Mutual interest

MUTUAL organisations have a long history – much longer than other forms of business organisation. Since earliest times people have come together to pursue matters of mutual interest. Modern companies have their roots in the 18th century but mutual organisations can trace their history much further back in time.

Historically, mutuals were simple organisations formed by a group of people to pursue matters in which they had a common interest. Many of them were to be found in the shipping and financial services industries. The friendly societies may well have been the earliest examples but by the end of the 18th century they were followed by building societies and, in the early 19th century, by savings banks and the co-operative movement. As time went on various Acts of Parliament were passed either to give legal recognition to these organisations or to regulate their affairs and give some protection to the public.

The mutual form of organisation was also to be found in the insurance business. Many of the very early insurers were established to cover risks in the shipping industry. Some were formed to insure one ship for a single voyage and were thus impermanent, but others began to be organised on a more established footing to price and cover risks in shipping and other industries.

Similarly, many of the early life assurance companies were formed as mutual organisations. A few, like Scottish Amicable, were started out as public companies but later converted to mutual status.

Demutualisation trend

In recent years it has been more common for mutuals to convert themselves into public companies and this has been especially prevalent among the building societies who have been enthusiastic about transforming themselves into banks. Savings banks have also followed the trend, firstly banding together (following publication of the Page Report in 1973) to form a single Trustee Savings Bank which then abandoned its mutual status and became a public company. Many of these organisations which gave up their mutual status have doubtless had time to reflect upon and regret their decisions to convert. This movement was particularly strong in the 1980s and early 1990s and was especially active in the UK, USA and Australia.

Perhaps the largest transition in recent years was that of Standard Life which, only a few years ago, put up a stout defence of its mutual status in face of opposition from a determined group of policy holders, only to change its mind a few years later and become a public company.

Its main argument for the change of mind was that its mutual status limited its ability to seek fresh capital from the money markets. This decision by Standard Life underlined one of the problems that mutuals face. If they want or need to expand, the option of going to the stock market for new money is not open to them. It might be possible to borrow money from other sources but for most mutuals the only way to raise money for expansion is to earn it. That is why having a healthy annual trading surplus and building up reserves is so important for mutuals. A substantial reserve fund is doubly important during difficult economic times.

At the same time this is often the aspect of mutuals which is least well understood by their members. Bumbling along for years at no more than break-even will, almost certainly, lead to the demise of the organisation.

Plus points

There are many plus points for mutuals. It is often, but not always the case, that their governance is much simpler than that of public companies, although they may be subject to the same regulatory oversight which can make life more complicated. Many mutuals have charitable status which brings substantial tax advantages both at national and local levels.

Perhaps the main advantage of being a mutual organisation is that there are no shareholders and, if there are no shareholders, then there are no dividends to pay and the organisation gets to keep its entire trading surplus for re-investment. This may also have the consequence of allowing the organisation to charge lower prices for its services. Management time can be better concentrated on enhancing the service provided rather than on worrying about how to generate profits with which to pay dividends. That is not to say, however, that the annual general meeting will be any less troublesome than that of a public company. For the members of a mutual can be just as demanding and just as vociferous as the shareholders in a public company.

The other advantage of mutuals is that they are not under the same pressure as public companies to reduce costs. The result of this is that they are able to provide a better service to their members. It is an often recorded fact that staff in a mutual organisation will try harder to provide a better service because their customers are the de facto owners.

It is also the case that many mutuals were formed because there was either no need for large amounts of capital or because those who formed them had a particular need which was not provided for by public companies. Such was the situation in 1902 when the Medical and Dental Defence Union of Scotland was begun.

Medico-legal risk

In the closing years of the 19th century a number of high profile medical negligence cases began to appear in the courts, especially in England. Many were frivolous and regarded as ‘vexatious’ but there was a sufficient number of serious cases for the medical profession to understand that it had an insurable risk. The Medical Defence Union was duly established in London in 1885. Only medical doctors could obtain membership. Dentists were excluded. Differences between English and Scottish law led to a feeling that the interests of Scottish practitioners were not well served by a London-based organisation. An early effort to establish a similar organisation in Scotland was short lived and it was not until 1902 that the Medical and Dental Defence Union of Scotland was established on a mutual basis by a group of nine doctors and one dentist who were practising in Glasgow.

The judgement of the founders was strongly based and within a year there were almost 500 members from all over Scotland. The first annual report shows a balance of only £135 but, as most of the cases being handled required only advice, this was deemed sufficient for the needs of the organisation. And so it proved. In the century and more since MDDUS was founded there have been enormous strides forward in medical and dental treatment. Society has also changed. Inter alia it has become more litigious. The need for MDDUS is greater than ever and it is a mark of the organisation’s success that it has resisted pressures to convert into a public company and has maintained its mutual status.

• Professor Charles W Munn, OBE, FCIBS, is a former chief executive of the Chartered Institute of Bankers in Scotland and an honorary professor in the universities of Dundee, Stirling, Glasgow and West of Scotland, where he gives lectures on business ethics. He is currently writing two histories of financial services companies