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Tuesday, November 15, 2005

More Michie on Mutualism

Apols for the alliteration- it makes me sound lie a third rate marketing exec! Then again, the Guardian sub-editors used the same title for these two articles, so I am not alone in my lack of imagination. Seriously, mutualism (under which I see guilds, guild socialism, market collectivism, co-operatives, credit unions, distributism, and open economic partnerships as all being a part of) is an economic idea whose time is more than overripe. It challenges Actual Existing Capitalism without being tarred with the brush of Actual Existing Socialism (as was). My own political stance (which has developed since May's general election) is that we need a mutualist political party in England. However, at the moment I am still unsure about whether it is necessary to start a new mutualist party from scratch, or make an existing political party adopt a mutualist programme.

Enough of organisational matters. Here's JM on mutualism.

Our mutual friends: New evidence underlines the benefits cooperatives and mutuals bring to their members - but also to the wider economy and community
Jonathan Michie, The Guardian,Friday March 18, 2005

It would be easy to assume that cooperatives and mutuals - businesses owned by their customers - were on their last legs. The Co-op used to be one of Britain's great retail stores but lost out to the new supermarket chains from the 1960s onwards. The mutual sector remained strong because generations of homeowners used building societies for mortgages. But the demutualisation (effectively a form of privatisation) launched in the Thatcher era allowed building society members of mutuals to profit from the value built up in those organisations over years: a very Thatcherite coup. That wave of demutualisation gave a greater boost to share-ownership than all the 1980s headline privatisations promoted with lavish advertising - such as the British Gas "Tell Sid" campaign.

Many might doubt that there is any way back for cooperatives and mutuals in Britain -particularly as the American model of capitalist organisation appears to be sweeping all before it across the globe. But the mutual and cooperative sector is actually stronger in the US than Britain.

Even in Britain, co-ops and mutuals have more than 50 million members, although many people will be members of more than one. In a survey conducted by Birmingham Business School, we found that on average people were members of 2.6 mutuals or co-ops: in other words, there are around 19 million individuals who belong to at least one co-op or mutual. That compares with about 11 million shareholders - despite the huge boosts to share-ownership given by privatisation and demutualisation. The sector clearly remains an important part of economic and social life.

So what? Would it matter if the remaining co-ops and mutuals turned into private companies or companies listed on the stock exchange (plcs)? One way of judging that is to consider whether the managers of such organisations behave differently because of their ownership structure. A second survey we carried out, of managers within the sector, found that the organisational form clearly does influence behaviour and decision-making. That is due not just to the organisations being owned by the members rather than shareholders, but also to the different organisational culture that this fosters.

Managers of plcs are made aware that they owe a legal duty to shareholders. In co-ops and mutuals, managers are equally aware that they owe a duty to the members and to the principles that underpin the mutual and cooperative movement, including "concern for community".

Co-ops and mutuals behave differently in three crucial ways. First, concern for community translates into higher charitable giving, both in cash and in kind. Second, business decisions give a greater weight to community interests, for exampleby keeping branches open in rural areas. Third, management decisions give a greater weight to the interests of members, prioritising quality of service over profits.

Ironically, this last difference may lead national statistics to under-report the importance of the cooperative and mutual sector. Gross national product is calculated according to the "value added" by companies, broadly made up of wages and profits. If a private company boosts profits, this may be recorded as a greater contribution to national income; if a co-op or mutual decides to forgo such opportunities, and concentrates on quality of service, the benefit to the economy may go unrecorded.

Co-ops and mutuals have a wider impact on the economy, not only as a result of what they do themselves, but from the constraints they put on private companies and plcs. There is compelling evidence that the stronger the cooperative and mutual presence in a market, the less other companies are, for example, able to raise prices, for fear of losing market share.

There has long been a recognition across the political spectrum of the need to tackle what Edward Heath called the "unacceptable face of capitalism": from Winston Churchill's advocacy of a minimum wage to prevent the good employer being undercut by the bad, to the Enron scandal - a company that ticked all the good corporate governance boxes while lining the pockets of managers and directors until the company was bankrupted and the employees lost their jobs, pensions and savings, all tied up in Enron stock.

Great effort has gone recently into improved corporate governance as a way of improving corporate behaviour. This is important but, as Enron demonstrated, may not suffice. Another more effective form of pressure may be to encourage a strong cooperative and mutual sector, which will not only behave ethically itself, but constrain others from behaving in too ugly a fashion.

After all, the battle against bad corporate practice goes back to the earliest days of capitalism. The cooperative movement was founded so that customers could buy reliable produce, as a reaction to the foodstuffs that were all too common at the time.

Similarly, credit unions are being formed to cut out loan sharks, and football clubs are being rescued from improper or corrupt ownership practices by supporters' trusts that seek to ensure clubs are run in the interests of the supporters and the community rather than private financial gain.

So the mutual form is not only surviving, but is being re-born. It is showing a way to organise economic and social activities in the interests of those who work for or deal with those organisations, rather than for external shareholders. And rather than pay out dividends to external shareholders, co-ops and mutuals can use their surpluses to reward customers, employees and local communities.

Our mutual friends: Mistrust of corporations is growing because they put shareholders first. That creates opportunities for cooperatives and mutuals, which don't
Jonathan Michie,The Guardian, Tuesday June 24, 2003

Companies like to be trusted. Enormous effort is made by firms through public relations, reward schemes, corporate social responsibility and other measures to boost public confidence. They want to persuade us that their product really does "exactly what it says on the tin".

It makes sense because it makes money. Trusting customers become loyal customers, who in turn are more likely to keep on buying - as well as purchasing new products and services in the future.

But how can customers decide who to trust? How do we know that a firm will put the interests of customers first? When push comes to shove, will they prioritise the customer? Or is it just a con? A way to dupe and exploit the consumer to boost profits?

John Kenneth Galbraith has long argued that advertising aims to persuade people they need things they don't. Extended warranties are just the latest vehicles to be criticised for being pushed on to people who don't really need, or want, them.

According to Shoshana Zuboff and Jim Maxmin, authors of The Support Economy, 57% of Americans say they don't trust corporate executives or brokerage houses to give them honest information. And the proportion of Britons saying they have faith in corporations has switched over the past 30 years from two to one in favour, to two to one against.

Consumers may have good reason to be sceptical. After all, the big push in business over the past decade or more has been the pursuit of "shareholder value", which in Britain and America has been interpreted as prioritising the short-term interests of shareholders. Greed is good. And as the share price rises so do the executive share-option scheme payouts.

So how can we trust a company to put our interests first when it admits to prioritising shareholder value? Whatever is said about serving the customer, about corporate social responsibility, about employees "being our greatest asset" and about stakeholders, UK company law requires plcs to prioritise the interests of shareholders. The owners must come first.

A new report in the UK into consumer trust and ownership structures - gleaned from responses to questions put to a random sample of first-time buyers who hadn't yet decided which provider to choose for their mortgage - is illuminating.

Some 78% agreed with the statement: "I like the fact that building societies have no shareholders". While the demutualisation of building societies allowed members to cash in on years of value creation by those organisations, they are now answerable to external shareholders rather than to their members.

Meanwhile, 55% agreed with the statement: "I am more likely to trust a building society than a bank". And, crucially, 66% agreed with: "In the future I am more likely to deal with a building society".

The results are even more striking when customers of mutual and cooperative organisations are surveyed. In the case of the Oxford, Swindon & Gloucester Co-operative Society, faced with the statement: "The Co-op is trustworthy", 37% agreed "slightly" and 58% agreed "strongly".

What causes this remarkable degree of trust? First-time buyers' suspicions of banks, which are owned by external shareholders, is mirrored in the views of cooperative members. Some 86% agreed with the statement: "The Co-operative acts more in members' interests because it is answerable to us and not to big City investors".

Cooperatives and mutuals are obliged to prioritise the interests of their members - the customers. In the battle for consumer trust, cooperatives and mutuals therefore have an advantage over plcs: they have to prioritise the interests of consumers, just as plcs have to prioritise the interests of external shareholders.

But is a cooperative or mutual ownership structure sufficient to generate trust, consumer loyalty, repeat business and commercial success? Of course, any organisation must deliver the goods. Products must be trusted as being good value for money. This requires excellent organisation and management, as well as investment in product and process innovation. Here again, cooperatives and mutuals have an advantage because, rather than paying out profits as dividends to shareholders, any surplus has to be passed on to members and customers in the form of reduced prices or investment in new products and processes.

But the extent to which cooperatives and mutuals benefit from their "mutual advantage" depends on how much they involve their members and customers in business decisions. This can range from electing directors to surveying customers on what they want. Of course, plcs survey their customers too. But their purpose is ultimately to make more money for their shareholders. For the cooperative or mutual the purpose is to benefit members, customers and other stakeholders - namely the employees and the local community.

Thus, asked to respond to: "As the Co-op board of directors is elected by local members, my interests will be more honestly represented", more than 75% agreed. The survey found that the existence of external shareholders was the main factor hampering people's trust in plcs. And with good reason, as plcs have an obligation to shareholders.

So while corporate social responsibility for plcs should be encouraged - and the business case can be made - the need to prioritise the interests of external shareholders will always constrain what they can deliver. Thus there is huge potential on which mutual and cooperative organisations can capitalise if they can combine their commitment to the community and the customer by providing high-quality goods and services at competitive prices. Their corporate structure allows this, as they can prosper with a lower return on assets than is possible for plcs. But they need to match the achievements of the most successful cooperatives and mutuals if this mutual advantage is to be fully realised.

Professor Jonathan Michie is director of Birmingham Business School and co-author of Mutuals and their Communities, available from


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