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Last year’s attempt to demutualise the UK’s second largest mutual insurer, LV=, brought the debate around mutual ownership, and indeed the process of ending that mutual status in to sharp relief. A process which might have been seen as a relic of the 1980s and 1990s can now perhaps be better understood as a pernicious threat to which all co-ops and mutuals must remain alive.

What do we mean by demutualisation?

Broadly, it is the loss of mutual status in a member-owned business. In practical terms, that usually means a conversion into a proprietary company, which can be either private or publicly listed.

What are the motivations behind demutualisation?

Demutualisation is usually justified by a mutual’s difficulty in raising sufficient capital to compete in its market. The experience of most demutualisations is that this rationale for conversion soon falls away as most businesses cease to trade as independent entities as they are merged into larger consolidated groups.

Past demutualisations have been detrimental to members, particularly over the longer term. The requirement to service shareholder capital means that there will be less money for customers to benefit from, short term payments for loss of membership rights are soon recouped through higher costs and lower benefits.

Defeating demutualisation

Most demutualisation attempts succeed, assisted by a significant power imbalance between boards of mutuals and members. The example of LV= shows that demutualisation can, however, be defeated. We should beware of the interest that private equity is showing in mutuals across the world, attracted by the prospect of acquiring significant assets, which have been built up by generations of members.

Legislation governing mutuals can incentivise demutualisation by permitting legacy assets to be distributed. Legacy assets have been built up over generations and often constitute a significant part of the working capital of the business. Current members, on the other hand, have typically not contributed to this capital.

In some countries, legislation prohibits the distribution of such capital. Instead, it must be used for the purpose intended by the original founders or otherwise transferred to a different mutual. In the jurisdictions where legacy assets are not available for distribution, demutualisation is less common and consequently, large mutuals maintain their member ownership, reflecting significant mass in a range of markets.

In countries with no legislative restrictions on the distribution of assets, waves of demutualisation have occurred. To protect legacy assets and the purpose of the business, mutuals often adopt constitutions which require a high threshold member vote to permit a transfer of ownership. This works to an extent but is vulnerable to rule change. Demutualisation must be deterred by a combination of legislative reform and a revitalising of mutual membership.

Simple voluntary legislation can be introduced that would give every mutual the right to choose a constitution that preserves legacy assets for the purpose they were intended. Mutuals should refresh their member value proposition to demonstrate the importance of their mutual business purpose.

Those wishing to preserve mutual ownership as a legitimate sector within economies, should work together to ensure that demutualisation is opposed, using the ideas suggested in our report.

Mutuo’s report including a toolkit to defeat demutualisation can be viewed in full here.