How accountable are large mutuals?

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I find myself wring about “mutuals” again. Not this time because of some pronouncement supporting mutuals and co-ops – usually from a political leader – but because of a report in the business section of the Sunday Telegraph:

“The Coventry Building Society, the country’s third largest mutual, is in merger talks with its smaller rival, the Stroud & Swindon.”

So what I hear you ask. Why the concern? It’s pretty simple really. Because no one individual can have a greater interest in the society than another there is no mechanism to balance the activities of management – other than at a general meeting. This contrasts directly with the traded company where markets give a clear signal to management and individuals can build up levels of ownership sufficient to influence decision-making.

At the local level, mutual organisations a pretty accountable to their members. As a member of Cullingworth Conservative Club, I feel able to influence (should I wish to) the decision-making of the management. A management who are unpaid and elected from the ordinary membership. In a multi-million pound turnover building society such influence is diluted across the entire membership – so long a management does not directly act to reduce the value of members’ savings those members will not challenge the decisions of management.

Put simply, the management are insufficiently accountable for a business that (in the case of the Coventry Building Society) has assets of £18.4 billion. The primary outcome of this lack in accountability is that management will act in their own interests rather than in the interests of the mutual owners of the business. Increasing the size of the business through merger is clearly in the interests of management – larger organisations have more and better paid managers – but it is open to question whether increases in scale are of any direct benefit to the majority of members since there is little likelihood of such a merger either reducing mortgage rates or increasing savings rates.

So while building society mergers do provide great headlines - “Yorkshire agrees takeover of Chelsea” – they do cast doubt on the mutual model and the degree to which management can, and probably do, act in their own interests rather than in the interests of the actual owners of the business.


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Some thoughts on the Co-operative Party and their misplaced ideas

Given that Labour are saying “co-operative party principles” will be included in the Labour Manifesto for the coming election I thought it might be worthwhile looking at those principles and at their practical implications. And I do so from the perspective of someone who favours mutual organisations, community ownership and new models of service delivery – something I share, it seems, with David Cameron.

The Co-operative Party has helpfully published their guide – “A Co-operative Party Agenda for a Fourth Term” (so no question as to who they’ll be backing despite the enthusiasm from all three main parties for mutualism). I thought I’d pull out some of their suggestions and give a considered view set against our mixed experience of co-ops.

Promoting co-operative and mutual enterprise. The underlying argument here – although it isn’t quite put that way –is that co-op and mutual models of business are superior to “capitalist” models of business. These models are dubbed “social” – presumably implying that the joint stock company is anti-social. There is no attempt made beyond glib statements about service and lies about profits (co-ops and mutuals are profit-making organisations) to explain the basis for this distinction. In my view Government should not involve itself in how private citizens and private organisations choose to organise themselves yet it is clear that the Co-op Party wished to force unspecified co-operative “values” on private firms and to “reconnect them with stakeholders and society”. Nowhere in all this is there a word about the consumer, the customer – the most important stakeholder in any business.

Employee-ownership. John Lewis has a lot to answer for! This for-profit, quite pricey general store and supermarket chain is held up as a paragon of socialist virtue. We’re told that this shows just how effective employee-ownership can be. Truth be told though – for the amount of real control employees have over the management of John Lewis – the “employee-ownership” model is just a glorified bonus scheme. Don’t get me wrong – if firms wish to organise this way they can – and it clearly works for some organisations. But there is no evidence of more social or economic benefit compared, let’s say, to being owned by faceless Swiss gnomes or big-hatted Texan billionaires.

Remutualisation. Ah, here’s the cheap shot! Those wicked Tories allowed all those nice cuddly building societies to get turned into banks – and look what happened! We must turn Northern Rock back into a mutual organisation pour encourager les autres! Excuse me but do you remember what those mutual organisations were like? Do you recall how unaccountable, producer-led, unresponsive and lazy they were? Mutual organisation works pretty well at the level of the working mans club (or Conservative Club for that matter, most of which are mutuals) but scale it up to a multi-billion financial organisation and you can forget real accountability. These organisations become run purely for the interests of the management not the member or the customer. And certainly not for any wider “stakeholders”. A quick look at the US savings and loan scandals shows just how vulnerable mutuals are to managerial abuse.

Land reform. Now we get the real lefty stuff. Introducing a land value tax to replace council tax and business rates. Apparently the reason for the strange behaviour of the UK’s property market is because the existing property taxes create a system that favours the developer over the user. Leaving aside the scale of destruction in our property sector during this recession, this argument not only shows profound ignorance of how land is valued but ignores the primary reasons for our distorted property market. And those reasons? Our planning system and our preference for freehold models of residential ownership. If the Co-op Party wanted a really radical approach that would allow for more affordable housing in places where people want to live, then they would be proposing the privatisation of property rights through the repeal of the Town & Country Planning Acts and associated guidance and secondary legislation.

Trade Justice. As we might expect from the UK’s biggest recipient of Common Agricultural Policy cash, the Co-op is firmly in the protectionist camp. OK, they call it trade justice but what they mean is that we carry on the protectionist agriculture policies that puff up the Co-op's profits while assuaging our guilt at the damage this does to poor African farmers by promoting so-call “fair trade”.

There is some good stuff in the Co-op ‘manifesto’ too – mutualising the health service would take us back closer to the private (mostly charitable) delivery that existed prior to Labour nationalisation of health and there are some interesting ideas about increasing participation. However, the Co-op's connection to the Labour Party holds it back – they seem obliged to continue to nod in the direction of groupthink and to promote the failed initiatives of socialism.

It seems to me that trying to make party political capital out of the idea of mutuality and co-operation is misplaced. And it also seems to me that, for all the talk of engagement and participation, the one thing not proposed here is the real transferring of power from centralised, monolithic and failing government to ordinary people. Now that would be radical!

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