Mutuals are not always a good middle way


        Mutuals have been muc h in vogue with all 3 main parties in the Uk in recent years. It is true that John Lewis has been trading very well. There is something satisfying about their model of staff participation in the success of the business which attracts both Labour and Conservative to them.

           However, when it comes to the financial sector both the Co-op and Equitable Life have shown a darker side to mutuals. Politicians need to learn from these bitter experiences that the mutual model can be both risky and  unfriendly to customers and employees alike.

           The mutual model has largely disappeared from the Building Society movement. There were too many small societies with insufficient capital. Some got into trading difficutlies and needed to look for larger partners. Others decided that becoming a for profit bank was a better way to expand their service and finance themselves in the future, so they converted willingly. We need to ask why this was so?

            One of the main weaknesses of a mutual is the absence of enough retained profit to give the business balance sheet streength. Mutuals often pay out too much to satisfy their demands of their mutual owners, leaving them weak should profits slump or assets fall in value. Well based banks and insurance companies need a good reserve to fall back on, and sometimes need the support of shareholders able and willing to put in new capital. Mutuals have neither of these safeguards.

               Mutuals can also lack the competitive edge and the close scrutiny of management that occurs in quoted PLCs. Equitable Life was so keen to pay out more to its policyholders that it made them promises it could not possibly fulfill. Its Board and management did not recognise this problem, and allowed promises to be made and liabilities built up over many years before the truth came out about its plight.

                    So too with the Co-op bank. Far from proving to have a superior moral model to that of the profit making PLC banks, the  Co-op Bank managed to build up a large portfolio of assets which were full of  problems. It has now had to make enormous write offs. To cap it all, it hired a CEO who wanted a huge salary, which was unpopular with many of the true believers in the Co-op approach.

                   We should beware of the idea that there is a moral superiority in mutuals when we look at two of the largest, Equitable and the Co-op. We should also recognise that their enthusiaism to pay out too much to co owners made them far more vulnerable to a downturn and to adverse conditions.


  1. Lifelogic
    March 14, 2014

    Indeed this is all very true for mutuals which are so often run for the benefit of the senior staff. Equally however the quoted PLC structure is rather broken and in decline too. Company directors are often able to extract huge fees that should rightfully be the shareholders even while running the businesses totally into the ground.

    Real control (particularly of remuneration packages) need to be give more to shareholders.
    Some directors get away with virtual corporate theft and murder and yet still retire with millions in pensions. Payment for total destruction and failure quite often.

    There as a parallel to be drawn with UK PLC where the state sector is paid 50% more than the private sector (with pensions included) yet largely live of the backs of the private sector.

    The democratic control structures are generally very ineffective. The powers that be get into power and just help themselves from the honey jar. Even to the extent of passing special tax laws and different pensions rules for themselves.

    1. margaret brandreth-j
      March 14, 2014

      Are you saying that the FCA are not undertaking their job then?

      1. Lifelogic
        March 14, 2014

        Indeed the FCA then and now the Prudential Regulation Authority with their absurdly structured “slotting” for loans seem to be acting very irrationally and damagingly to me. Causing yet more harm to the banking sector and to loans for businesses.

        If the government are going to insure the bank deposits they need to manage the risks involved and the premiums charged. That or preferably they need to get out of the insurance business as they do not what they are doing.

        The banks were too loose in 2007 and are rather too restrictive now on business lending.

        1. Bob
          March 14, 2014

          Who was in charge of Northern Rock’s Risk Management Committee when their liquidity ratios became so dangerously low?

          I think we should be told.

    2. uanime5
      March 14, 2014

      There as a parallel to be drawn with UK PLC where the state sector is paid 50% more than the private sector (with pensions included) yet largely live of the backs of the private sector.

      Care to provide some evidence to back up this claim as studies have shown that the difference is much less than 50% and when you factor in the levels of education those working the private sector earn more than the public sector.

      The democratic control structures are generally very ineffective. The powers that be get into power and just help themselves from the honey jar.

      The corporate control structures aren’t any different.

  2. Mike Stallard
    March 14, 2014

    And our local Co-op which has sold out to Morrisons (who do a much better job) was first to put up a wind farm on its real farm. Smug groupthink?

    1. Lifelogic
      March 14, 2014

      Doubtless a wind farm that is paid for by Osborne, Davey & Cameron’s policy of endless subsidies for pointless greencrap. Paid for too in the loss/export of jobs due to high energy prices and over taxation of the productive.

      A hugely damaging misallocation of capital.

  3. Mick Anderson
    March 14, 2014

    The Halifax lasted a lot longer as a mutual than it did as a self-supporting bank. If all those customers who wanted a windfall from the reserves had not been so greedy, things could have been different. The Nationwide still seems to be OK….

  4. John Eustace
    March 14, 2014

    I would argue it is the involvement of politicians in running these institutions that is the red light.

    I expect you will soon have opportunity to write an article looking at the parallels between the Co-op and the German Landesbank.

  5. alan jutson
    March 14, 2014

    Its not the fact that the Co-Op and Equitable Life were mutuals which caused them to fail.

    We had Northern Rock, Lloyds TSB, and RBS and a host of others also failing, and they were not mutuals.

    The common factor in all of these were Poor management who seemed to manage to hoodwink a very poor Regulator, who simply failed to spot (or make public) any tell tale sign of the problems.

    Likewise we should perhaps also look at the role of the auditors in all of this, it would seem that they performed their legal duties correctly, but also failed to spot any of the problems, giving them a clean bill of health every year until collapse.

    The sad fact in all of this is that the management/directors in every case, were paid millions for their services, because of the usual mantra of we have to pay that much to get the best, and their performance turned out to be a disgrace.

    If ever there was a case for being banned from being a director ever again, I would suggest some of these people should be put to the top of the list, not that it would be much of a penalty when they have escaped with millions and a huge pension pot.

    1. Lifelogic
      March 14, 2014

      Indeed the accounting rules, regulators, politicians interfering and auditors are all hugely culpable & yet always seem to escape. Far too many lawyers, managers and accountant but so few doing the right things for the benefit of business or the country.

      1. Lifelogic
        March 14, 2014

        Employment laws that stop you firing the useless do not help much either.

    2. APL
      March 14, 2014

      alan jutson: “The common factor in all of these were Poor management who seemed to manage to hoodwink a very poor Regulator,”

      I don’t think Lloyds TSB would have failed had it not been involved in the shotgun marriage with HBOS.

      HBOS of course was engaged in a competition for growth – any growth would do – with Royal Bank of Scotland. Two reckless management teams doing whatever it took.

      Then John suggests the Politicians should learn from these examples; what *WE* should learn is that Politicians* are hand in glove with high finance. They need big banks with access to deep liquidity in order to finance their deficit spending plans, without which they couldn’t buy elections.

      *Our former PM just loved preening himself at Mansion House events, smoozing with the financiers and lecturing the Europeans how things should be done.

      When is he going to turn up to Parliament?

    3. libertarian
      March 14, 2014


      I’m afraid Lloyds was a very strong well managed bank until they bowed to Gordon Browns pressure to make them take over HBOS etc THEN an only then did they fail

      1. alan jutson
        March 14, 2014


        Lloyds was strong, but then failed in the ultimate test.

        The Directors could have, and should have said NO !

        Thus I include them in the failure list.

        1. APL
          March 15, 2014

          alan jutson: “Lloyds was strong, but then failed in the ultimate test.”

          What if the ‘ultimate test’ was Gordon Brown rolling with the ultimatum, merge with HBOS or be Nationalised?

          Can’t really pass that test.

          There was much criticism of Lloyds management for being a boring retail bank … before the crash.

  6. forthurst
    March 14, 2014

    “However, when it comes to the financial sector both the Co-op and Equitable Life have shown a darker side to mutuals”

    As Sir John Chadwick (a retired Court of Appeal Judge) said in 2010 “The view is widely held among lawyers experienced in this field that the House of Lords’ decision in Hyman was unexpected and did not accord with the principles that should have been applicable in relation to a mutual Society”.

    Equitable Life may not have held comfortable levels of reserves in its with profits fund, but it was destroyed by the sharp-elbowed mediocrity that populated the Court of Appeal and the Law Lords at that time. As to the Co-op, clearly, insisting on socialist crdentials is rather limiting when it comes to running a bank, or indeed anything.

    Now can we talk about RBS, please and the fact that they have ‘lost’ all the money that the taxpayer ‘invested’ in it? By failing to break RBS up, the government has to take responsibility for its sin of omission leading to this disgraceful ste of affairs.

  7. Bert Young
    March 14, 2014

    Mutuals have the great disadvantage of medium to longer term strategy planning because the drive is more influenced from the shop floor upwards . All organisations have to continuously sweep the horizon in order maintain competitiveness and ensure they have the right products in place at the right time ; this initiative depends on the skills of a small centre who must be prepared to reach decisions quickly. Not such a long time ago Bullock tried to make it mandatory for worker representation on Boards – this , if it had been successful , would have introduced a time lag in decisions that most companies could not afford to take . Mutuals from a philosophic point of view do have a sympathy following , but those of us who have been exposed to the sharp end know full well that it is the bottom line that matters and there is little room or time for error .

    1. Lifelogic
      March 14, 2014

      If you put investors into the same fund and offer some guaranteed annuity rate terms and other not . You are clearly setting up huge problems between one set of interest and the other. Why on earth did they do this from the one pot, and why did regulators and auditors let them get away with it?

    2. uanime5
      March 14, 2014

      Given that in all German companies the board of directors is 50% workers representatives it seems that having workers representatives on boards isn’t bad for companies.

      Also you only need to make decisions quickly when managing a crisis. Strategic decisions require careful analysis, not rash actions.

      1. Edward2
        March 15, 2014

        You continue to tell us about all boards of directors in Germany having worker representatives Uni.
        But it is not true.
        Only subsidiary boards have workers on them and they can only advise and request not vote on major issues.
        There is nothing wrong with better staff representation in companies but real power in Germany is still in the hands of directors and major shareholders just as in the UK

  8. Robert Taggart
    March 14, 2014

    Mutuals may not be perfect, but, they just fine – most of the time.
    The Co-op maybe Socialist (a four syllable word – if you emphasise the a !), but, it has mostly served us well.
    Signed, Conservative Capitalist Cadger !

  9. acorn
    March 14, 2014

    You say; “Others decided that becoming a for profit bank was a better way to expand their service and finance themselves in the future, so they converted willingly [to banks]. We need to ask why this was so? One of the main weaknesses of a mutual is the absence of enough retained profit to give the business balance sheet strength.”

    We know why JR, since Northern Rock!!!

    As at 31 March 2012, UK government total support to the financial sector impacting the balance sheet = £114,400,000,000. Contingent liabilities and Remote contingent liabilities; Asset Purchase Scheme; Credit Guarantee Scheme and Guarantees to depositors = £255,400,000,000. (the two big ones are now extinguished, thankfully.)

    You say; “Well based banks and insurance companies need a good reserve to fall back on”. They certainly do; it’s called the government’s TAXPAYERS.

  10. MickC
    March 14, 2014

    “well based banks and insurance companies…………”?

    Now today, you really are having a bit of a “giraffe”, surely?

    Err, we don’t HAVE any well based banks and insurance companies. Every last one of them is effectively insolvent! Their capital base consists of….us, the fools who are taxed to support them.

    What we DO have are zombie banks no longer fulfilling the proper role of banking, but skinning alive both their depositors and borrowers whilst sucking on the teat of the state (actually, taxpayer) via QE, in order to pay their “top” (haha!) people indecent salaries and bonuses.

    SMEs are being destroyed by their policies-but thats fine apparently. No politician will get a nice sinecure from an SME.

    As for some mutuals having been too small, the real problem was the banks being too big. Apparently fine, so they could compete on the world stage-except they weren’t any good.

    Regrettably “big bang” allowed banks to become gamblers, rather than boring bankers-and that huge mistake has not been corrected. I (don’t!) wonder why.

    Until the zombie banks are put down there can be no real recovery (and please don’t quote the government statistics-only the Westminster bubble believes they are anywhere near correct).

    1. miami.mode
      March 14, 2014

      Excellent post Mick.

      I see RBS has used up all of the £40 odd bn we ‘invested’ in it and doubtless we will have to cough up more.

      I think the LLP legislation added to the problem by allowing accountants to dodge their responsibilities.

  11. zorro
    March 14, 2014

    Not always John, but I’m not sure how sound some of you assumptions are here. The model of staff participation is good in that staff have a sense of ownership, involvement, and profit in the success of the business. I even remember a politician who once said that such employee participation mitigated against strikes…..’Why would people go on strike if they were striking against themselves?’ (Admittedly talking about share ownership, but same principle)…..

    In a lot of cases (Co-Op) it is because of poor management and undue political influence. But the rush to deregulation has also caused some disasters in institutions over stretching themselves or being one trick ponies. There are also a lot of private financial banks which have dealt chaos in their midst….let me think…. RBS? This is too simplistic John, it doesn’t matter, private, mutual, or nationalised, if your CEO or management are duffers, you are on a downward slide…..


  12. John B
    March 14, 2014

    If for-profit organisations get their capital outside retained profit, from investors, from whom do mutuals get their capital? From banks.

  13. Sue L
    March 14, 2014

    The Co-op group is said to be owned by its 7 million members however:

    • Members only receive a share of the profits in any one year and this can prove to be worth less than the value of rewards receivable from an alternative store loyalty card;
    • The net assets of the group on dissolution are transferable to another (unspecified) mutual which may not have the same members as the Co-op;
    • Only about 1% of members participate in voting for local representation on the local boards – and they are incentivised to do so by the promise of a bonus increment to their so-call dividend;

    Stewardship is therefore negligible and susceptible to cronyism.

    The Co-op group has suffered from a number of poor decisions, not all of which have been discussed in the media. In particular, the group operate a defined benefit pension plan with net liabilities exceeded £1 billion (see bank prospectus of the bank liability management exercise issued in Nov 2013). However, the group reported a surplus of £199m across its pension plans even though the extent of the deficit was known when it prepared its 2013 accounts (see 2013 audited accounts / employee benefits statements). The lack of spotlight on issues such as its pension plan mean that these problems are not being actively managed.

    Similarly, it is not unexpected that the group has had to write down its goodwill in Somerfield. The retail group has had a lack lustre performance over a number of years. Whilst they have a near monopolistic status in many smaller towns (my home town included), they have failed to be price competitive and ensure fresh food is restock efficiently (thus impacting variety and quality). Customers increasingly drive to other stores in neighbouring towns leaving others, notably the elderly, to pay inflated prices.

    The Co-op is an important employer / retailer – especially in the North. Its success requires a corporate structure which attracts, retains and rewards good management with non-execs able to properly support but challenge them. Its status as a mutual is a farce. And it endeavours to avoid competitive challenges.

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