The Impact of Mutuality on Ownership

Introduction

The terms ‘mutuality’ and ‘mutuals’ have been used variously over the decades and between countries. As indicated in Chapter 3, a common usage of mutuals as a corporate form has been in relation to financial mutuals, meaning companies owned by their ‘members’, which in these cases have generally been the customers. Financial mutuals include credit unions, co-operative banks, and building societies, the last being the type of company which in Britain provided the overwhelming majority of home loans (or mortgages) for many decades, until the demutualization process transferred many (comprising the majority of the sector’s assets) into shareholder-owned banks. The term ‘mutual’ is also used to describe any company owned by its members, as opposed to being owned by a private individual or family, by external shareholders, or by the state. This more general definition would include co-operatives and employee-owned firms, and while for many of these the member-owners are the customers, for others the member-owners will be the employees, and there may be other member-owners such as producers, or representatives of national or local government; and hybrid mutuals have a combination of more than one such category of member-owner.

The motivation for structuring ownership in this fashion, rather than via the more usual external shareholder model, has generally been the belief that if the organization is owned by, for example, its customers, it is more likely to prioritize the interests of those customers. Thus, any financial surplus or gain (for example from the overall value of the organization’s growing) will belong to the member-owners, and should be returned to them in some form, whether this is a financial dividend, or being charged a lower price (for example a lower interest rate on a loan or mortgage), or being provided with a better service than might otherwise be the case. Mutuality thus refers not only to the ownership and governance of companies, but also to their aims and objectives; corporate culture, incentives, and decision-making; policies and practices; and outcomes in the sense of the quality and price of the goods or services delivered. Thus, even if the term mutuality is considered to refer primarily to ownership (with a ‘mutual’ meaning a member-owned company), it still makes sense—and is important—to consider such issues as the relationship between ‘the economics of mutuality’ and ownership, as there is no automatic link between ownership and behaviours. A member-owned organization might be poorly managed and thus fail to deliver improved outcomes for its members. Conversely, while a shareholder-owned company may have a duty to prioritize the interests of its shareholders, if it is well managed it may be able to give due regard to the interests of its other stakeholders—customers, employees, suppliers, and the local communities in which it operates.

In this wider context, ‘mutuality’ implies a commitment by a company to share success with its stakeholders, so there is a mutual sharing of benefits—and more generally a commitment to respecting the interests and well-being of stakeholders, so if it is a question of losses, these will not be passed on to stakeholders opportunistically, without regard to the mutual interest.

Such behaviour will be costly, in that resources will be devoted to these stakeholders that could alternatively have been retained, or some share of losses may be absorbed rather than passed on. But the company’s loyalty to its stakeholders is likely to be reciprocated. For example, suppliers may be less likely to behave opportunistically in exploiting a temporary shortage to their advantage; employees may be more motivated—and prepared—to contribute discretionary effort and innovative ideas; and consumers may display a degree of consumer loyalty, rather than switching to other suppliers for what might be only a temporary opportunity to benefit.

Any such loyalty from suppliers, employees, and customers is likely to have economic benefits over the long term—in effect, returns on the investment in mutuality, so that the value of the company and the level of its profitability may thereby become greater over time than had the commitment to mutuality not been made (albeit there would then be an expectation to share this success, on a continuing basis, for this process to continue).

In short, there is a commitment to the welfare of stakeholders (an investment), with this commitment likely to be reciprocated, to the economic benefit of the company. Whether a company taking a ‘mutual’ approach will be more successful as measured by levels of profitability will depend on which of these is greater in quantitative terms, the investment or the returns.

This affects ownership for two reasons. First, whether the commitment by the company is reciprocated depends on the confidence stakeholders have in the company’s commitment to mutuality, the ability of managers to deliver, and the likelihood these will continue. A way to signal the commitment is mutual ownership. Having at least a degree of mutual ownership (that is, even if the stakeholder ownership stake is less than 100 per cent) will give confidence that the policy of recognizing mutual interests will not be reversed at any moment, but rather is embedded in ownership, with rights of governance and decision-making.

Second, if the owner wishes the principle of mutuality to continue, then introducing mutual ownership is the way. Many companies in the past had commitments to such principles, but have since abandoned them, such as Cadbury’s or Barclays Bank. A family-owned company is likely to be converted sooner or later into a shareholder-owned company, and thus follow the Cadbury’s and Barclays route. The only way to maintain the mutual ethos is to embed a degree of mutual ownership.

Ownership forms and governance arrangements play a critical role in ensuring the future of mutual practices and outcomes for any company committed to them. Using ‘trust’ or ‘foundation’ structures has proved successful at delivering such outcomes in a range of companies across the leading industrialized economies.

High-Commitment Work Systems

Employment contracts can go so far in setting out what employees are expected to contribute during the working day to achieve organizational outcomes and corporate success—but only so far. Work can be monitored, but this is costly. Ultimately, employees have a degree of discretionary effort. High-commitment work systems bring together policies and practices to enable, encourage, motivate, and facilitate employees to contribute such discretionary effort—and on a long-term, sustainable basis.

Such policies aim to achieve three outcomes:

First, ensure employees have the capabilities to deliver the desired discretionary effort.

Secondly, employees need to be afforded the opportunity to contribute the discretionary effort. If they are working on a production line, there may be little opportunity to contribute anything beyond performing the number of tasks the production line speed dictates. So work organization is key. If the discretionary effort is to include devising and proposing product and process innovations then employees need to be well informed and probably involved to some degree in decision-making, so policies around information-sharing, consultation, involvement, and participation may be vital.

Thirdly, motivation: these may include explicitly economic incentives such as profit sharing, including employee share ownership. Here one can see a link from the one definition of mutuality, as sharing in the success of business—whereby information-sharing and participation in decision-making may create the opportunity for enhanced output from which all can benefit—through to the other definition, where employees have a stake, which will be a motivation to contribute discretionary effort on a sustained basis.

Ownership and Governance

The link between ownership and outcomes is governance: there needs to be a mechanism to ensure managers prioritize the interests of the owners, rather than, for example, their own interests. This was the original case for establishing member-owned organizations—to ensure they would operate in the interests of members.

There is a separate question of time-scale—whether the organization will operate in the long-term interests of its members. The short-term interest might be to sell the organization to a shareholder-owned business, with the members enjoying a financial windfall. But that may mean the end of the mutual’s existence. If one wishes to safeguard long-term interests, this requires ownership, with the necessary legal framework. With the John Lewis Partnership this is achieved by requiring the trustees to act in the interests of the current and future employees of the company.

Unless such governance arrangements are thought through, there is a danger that mutuality might result in member-owners acting in a short-term fashion. This is why the ‘Trust’ form of mutual ownership is important.

Ownership and Employee Motivation and Innovation

One incentive to give an ownership stake to employees is to motivate them to prioritize financial outcomes—profitability. Ownership may take the form of individual shares, or ownership being held in trust, with the trustees obliged to act in the interests of the employees. With individual share ownership, higher profits may boost the share price. In the case of shares held in trust, a rise in profits may be distributed to employees as a bonus. These financial incentives may lead to employees being loyal to the organization and motivated to contribute additional discretionary effort, becoming more productive and innovative, with beneficial outcomes including lower staff turnover, higher rates of innovation, increased productivity, higher quality of outputs, and increased profitability.

In the case of innovation, if an employee sees a way to reorganize work that would do away with their job, will the employee volunteer this information? If they think they would be made redundant, they may withhold the idea. If they had confidence the information would improve performance, and the gains would be shared—including through reassigning employees to alternative roles—then such suggestions are more likely to be forthcoming. The confidence that such an approach would be taken may be enhanced by mutuality.

Organizations may seek to enjoy these benefits by promoting mutuality without ownership. The advantages of underpinning such policies with ownership are, first, that this can embed such commitments as long-term. Second, the causal mechanisms depend crucially upon subjective attitudes of trust, loyalty, and commitment, and without the organization committing to the ownership aspect of mutualism, the other aspects are likely to be that much weaker. So, it is a matter of degree, and of time horizons.

Using Mutualism to Promote Corporate Diversity

In addition to the benefits of mutuality for companies, there’s a benefit to the economy from corporate diversity. Economies have a range of ownership forms, including family ownership, shareholder ownership, state ownership, and mutual ownership (including financial mutuals, co-operatives, employee-owned businesses, and other member-owned companies). The balance between these varies—across economies and over time.

The United Kingdom is peculiarly dominated by shareholder-owned companies, exacerbated by the privatizations and demutualizations from the 1980s onwards. In response to the global financial crisis of 2007–08, the United Kingdom’s 2010–15 government pledged to boost corporate diversity across the financial services sector, and to support mutuals to deliver on this pledge (which was not achieved, as documented by Michie and Oughton, 2013, 2014). The point is not that one corporate form is preferable to others: some may be preferable for some purposes, and others for others. The aim is to keep options open, and to promote ‘biodiversity’ across the economy (Michie, 2011, 2017; Ownership Commission, 2012).

Thus, for example, in Denmark many of the largest companies are controlled by non-profit foundations. Carlsberg is majority-owned by a foundation that uses its profits to fund scientific research. The shipping company Maersk is majority-controlled by a foundation. The Lundbeck pharmaceutical company is majority-owned by a foundation that funds around $75m worth of medical research and educational programmes a year. Novozymes has 69 per cent of its voting stock owned by a foundation. These foundation-owned companies deliver similar financial returns to their competitors (Thomsen and Rose, 2004). Firms owned partially by a foundation comprise a quarter of the largest 100 Danish corporations and their market value represents around half the market value of the Danish stock exchange (Hansmann and Thomsen, 2013). In Sweden, IKEA is foundation-owned.

In Germany many companies are fully or partially owned by foundations, including Bertelsmann, Bosch, Korber, Mahle, ThyssenKrupp, ZF Friedrichshafen, Aldi, and Lidl. The median return on assets of such foundation-owned firms was found by Gunter and Matthias (2015) to be about 6.7 per cent, compared to 7.5 per cent for matching firms; foundation-owned firms also tend to follow a more conservative financing policy, which stabilizes their long-term existence.

There are many other companies across the globe with varying ownership and governance structures, seeking mutual sharing of success. The Mahindra Group was ranked by Forbes in 2009 as among the top 200 most reputable companies in the world; in 2011 it launched a new corporate brand Mahindra Rise, which seeks to unify Mahindra’s image and brand as aspirational, supporting customers’ ambitions to ‘rise’. The Group is involved extensively in philanthropy and social responsibility. This includes supporting the Mahindra United World College (UWC), one of the seventeen UWC colleges globally.1

The LEGO Group was founded in Denmark in 1932 and remains family-owned; in 1986 25 per cent of the company was constituted as a foundation whose ‘activities are based on the belief that all children should have access to quality play and learning experiences’. Thus, 25 per cent of the company’s dividends go to the foundation, to further these aims. There are two aspects: first, it’s a mechanism for the company to put into practice their values; second, it makes this outcome more sustainable. Without the foundation, if the management changed, the practice might cease—and it almost certainly would do so were the company to be floated on the stock exchange, with shareholders wanting maximum returns on their shares. Having 25 per cent of the company protected by its foundation status makes it less likely that the company would be taken over by owners seeking maximum financial returns; and even if it were, the foundation status ensures that funds would continue to be dedicated to the charitable purposes.

The John Lewis Partnership and the Rule against Perpetuity

Sustaining mutuality requires permanent ownership structures. In the United Kingdom, employee benefit trusts (EBTs) are governed by the ‘rule against perpetuity’, which limits EBTs in England and Wales to 125 years. The law ‘has its origins in seventeenth-century common law and was developed to restrict a person’s power to control perpetually the ownership and possession of his property after death and to ensure the transferability of property.’2

In the case of John Lewis, an EBT has held all the shares of the company on behalf of employees, current and future, since 1950. The trust is governed by three trustees and the John Lewis chairperson; the trustees hold 60 per cent of the shares, the chairperson the remaining 40 per cent. Trustees are elected through a system of representative councils (Pendleton, 2001: 26–9).3

The John Lewis trust uses a version of the perpetuity rule ‘dating back to the era of the Crusades’ that fixes the longevity of the EBT at ‘twenty-one years after the death of the last survivor of the descendants then living of the British monarch at the time—King George V’ (Erdal, 2011: 212). This means the John Lewis trust shall continue until ‘twenty-one years after the death of the Queen or, if the seventh Earl of Harewood lives longer, twenty-one years after his death’ (Erdal, 2011: 212). This creates a problem for John Lewis, with its legal team looking for alternatives to the projected dissolution of the trust. One example of circumventing the rule against perpetuity comes from the Baxi Partnership, which successfully pursued an Act of Parliament to allow for the Baxi trust to last as long as the company lasts. This solution, however, remains ad hoc and has not been codified in law.

The 2012 Nuttall Review4 recommended the rule against perpetuities be re-evaluated in relation to EBTs; such a change has been made in both Jersey and Guernsey. The Department for Business, Innovation and Skills (BIS) began this review in 2013; the John Lewis Partnership made a submission complaining that ‘banks may also be less willing to lend to companies approaching the end of their term, so stultifying growth.’5 Despite such arguments, the review concluded in 2014 against changing the rule.

In the United States, the Tax Reform Act of 1969 has virtually eliminated trust ownership by restricting how much of a for-profit business a private foundation can own. This effect appears to have been deliberate, to prevent foundations such as Rockefeller or Carnegie from wielding corporate power over current firms.

So, to protect and enshrine the principles of mutuality within a company in perpetuity is certainly possible, but the mechanisms available will vary across jurisdictions.

Conclusion

One motivation for the creation of mutuals—in the sense of member-owned organizations—has been in response to the problem of succession for family-owned businesses. The next generation may not wish to take on the running of the company, but the family may not wish to see the company lost, which will be the eventual outcome of either a trade sale or a flotation (Davies and Michie, 2012). In this case the employees, or a combination of stakeholders, can ensure the company’s continued existence. Another motivation for the creation of mutuals is to encourage positive employee behaviours, such as innovation and commitment, and to align the interests of employees and the firm by sharing benefits.

Mutuality as a business practice can enhance organizational outcomes and corporate performance through a range of mechanisms, including employee motivation and discretionary effort, customer loyalty, and the ability to work with suppliers on a long-term basis. Underpinning such practices with mutual ownership can enhance the positive impact through reinforcing the belief that such policies will be maintained, so that it becomes worthwhile for stakeholders to invest in this mutual relationship.

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Notes

1. Disclosure: the author is a member of the UWC Council, and chair of governors for UWC Atlantic College. Bosch, above, also supports the UWC in Germany.

2. http://www.fieldfisher.com/publications/2014/01/employee-ownership-one-year-on.

3. See John Lewis case study: http://cets.coop/moodle/pluginfile.php/43/mod_ folder/content/0/Cases/John%20Lewis%20Partnership.pdf?forcedownload=1.

4. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/

   31706/12-933-sharing-success-nuttall-review-employee-ownership.pdf.

5. BIS findings here, John Lewis comment on page 11: https://www.gov.uk/ government/uploads/system/uploads/attachment_data/file/337988/bis_14_963_bis_response_to_call_on_amending_the_rule_against_perpetuities_2.pdf.

Jonathan Michie is professor of innovation and knowledge exchange at the University of Oxford where he is director of the Department for Continuing Education and president of Kellogg College. He is a fellow of the Academy of Social Sciences. Prior to moving back to Oxford in 2008, he was dean of the Business School at the University of Birmingham; before that held the Sainsbury Chair of Management at Birkbeck, University of London, where he was head of the School of Management and Organisational Psychology; and before that was a lecturer in accounting and finance at the Judge Business School, Cambridge.

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