Our mutual friends

New evidence underlines the benefits cooperatives and mutuals bring to their members - but also to the wider economy and community.

Jonathan Michie
The Guardian,
Friday March 18, 2005

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It would be easy to assume that cooperatives and mutuals - businesses owned by their customers - were on their last legs. The Co-op used to be one of Britain's great retail stores but lost out to the new supermarket chains from the 1960s onwards. The mutual sector remained strong because generations of homeowners used building societies for mortgages. But the de-mutualisation (effectively a form of privatisation) launched in the Thatcher era allowed building society members of mutuals to profit from the value built up in those organisations over years: a very Thatcherite coup. That wave of de-mutualisation gave a greater boost to share-ownership than all the 1980s headline privatisations promoted with lavish advertising - such as the British Gas "Tell Sid" campaign.

Many might doubt that there is any way back for cooperatives and mutuals in Britain - particularly as the American model of capitalist organisation appears to be sweeping all before it across the globe. But the mutual and cooperative sector is actually stronger in the US than Britain.

Even in Britain, cooperatives and mutuals have more than 50 million members, although many people will be members of more than one. In a survey conducted by Birmingham Business School, we found that on average people were members of 2.6 mutuals or cooperatives: in other words, there are around 19 million individuals who belong to at least one cooperative or mutual. That compares with about 11 million shareholders - despite the huge boosts to share-ownership given by privatisation and de-mutualisation. The sector clearly remains an important part of economic and social life.

So what? Would it matter if the remaining cooperatives and mutuals turned into private companies or companies listed on the stock exchange (plcs)? One way of judging that is to consider whether the managers of such organisations behave differently because of their ownership structure. A second survey we carried out, of managers within the sector, found that the organisational form clearly does influence behaviour and decision-making. That is due not just to the organisations being owned by the members rather than shareholders, but also to the different organisational culture that this fosters.

Managers of plcs are made aware that they owe a legal duty to shareholders. In cooperatives and mutuals, managers are equally aware that they owe a duty to the members and to the principles that underpin the mutual and cooperative movement, including "concern for community".

Cooperatives and mutuals behave differently in three crucial ways.

• First, concern for community translates into higher charitable giving, both in cash and in-kind.
• Second, business decisions give a greater weight to community interests, for example by keeping branches open in rural areas.
• Third, management decisions give a greater weight to the interests of members, prioritising quality of service over profits.

Ironically, this last difference may lead national statistics to under-report the importance of the cooperative and mutual sector. Gross national product is calculated according to the "value added" by companies, broadly made up of wages and profits. If a private company boosts profits, this may be recorded as a greater contribution to national income; if a cooperative or mutual decides to forgo such opportunities, and concentrates on quality of service, the benefit to the economy may go unrecorded.

Cooperatives and mutuals have a wider impact on the economy not only as a result of what they do themselves, but from the constraints they put on private companies and plcs. There is compelling evidence that the stronger the cooperative and mutual presence in a market, the less other companies are, for example, able to raise prices, for fear of losing market share.

There has long been a recognition across the political spectrum of the need to tackle what Edward Heath called the "unacceptable face of capitalism": from Winston Churchill's advocacy of a minimum wage to prevent the good employer being undercut by the bad, to the Enron scandal - a company that ticked all the good corporate governance boxes while lining the pockets of managers and directors until the company was bankrupted and the employees lost their jobs, pensions and savings, all tied up in Enron stock.

Great effort has gone recently into improved corporate governance as a way of improving corporate behaviour. This is important but, as Enron demonstrated, may not suffice. Another more effective form of pressure may be to encourage a strong cooperative and mutual sector, which will not only behave ethically itself, but constrain others from behaving in too ugly a fashion.

After all, the battle against bad corporate practice goes back to the earliest days of capitalism. The cooperative movement was founded so that customers could buy reliable produce, as a reaction to the foodstuffs that were all too common at the time.

Similarly, credit unions are being formed to cut out loan sharks, and football clubs are being rescued from improper or corrupt ownership practices by supporters' trusts that seek to ensure clubs are run in the interests of the supporters and the community rather than private financial gain.

So the mutual form is not only surviving, but is being re-born. It is showing a way to organise economic and social activities in the interests of those who work for or deal with those organisations, rather than for external shareholders. And rather than pay out dividends to external shareholders, cooperatives and mutuals can use their surpluses to reward customers, employees and local communities.

© The Guardian 2005 www.guardian.co.uk

Professor Jonathan Michie is director of Birmingham Business School and co-author of Mutuals and their Communities, available from www.mutuo.co.uk

j.michie@bham.ac.uk