sell out. That is what has happened to most of Britain's building societies and life offices. Those former mutual associations belonged to a culture which played down commercialism, competition, ruthless efficiency, maximum profitability and unfettered choice; which preferred stability and long-term business relationships. Just as there are obstacles (3) to changing one's club, there was a strong incentive to stay with the same building society; this made it easier to get a mortgage. And, likewise, with the same life assurance office; changing involved taking an ungenerous surrender or paid-up value.

Traditional values: dead or in hibernation?

It is not surprising that these businesses have failed to survive the Thatcherite whirlwind in their mutual form. It is all part of the abandonment of "gentlemanly capitalism". However, though mutuality in British business has almost vanished, many of the grand old clubs endure. Gentlemanliness may have forsaken the City; it lives on in the West End.

Every generation complains, as it ages, that traditional values are evaporating. Yet they are more persistent than the grumbling greyheads imagine. Indeed, in certain quarters today, the revival of ancient traditions is all too drastic. It seems unlikely that the business world will remain forever attached to the ethos of the capitalist jungle. We are growing tired of its stresses, its inequities, its financial crises and its social upheavals. We are learning, too, that the jungle is not compatible with preserving the earth's resources and thus, in the long run, with human survival.

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References

1 This paraphrases the opening sentence of L P Hartley's novel The Go-Between (1953): the past is a foreign country; they do things differently there.

2 This saying appears to be anonymous. "Truly the unknown poet expressed the cri de coeur of his countrymen when he wrote: there's no place like club": James Bone, The London Perambulator (Jonathan Cape, London, 1925) page 106

3 One may say that there is an element of competition between clubs to attract members. In principle, a member who is dissatisfied with his club can move to another. But in practice, there are obstacles to moving; joining a club entails being proposed and seconded by existing members whom one knows, while on leaving one loses the capital paid in on joining.

4 It has been argued that it is wrong for a mutual life assurance office to accumulate surpluses; they should all be distributed without delay to the owners (policyholders). But this argument goes against the spirit of mutualism, whereby current members contribute to building up the assets of the institution for the benefit of future members, just as current members benefit from the existence of assets built up by past members. The Equitable, the oldest British life office, failed partly because it had for many years distributed substantially all its surplus, and so had little or no "cushion" of reserves against unforeseen problems.