Mutual organization
Encyclopedia
A mutual, mutual organization, or mutual society is an organization
(which is often, but not always, a company or business
) based on the principle of mutuality. Unlike a true cooperative
, members usually do not contribute to the capital
of the company by direct investment, but derive their right to profits and votes through their customer
relationship. A mutual organization or society is often simply referred to as a mutual.
A mutual exists with the purpose of raising funds
from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members - it has no external shareholder
s to pay in the form of dividend
s, and as such does not usually seek to maximize and make large profits
or capital gain
s. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax
.
Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be necessary in the case of mutuals for internal financing
to sustain or grow the organization, and to make sure it remains safe and secure.
has been mutual insurance
. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policy owners. Under this idea, what would have been profits
are instead rebated to the clients in the form of dividend
distributions or reduced future premiums. This could be seen as a competitive advantage to such companies — the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors.
However, the mutual form of ownership also has many disadvantages. The chief of them is that mutual companies must generate capital for growth internally — they have no shares to sell and hence no access to equity markets. Another shortcoming is the tendency of the management of such companies to act as if they were themselves the ultimate owners. While major decisions are technically subject to the vote of members, in fact very few members are cognizant of the daily operations of the company as would be outside investor groups such as mutual fund
s or pension
funds. Further, without large shareholders exerting pressure to maximize profits, management has little incentive to control costs.
At one time, most major U.S. life insurers were mutual companies. For many years, the tax status of such organizations was open to dispute, as they were technically nonprofit organizations. Eventually, it was agreed that federal taxation would be based on their share of business: for instance, in years in which mutual companies represented half of the business, they would be responsible for half of the taxes paid by the industry.
Many savings and loan association
s were also mutual companies, owned by their depositors.
As a form of corporate ownership the mutual has fallen out of favor in the U.S. since the 1980s. Savings and loan industry deregulation
and the late 1980s S&L crisis
led many to change to stock ownership, or in some cases into bank
s. Many large U.S.-based insurance companies, such as the Prudential Insurance Company of America and the Metropolitan Life Insurance Company
have demutualized
, with shares of stock being distributed to their policyholders to represent the ownership interest they formerly had in the form of their interest as mutual policyholders.
The Mutual of Omaha
Insurance Company has also investigated demutualization, even though its form of ownership is embedded in its name. It is noted that other formerly mutual companies such as Washington Mutual
, a former savings and loan association
, have been allowed to demutualize and yet retain their names.
The approximate British
equivalent of the Saving and Loan is the building society
. Building societies also went through an era of demutualisation in the 1980s and 1990s, leaving only one large national building society and currently 52 (Jan 2010) smaller regional and local ones. Significant demutualisation also occurred in Australia in the same era.
Cooperatives are very similar to mutual companies. They tend to deal in primarily tangible goods and services such as agricultural commodities or utilities rather than intangible products such as financial services
. Nevertheless, banking institutions with close ties to the cooperative movement are usually known as credit union
s or cooperative banks
rather than mutuals.
s around the world are mutuals, and examples include:
Some mutual financial institutions offer services very similar to (if not the same as) those of a commercial bank
. In some markets, mutuals offer very competitive interest rate
s and fee tariffs on savings
and deposit account
s, mortgages and loans. The members who save and borrow with the mutual ultimately own the business.
. This process became increasingly common in the 1980s as a result of "Thatcherite
" policies and ideology. In the United States, conversion may be full, to a public company
, or, in many states, partial, to a mutual holding company.
Organization
An organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...
(which is often, but not always, a company or business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
) based on the principle of mutuality. Unlike a true cooperative
Cooperative
A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...
, members usually do not contribute to the capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
of the company by direct investment, but derive their right to profits and votes through their customer
Customer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
relationship. A mutual organization or society is often simply referred to as a mutual.
A mutual exists with the purpose of raising funds
Funding
Funding is the act of providing resources, usually in form of money , or other values such as effort or time , for a project, a person, a business or any other private or public institutions...
from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members - it has no external shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s to pay in the form of dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s, and as such does not usually seek to maximize and make large profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
or capital gain
Capital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
s. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
.
Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be necessary in the case of mutuals for internal financing
Internal financing
In the theory of capital structure, internal financing is the name for a firm using its profits as a source of capital for new investment, rather than a) distributing them to firm's owners or other investors and b) obtaining capital elsewhere. It is to be contrasted with external financing which...
to sustain or grow the organization, and to make sure it remains safe and secure.
Background
The primary form of financial business set up as a mutual company in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
has been mutual insurance
Mutual insurance
A mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders. The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Under this idea, what would have been profits are...
. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policy owners. Under this idea, what would have been profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
are instead rebated to the clients in the form of dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
distributions or reduced future premiums. This could be seen as a competitive advantage to such companies — the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors.
However, the mutual form of ownership also has many disadvantages. The chief of them is that mutual companies must generate capital for growth internally — they have no shares to sell and hence no access to equity markets. Another shortcoming is the tendency of the management of such companies to act as if they were themselves the ultimate owners. While major decisions are technically subject to the vote of members, in fact very few members are cognizant of the daily operations of the company as would be outside investor groups such as mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s or pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
funds. Further, without large shareholders exerting pressure to maximize profits, management has little incentive to control costs.
At one time, most major U.S. life insurers were mutual companies. For many years, the tax status of such organizations was open to dispute, as they were technically nonprofit organizations. Eventually, it was agreed that federal taxation would be based on their share of business: for instance, in years in which mutual companies represented half of the business, they would be responsible for half of the taxes paid by the industry.
Many savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
s were also mutual companies, owned by their depositors.
As a form of corporate ownership the mutual has fallen out of favor in the U.S. since the 1980s. Savings and loan industry deregulation
Deregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
and the late 1980s S&L crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
led many to change to stock ownership, or in some cases into bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s. Many large U.S.-based insurance companies, such as the Prudential Insurance Company of America and the Metropolitan Life Insurance Company
Metropolitan Life Insurance Company
MetLife, Inc. is the holding corporation for the Metropolitan Life Insurance Company, or MetLife, for short, and its affiliates. MetLife is among the largest global providers of insurance, annuities, and employee benefit programs, with 90 million customers in over 60 countries...
have demutualized
Demutualization
Demutualization is the process by which a customer-owned mutual organization or co-operative changes legal form to a joint stock company. It is sometimes called stocking or privatization. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form...
, with shares of stock being distributed to their policyholders to represent the ownership interest they formerly had in the form of their interest as mutual policyholders.
The Mutual of Omaha
Mutual of Omaha
Mutual of Omaha is a Fortune 500 mutual insurance and financial services company based in Omaha, Nebraska. The company was founded in 1909 as Mutual Benefit Health and Accident Association.- History :...
Insurance Company has also investigated demutualization, even though its form of ownership is embedded in its name. It is noted that other formerly mutual companies such as Washington Mutual
Washington Mutual
Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008....
, a former savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
, have been allowed to demutualize and yet retain their names.
The approximate British
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
equivalent of the Saving and Loan is the building society
Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
. Building societies also went through an era of demutualisation in the 1980s and 1990s, leaving only one large national building society and currently 52 (Jan 2010) smaller regional and local ones. Significant demutualisation also occurred in Australia in the same era.
Cooperatives are very similar to mutual companies. They tend to deal in primarily tangible goods and services such as agricultural commodities or utilities rather than intangible products such as financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
. Nevertheless, banking institutions with close ties to the cooperative movement are usually known as credit union
Credit union
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s or cooperative banks
Cooperative banking
Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world....
rather than mutuals.
Modern mutuality
Various types of financial institutionFinancial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s around the world are mutuals, and examples include:
- Asset management companies (most are not mutual)
- The Vanguard GroupThe Vanguard GroupThe Vanguard Group is an American investment management company based in Malvern, Pennsylvania, that manages approximately $1.6 trillion in assets. It offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. Founder...
- United States - TIAA-CREFTIAA-CREFTeachers Insurance and Annuity Association – College Retirement Equities Fund is a Fortune 100 financial services organization that is the leading retirement provider for people who work in the academic, research, medical and cultural fields...
- United States
- The Vanguard Group
- Building societiesBuilding societyA building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
- Nationwide Building SocietyNationwide Building SocietyNationwide Building Society is a British building society, and is the largest in the world. It has its headquarters in Swindon, England, and maintains significant administration centres in Bournemouth and Northampton...
- United Kingdom, largest building society
- Nationwide Building Society
- Cooperative banksCooperative bankingCooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world....
- Credit unionCredit unionA credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s - Friendly societiesFriendly societyA friendly society is a mutual association for insurance, pensions or savings and loan-like purposes, or cooperative banking. It is a mutual organization or benefit society composed of a body of people who join together for a common financial or social purpose...
- Mutual healthcare providers such as Benenden Healthcare SocietyBenenden Healthcare SocietyBenenden Healthcare is a UK-based mutual not-for-profit friendly society run for members, providing healthcare for those who work, or have worked, in the UK public sector. Members of approved charities, credit unions and co-operatives are also eligible. It has a membership of over 900,000, and all...
- United Kingdom - Mutual insuranceMutual insuranceA mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders. The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Under this idea, what would have been profits are...
/assurance companies- Current:
- Amica Mutual InsuranceAmica Mutual InsuranceAmica Mutual Insurance Company is an American mutual insurance company which sells automobile, homeowners, marine and personal umbrella liability insurance, founded in 1907. It employs 3,234 people in 40 offices across the United States, and is headquartered in Lincoln, Rhode Island...
- United States - American Family InsuranceAmerican Family InsuranceAmerican Family Insurance is a private mutual company that focuses on property, casualty and auto insurance, but also offers commercial insurance, life, health, and homeowners coverage, as well as investment and retirement-planning products...
- United States - Co-operative Insurance Society - United Kingdom
- Guardian Life - United States
- Liberty Mutual Insurance - United States
- LV=LV=LV is the UK's largest friendly society with approximately 1.1 million members.-History and legal constitution:...
- United Kingdom - Mutual of OmahaMutual of OmahaMutual of Omaha is a Fortune 500 mutual insurance and financial services company based in Omaha, Nebraska. The company was founded in 1909 as Mutual Benefit Health and Accident Association.- History :...
- MassMutual - United States
- New York Life - United States
- Northwestern Mutual Life - United States
- State Farm InsuranceState Farm InsuranceState Farm Insurance is a group of insurance and financial services companies in the United States. The company also has operations in Canada....
- United States
- Amica Mutual Insurance
- Former:
- Gjensidige ASA - Norway
- Metropolitan Life - United States
- Principal Financial GroupPrincipal Financial GroupPrincipal Financial Group is a publicly traded corporation based in Des Moines, Iowa, USA.The Principal Financial Group is a global financial services provider which offers a wide range of financial products and services, and is a U.S. leader in 401 plans. Headquartered in Des Moines, Iowa, the...
- United States - PrudentialPrudential FinancialThe Prudential Insurance Company of America , also known as Prudential Financial, Inc., is a Fortune Global 500 and Fortune 500 company whose subsidiaries provide insurance, investment management, and other financial products and services to both retail and institutional customers throughout the...
- United States
- Current:
- Mutual savings bankMutual savings bankA mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared between the members...
- Savings and loan associationSavings and loan associationA savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
s
Some mutual financial institutions offer services very similar to (if not the same as) those of a commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
. In some markets, mutuals offer very competitive interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s and fee tariffs on savings
Savings account
Savings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...
and deposit account
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
s, mortgages and loans. The members who save and borrow with the mutual ultimately own the business.
Conversion
A mutual may convert itself to a non-mutual through the process of demutualizationDemutualization
Demutualization is the process by which a customer-owned mutual organization or co-operative changes legal form to a joint stock company. It is sometimes called stocking or privatization. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form...
. This process became increasingly common in the 1980s as a result of "Thatcherite
Thatcherism
Thatcherism describes the conviction politics, economic and social policy, and political style of the British Conservative politician Margaret Thatcher, who was leader of her party from 1975 to 1990...
" policies and ideology. In the United States, conversion may be full, to a public company
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
, or, in many states, partial, to a mutual holding company.
External links
- Are mutuals an endangered species? -- Swiss RE article on the result of demutualization activity.
- Report on the near collapse of the Equitable Life Assurance Society (Commissioned by the UK House of Commons, 2001)