Casualties of Cashing In

Feature Article for the Sydney Morning Herald 28/2/00

Race Mathews

Reports of the death of the mutual or user-owned firm ("Mutual Obligations", Herald, February 19) are greatly exaggerated. For example, Holland's Rabobank, Britain's Co-operative Bank, Spain's Caja Laboral Popular credit union and the Desjardins credit unions in Canada are among the many outstandingly successful mutualist financial intermediaries which have categorically rejected demutualisation. Australian credit unions have more than three million members, with assets of more than $20 billion. Housing co-operatives are widespread in Europe, Canada and parts of the United States.

Most of Australia's milk and many other farm products continue to be processed by farmer-owned co-operatives. America's fast-growing "New Generation" farm co-operatives are widely admired. From a standing start in 1956, the Basque Mondragon Co-operative Corporation (MCC) has developed into the largest business group in its region and the ninth largest in Spain. The MCC provides 42,000 jobs, has annual sales of more than $US7 billion and exports 44% of its output. 

While many mutualist building societies  and insurance societies have demutualised, others including Britain's giant Nationwide Building Society have foiled attempted demutualisations by alerting their members to the benefits of mutuality.  So too has Britain's giant Co-operative Wholesale Society.

More generally, there is growing public unease over the possible costs and abuses of demutualisation. In the case of the proposed demutualisation of the National Roads and Motorists' Association (NRMA) insurance business, it is widely recognised that, far from NRMA Insurance having performed poorly as a mutual, it has been notably efficient, effective and profitable. Moreover, it has not like the demutualised National Mutual Society allowed itself to be acquired by the French insurance giant AXA. It has not, like the demutualised Australian Mutual Provident Society (AMP), incurred losses of more than $1 billion in a botched takeover bid for the privatised NSW Government Insurance Office (GIO).

It has not, like the GIO, so misconducted its response to that take-over as to now face a $500 million class action by its aggrieved shareholders. It has not, like the GIO, incurred losses totalling well over $1 billion in the reinsurance market. 

Far from the demutualised or privatised insurance businesses creating wealth as some claim, they are widely seen to be destroying it. Thanks to the abject failure of demutualisation to deliver on its fraudulent promises of better governance and management, most of Australia's insurance firms, together with their huge holdings in investment capital, could well end up in foreign hands

Nor is there less public concern over the dawning realisation that the advice which drives demutualisations is not necessarily objective. The same managers and directors who seduce members into accepting windfall gains of a thousand or so dollars in return for their membership entitlements may also stand to benefit personally from subsequent obscenely lavish pay increases, appointments and allocations of share options.

The promoters of the failed demutualisation of the British Co-operative Wholesale Society stood to gain between £1.8 billion and £2 billion for an outlay of around £1.2 billion in payments to its members. When Australia's first demutualisation of a credit union - the Sunstate Credit Union in Queensland - took place in 1997, barely 14% of its members received anything in return for their interests in its assets. The most conspicuous beneficiaries were a tiny minority of its directors and staff.

Even those who perpetrate spectacular blunders can look forward to inflated severance benefits, as witness the $13.2 million paid by the demutualised AMP to its departing CEO, Mr George Trumbull. Mr Trumbull's original contract was for a $2.7 million base salary and a $10 million entitlement to shares. Other sources of advice are no less vulnerable to contagion. Payments for the proposed NRMA demutualisation to corporate lawyers, financial advisors and public relations consultants are reported to total $107 million.  

The threat from perverse incentives to demutualisation is acknowledged in recent Canadian insurance legislation, which specifies that directors and managers of demutualising insurance bodies shall not receive benefits other than those applying to ordinary policy-holders. Australian mutuals have yet to acquire comparable statutory safeguards. Members surrendering their entitlements can have no certainty that their trust will not be abused.

Trust - the glue which holds society together - is always the first casualty of demutualisations. The fundamental principle of mutuals is that each generation of their members adds to their assets in the expectation that they will be retained for the benefit of others still to come - that current members are trustees in effect for the intentions of the dead and the inheritance of the unborn. A key question for NRMA members is whether they can in good conscience abrogate their role as trustees - whether, like Esau in the Bible, they will exchange their birthright for a "mess of pottage".

(780 words)

Dr Race Mathews is a Senior Research Fellow at Monash University, and a former Labor MP and minister. His recent book "Jobs of Our Own: Building a Stakeholder Society" (Pluto Press Australia, $24.95) is about - among other things - mutuals and mutuality.