Ownership Matters - New Mutual Business Models
Cliff Mills, March 2001
Mutuo - Communicate Mutuality
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Contents
Investor-owned companies dominate the economies of the leading
industrialised nations. Modern UK company law has made the limited company
not only the easiest and most accessible form of business ownership, but
from the proprietor's point of view the most attractive.
The investor-owned company has been hugely successful as a medium of
business ownership. The number of live companies on the register at
Companies House (about 1.5 million) confirms this. Through mergers and
acquisitions, there are corporations of ever increasing size, which now
challenge governments in the amount of power they wield. Great fortunes are
created for investors, and executives of the most successful enterprises
earn huge salaries. And when businesses fail, limited liability provides the
protection for the proprietors.
In the UK as a result of privatisation's of the 1980s and 1990s a
significant number of industries have been taken out of state-ownership.
This has further dramatically increased the total volume of business held by
investor-owned companies.
But this very process of privatisation, of changing from state-ownership to
investor-ownership, (a process which undoubtedly opened up previously little
known businesses to wider scrutiny and wider ownership), is itself now being
criticised for having created organisations which put share-price before
safety, which concentrate on dividends before quality of service, and which
pay high rewards to executives when the public is dissatisfied with the
services for which they are paying.
Whilst questions are now being asked about the privatisation process, little
attention has been paid to the underlying corporate structure - the
investor-owned company or joint stock company - and whether, in spite of its
great success as a model for holding businesses, is it necessarily the most
appropriate one. Although other models are in use (such as the company
limited by guarantee and trust models), there still remains an assumption
amongst many that the investor-owned company is really the only model to use
in all but the most exceptional of cases.
Is there another way of doing this? Is there not an alternative form of
ownership, which puts the interests of the community first?
The answer to these questions is: yes, there is a real, deliverable
alternative. It is an alternative which brings multiple benefits, and which
is economically achievable. It is an alternative with real attractions in
terms of delivering public services and one, which looks to the future, as
well as meeting current needs. Furthermore it is an alternative, which
provides for greater participation by communities, for citizenship, and for
local control of services.
The purpose of this short paper is to explain that alternative, a new mutual
alternative, and to put forward reasons why it is an option that
decision-makers should consider.
The new mutual form of ownership is a radical new approach, but based on
established principles and legislation. It is aimed at providing an
alternative form of corporate model for the ownership of public services.
The starting point for the model is that public services are needed for the
benefit of communities, and the individuals and organisations that make up
communities. I have an interest in electricity, gas, water, transport and
similar services being available, not just so that I have access to them
when needed for my personal and work time use, but so that the community in
which I live and work can function. Even if I choose not to travel by rail,
those I work with, or members of my family, or those who visit me, may rely
upon rail travel.
Public services therefore serve communities. It would be logical for them to
be held within a structure focussed on serving the community and committed
to carrying on its business for the benefit of the community.
This is precisely the model which is used - a mutual organisation registered
under the Industrial and Provident Societies Act on the basis that it is
conducting it business for the benefit of the community.
Just as a company has shareholders that own the shares, so a mutual
organisation has members who also have a share. But there the similarity
ceases. The member's share in the mutual organisation is nominal only. Any
person receiving services is entitled to become a member and own a share.
Unlike shares in a company, membership of the new mutual organisation gives
each member one vote only, and it gives no right to a share in the
underlying value of the business. The member has no entitlement to a
divided. Instead, the surplus (profit) generated from the trading activity
is returned to the community in the form of better quality, or cheaper
service.
In other words, individual members hold their share - that is to say they
own the mutual organisation (nobody else owns it) - on behalf of the
community. The mutual conducts its business for the benefit of the
community, and the community ultimately controls it.
The community therefore owns the business, and the community is served by
the business. It is in this sense that it is a mutual organisation.
In relation to some public services, it may be appropriate to enable
employees to become members, in addition to those in direct receipt of the
services (this is not necessary where employees are themselves in receipt of
services). This might occur, for example, where the nature of the service
was highly dependent upon the part played by employees in delivering the
service.
A board of directors controls the mutual, in the same way as a company. The
composition of the board, however, is different, and the corporate
governance structure will depend upon the needs of the industry sector.
In all cases, the board contains directly elected representatives of the
members, who are non-executive directors. Secondly, it contains other
professional non-executive directors who are appointed by the rest of the
board in accordance with an agreed policy designed to ensure that the board
is properly representative of the community. Thirdly, it has a chairperson
with appropriate skills and background.
For some public services, the board also contains representatives of the
executives including the chief executive. In this model, the board itself is
charged with the day to day responsibility for the management of the
business. In other cases, there will be a separate management team itself
charged with responsibility for day to day management of the business. In
this model, the board sets strategy and policies for the business and is in
a supervisory role, with the chief executive reporting to each board meeting
on the progress of the business.
These structures create a different environment for those involved in the
management of the business. The responsibility for them to achieve success
in the running the business is no less than in any corporate model.
Delivering high quality services at the best price is still the aim, and the
executives and other managers are rewarded for achieving the targets based
upon that. The drive for financial efficiency and success is as hard-edged
as in public limited company (Plc). The key difference for them is that they
are striving to run a successful business in order that it may best serve
its community, rather than to generate the most profits for investors.
Management is incentivised by rewards based upon achieving targets. Both the
management and the board are also accountable for their performance, and the
community ultimately has the ability to determine who is running the
organisation.
New mutual organisations are incorporated under the Industrial and Provident
Societies Act, and are registered with the Registry of Friendly Societies,
now under the control of the Financial Services Authority. They are
registered as societies conducting their business for the benefit of the
community, and require the approval of the Registrar before being permitted
to amend their constitution (rulebook).
- The new mutual provides services to and is owned by the community.
- Delivering high quality services at the best price is the object of the
business.
- The ultimate aim is to serve the community, rather than generating profits
for investors.
The first most obvious benefit of the new mutual model is that it gives to
the community the ownership and control of the organisation from which it is
receiving the public service. The definition of community will vary
according to the service involved, but in each case, the effect will be to
give local control, and thereby to ensure that local interests are
considered. Whilst hard decisions will still be required, when they are
taken they will be based upon the interests of those whose lives and
livelihoods will be affected.
Membership is open to any person in receipt of the services. All members
have the opportunity to participate democratically in the organisation. This
means the right to attend and speak at meetings, to vote on resolutions and
in elections of board members, the right to receive certain information
about the business, and the right to participate in the democratic
structures in the organisation. Ultimately this includes the right to seek
nomination for election to the board.
Because membership is open to any person in receipt of the services, there
is no financial barrier excluding those who cannot afford membership. This
effectively means that those running such organisations are accountable to
the community they are serving.
The ability to become a member, to receive information, attend and speak at
meetings, to vote and to participate in democratic structures, all provide
opportunities for individuals in a community to participate and have a role
as a citizen within the community. Democratic organisations run for the
benefit of the community enable individuals to influence and have a real
sense of involvement in the life of their community.
The encouragement of competition in the supply of products and services may
have benefited consumers through providing choice and competitive pricing,
but when it is extended into the provision of all services including those
still perceived as public services, it has another effect. It leaves the
consumer as simply that - a consumer, a person who simply chooses to buy or
not to buy. The concept of citizenship and membership of a community is
further eroded.
Through organisations established to serve the community in a variety of
ways (transport, utilities, social services, leisure and recreation)
opportunities can be provided to encourage and develop participation by
individuals who have an interest in the provision of such services.
As the state both centrally and locally divests itself of responsibility for
the provision of services, as the role of government changes and individuals
see themselves as having decreasing impact through the casting of a vote,
the encouragement of citizenship, social responsibility and the fight
against exclusion all require the creation of opportunities for individuals
to take part and have a meaningful role in their community.
The opportunity exists for including employees within the constitutional
structures of the organisation. This will be appropriate in cases where, for
example, the success of the business and the nature of the service provided
depend upon the commitment and dedication of the employees.
In other cases, it may be appropriate to recognise within the constitution
the fact that the provision of employment is itself of benefit to the
community.
Investor-owned companies and specifically the Stock Market have for many
years been criticised for leading to short-term thinking. The focus on the
best interests of the company - effectively share-price and profitability -
together with executive reward schemes based on share options encourage
decision-making, which brings tangible quick results. Investment for the
long-term is clearly necessary and takes place, but once again, it will be
commercial expediency, which determines the priority of spending.
The boards and executives of new mutual organisations are freed from this
disadvantage. They can and must take decisions based on what is in the
interests of the organisation in serving its community. Those interests
manifestly include both the longer-term interests of current members of the
community, but also future generations.
Arguably the most serious longer-term need which should be informing current
commercial decision-making is the environmental one. The most graphic
examples of the shortcomings of decision-making within a company structure
can be seen in this context. Unless there is some specific statutory
requirement, or an unarguable commercial reason compelling a company to
choose the less environmentally damaging but more expensive option A,
whatever they may want to do their legal duties will drive directors to
choose the cheaper but more harmful option B. As stated above, there is no
room for altruism in an investor-owned company.
In a new mutual carrying on business for the benefit of the community, the
directors would be at liberty (and may be legally obliged) to choose the
less harmful but more expensive option A.
- New mutuals give control to the community.
- They are democratic and open, and accountable to the community.
- They encourage citizenship and participation by individuals.
- They provide the basis for long-term thinking.
Investor-owned companies will continue to be the appropriate model for
business ownership in the majority of instances. However, new mutual
structures provide options that should be considered in a number of
situations including the following, where a model designed to create wealth
is less appropriate than one based on serving a community>
Public or community services - Where the business is in the nature of a
public or community service, such that continuity and quality are essential.
- Community assets - Where the service is based upon what may be
characterised as community assets of which the community has a sense of
ownership.
- Monopoly - Where the provider of the service has an effective monopoly,
whether or not there is a statutory regulator attempting to maintain some
sort of balance between the interests of customers and the interest of
shareholders.
- Other dependence - Where substantial numbers of individuals are dependent
upon the service and effectively have no choice about where to purchase the
service.
The presence of one or more of the above features would suggest that a new
mutual option should be considered.
Reference has already been made to utility companies. These businesses
involve a number of features described above. A new mutual model had been
developed for the water industry, and a mechanism for transition from
investor to community ownership has been devised to meet the requirements of
the Regulator.
The current best value reviews being undertaken by local authorities are
leading to the consideration of a number of alternative approaches to the
provision of services. New mutual models are in the process of development
for the provision of care for the elderly, and the provision of leisure
facilities. Many services currently provided by local authorities display
one or more of the features outlined above, or simply do not readily lend
themselves to implementation through investor-owned companies (such as
crematoria, cemeteries and parks). New mutual structures provide alternative
options.
New mutual solutions are also appropriate for consideration in relation to
housing. Although housing associations provide a similar solution through
the traditional housing association model, this model is not open and
democratic.
There is one area where new mutual structures are already being implemented.
Supporters Direct is a Government backed organisation seeking to promote the
interests of members of football clubs by combining their influence as
shareholders. A football club is not only a community-based organisation; it
also has an effective monopoly on the rights associated with the club
concerned. It is an example of a business where it is arguably less
appropriate for an investor-ownership model to be used rather than a
community-ownership model. The change in the dynamic of decision-making
caused by a different model could have significant results. To-date some 28
football clubs have created some form of Supporters Trust as a means of
mutually holding shares in clubs since the formation of Supporters Direct.
Other sports clubs could follow the lead taken by Supporters Direct in
relation to football.
Other alternatives to investor-owned companies are used in a number of
situations referred to above. The traditional housing association model has
already been mentioned.
The company limited by guarantee is also used commonly described as a
not-for-profit organisation. A company limited by guarantee (CLG) differs
from an investor-owned company in that it does not generally have a share
capital (no new CLG can be registered with a share capital since the
Companies Act of 1980), and the liability of members is limited to the
amount guaranteed in the memorandum of association (commonly £1). The main
distinction between the company limited by guarantee and the new mutual
models is that membership of a company limited by guarantee is not open.
Members tend to be selected by the directors.
This model is commonly used in a charitable context. Whilst it is
appropriate in this area where those responsible for running a charitable
organisation wish to select appropriate members in the interests of
maintaining the original charitable intentions, it is less appropriate for a
business which is not trading for charitable purposes. This is particularly
the case where openness and accountability are important, and where the risk
of accusations of cronyism exists. To enable those responsible for running
the business to choose members clearly introduces a serious structural flaw.
- New mutual structures are suitable for public services, businesses based
on community assets, monopolies and other situations where significant
numbers of people depend upon the service.
- Some utility businesses are appropriate for new mutual models.
- Services currently provided by local authorities such as care of the
elderly, leisure and housing are appropriate for new mutual models.
The investor-owned company has been the dominant corporate structure in the
United Kingdom in the last two centuries. It reached its zenith in the years
of Margaret Thatcher's government (1980s and early 1990s) with the
privatisation programme, which brought very large businesses out of
state-ownership and into investor-ownership, and was intended to lead to
widespread share-ownership.
Investor-owned companies have no place in their structure for customers,
employees, and both of those groups are at a disadvantage in the key
decision-making process in company boardrooms. In spite of the efforts of
regulators, recent events are demonstrating that the company model does not
work in certain applications, when put to the test. The legal duty of
directors to act in the best interests of the company, and effectively its
investors, means that safety, environmental concerns and other long-term
issues including the interests of future generations do not receive and will
never receive the priority they need if the interests of the community are
to be properly protected.
New mutual models are already available in some areas and being developed in
others. These models provide real alternatives for those considering options
for delivery of services.
Not only do these models address the weakness of the decision-making process
in the traditional company structure, they provide many benefits in their
own right including:
- local community control; a constitutional role for employees;
- the encouragement of citizenship; and
- the promotion of long-term thinking in the interests of the community and
nature.
The opportunities that these models create now need to be seized by those in
a position to decide the future ownership of some our most important assets.
Cliff Mills has written widely on the institutional and legal aspects of
mutual and social ownership. He is a partner at Cobbetts solicitors and can
be contacted at
www.cobbetts.co.uk
This is an edited and abridged version of an article titled A lawyer's
Perspective. The full article and other articles on new mutualism can be
found in Ownership Matters - New mutual business models by Ian Hardgreaves,
Cliff Mills and Jonathan Michie (March 2001). The booklet is priced at £5.00
plus p&p and is published by
www.Mutuo.co.uk
. Copies of the publication can be
obtained from:
Mutio.co.uk
77 Weston Street
London SE1 3SD
For further information on Mutuo visit:
www.mutuo.co.uk
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