Having run short of ways to distract British voters from the need for drastic cuts, both Labour and the Conservatives have seized on mutuals as part of their strategy. Mutuals, the thinking goes, are nice cuddly non-profit organisations that pose no threat to the future of the planet or the future of finance – unlike nasty profit-hungry multinationals and banks.
On Monday, Labour’s manifesto (complete with a 1930s-themed cover featuring socialist realist art designed to make one think Gordon Brown statues could soon spring up around the country) pledged more mutual involvement in everything from banks to public houses. Here’s the full list of Labour’s mutual pledges:
- Finance: “will consult on measures to help strengthen” mutual financial services firms. Will “encourage” a mutual solution for Northern Rock (although it is clear there won’t be one, since it also promises to ensure value for the taxpayer)
- Transport: will “welcome” bids from mutuals, among others, for rail franchises
- Childcare: will “pioneer mutual federations running groups of local Children’s Centres in the community interest”
- Health: “across the NHS we will extend the right for staff, particularly nurses, to request to run their own services in the not-for-profit sector”
- Football: “Registered Supporters Trusts enabled to buy stakes in their club”
- Pubs: “We will support pubs that have a viable future with a new fund for community ownership”
- Old buildings: will “review the structures that oversee English Heritage, putting mutual principles at the heart of its governance so that people can have a direct say over the protection and maintenance of Britain’s built historical legacy”
- Canals and rivers: “British Waterways will be turned into a mutually owned co-operative”
So far, so populist. After all, how could the John Lewis-shopping classes be against mutuals? (For anyone who hasn’t realised, the department store and supermarket group is owned by its employees, who shared a bonus pool of £151m last year as a result.)
I like John Lewis. But Labour – and the Tories, who are also pushing mutual ideas – have misunderstood the lesson from the success of John Lewis. Its mutual model may contribute to its culture, and give staff an incentive to help customers; but equally, it may not. After all, many shareholder-owned retailers also offer strong customer service and value for money. What is clear is that fierce competition in retailing gives the company, and hence its management and staff, a strong incentive to provide keen pricing and good customer service.
What of the rest of the mutual sector? Currently, the biggest mutual businesses are building societies and insurers, plus the Co-operative retail-to-banking group. Supporters of mutuals make a clear distinction: the building societies that converted to banks had to be rescued (Northern Rock, Bradford & Bingley, HBOS and Alliance & Leicester); the building societies that stayed mutual did not. Mutuals, supporters argue, are inherently less likely to blow up because they are “less prone than banks to pursue risky speculative activity”.
Unfortunately, this just isn’t true. It is not just that Dunfermline building society blew up spectacularly after pretty much the same misguided property investments as HBOS. It is not just that Presbyterian Mutual Society in Northern Ireland collapsed after a bank run, just like Northern Rock, and had made lots of buy-to-let loans, betting on the frothiest part of the mortgage market bubble. It is not just that 10 troubled building societies, most recently Stroud & Swindon, were rescued by mutual friends in the sector.
What really shows the lack of safety of the mutual movement is that the last major banking crisis in the US, the savings & loans disaster, was in fact a systemic failure caused by the US equivalent of building societies, most of which were mutual. Before that, America’s mutual savings banks fell as a series of dominos in the early 1980s.
Of course, this is not to say that banks are perfect, to put it mildly. But my point is: neither are mutuals.
As with everything, it is a question of incentives. Mutuals run by their staff – such as GP practices, owned by doctors, or Lambeth’s local authority leisure centres, outsourced to a mutual – are naturally run to suit their owners. This can lead to terrible service, as at Lambeth’s swimming pools, or short working hours at inconvenient times for patients, as in doctors’ surgeries. Competition can stop mutuals becoming self-serving, as with John Lewis, but it is hard to apply competition to GPs or large leisure centres.
This is why the Tory plans are also likely to fail, if implemented. David Cameron wants “to let nurses manage their own clinics, job advisers take over employment offices and teachers run their own schools”. Are they likely to favour staff or customers/patients/students? My guess is that if staff have no one but the government looking over their shoulder, the organisations will have even more trouble motivating staff to work hard and provide great customer service than other ownership models.
Here are my three top problems with mutuals:
The first is corporate governance. The people who run large mutuals have almost no accountability to their owners. True, shareholders in big businesses relatively rarely act to throw out management; but the management of underperforming companies are frequently ejected through hostile takeovers. The lack of accountability of management at mutuals is a serious problem if they operate in a less than fully competitive environment. The wave of demutualisations in the 1990s made management at the remaining mutuals far more accountable than it had been; but public pressure has died down since the prospect of payouts went away, and renewed member apathy has left management with few checks on what it can do.
Second, linked to this, is the question of efficient use of resources. In competitive markets mutuals have the same pressures as non-mutuals. But in less competitive markets, such as banking or medical care, mutuals are under little pressure from their owners to use resources efficiently; if they are staff-owned, rather than customer-owned, they are likely to face pressure from their owners for the inefficient use of resources, in the form of above-market pay levels.
Third, mutuals distort the allocation of resources in the economy, by tying up capital far more tightly than any public company. If they are run inefficiently, they cannot be taken out in a hostile takeover, and may – particularly under a Labour administration – find it easier to access state funds to keep them in business.