Martin's blog

Mutuals Making a Difference

Posted on May 14, 2012

At the Building Societies Association's annual Conference in Manchester last week, as part of a panel charged with debating 'Mutuals making a difference' I explored the impact, amongst other things, of Mutuals on markets.

The value of mutuals to the consumer market is often to be seen in better rates, superior service and, as I wrote last week, in greater trust.  But what about the financial markets?

As I write this blog, the FTSE 100 is down over 2%, and markets across Europe are once again running scared over continued concerns about the viability of the single currency.  Banks in particular are taking the brunt of further negative sentiment, as they have done invariably since the start of the financial crisis in 2007.

Kellogg College Oxford, in a report on corporate diversity in 2010 highlighted the degree to which mutuals have a moderating effect on markets, by pursuing more conservative business strategies, and for focusing on the longer-term.  In support of this, the report emphasises that mutuals escaped the need for massive taxpayer bailouts during the crisis. http://www.kellogg.ox.ac.uk/researchcentres/documents/Mutuals%20oxford%20brochure.pdf

The recent report of the Commission on Ownership reiterated further the shortcomings that result from the PLC model as the default corporate organisational form.  The PLC monoculture has led to, amongst other things, increased short-termism in corporate mindset.

And by their very nature, PLCs are temporary structures, which inevitably adds to short-termism.  Research by Bloomburg suggests the average longevity of multinational, Fortune 500/ FTSE 100 companies is 40 to 50 years.  By my estimate, the average mutual insurer has been around 119 years.

That short-term focus for PLCs, as well as the brief tenure of the typical FTSE 100 CEO, has contributed to an excessive attention to remuneration.  But the tide is turning: shareholders increasingly resent the priority given to pay over shareholder returns, and a recent poll on the Owned By You website indicates 98% of people believe that fat cat pay should be capped.  Meanwhile of course last week's Queen's Speech laid out plans for reform of the framework for shareholder approval of Directors' pay as part of the Enterprise and Regulatory Reform Bill.

The challenge for all Board Directors- mutual as well as PLC- is to demonstrate that pay and performance go hand-in-hand, and that where the business is successful, owners benefit first before employees.  Our recent research found that bonuses are typically around a quarter in larger AFM member companies, compared with similar size (FTSE 250) PLCs.  But the 'Shareholder Spring' reminds us to never be complacent on pay, and with AGMs imminent for many Mutuals, we will be looking for evidence that members support pay policy.