Mutual describes a form of business enterprise which is owned by those who do business with it. It hence exists, at least in theory, to provide its clients with the best possible service rather than its shareholders with the maximum possible return on investment.
Cooperatives are very similar to mutual companies. However, they tend to deal in primarily tangible goods and services such as agricultural commodities or utilities rather than intangible products such as financial services. Further, cooperative banking institutions are known as credit unions.
The primary form of financial business set up as a mutual company in the United States has been the insurance company. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policyowners. Under this idea, what would have been profits are instead rebated to the clients in the form of dividend distributions or reduced future premiums. This could be seen as a competitive advantage to such companies — the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors.
However, the mutual form of ownership also has many disadvantages. The chief of them is that mutual companies must generate capital for growth internally — they have no shares to sell and hence no access to equity markets. Another shortcoming is the tendency of the management of such companies to act as if they were themselves the ultimate owners. While major decisions are techically subject to the vote of members, in fact very few members are cognizant of the daily operations of the company as would be outside investor groups such as mutual funds or pension funds. Further, without large shareholders exerting pressure to maximize profits, and the management has little incentive to control overhead.
At one time, most major U.S. life insurors were mutual companies. For many years, the tax status of such organizations was open to dispute, as they were technically nonprofit organizations. Eventually, it was agreed that federal taxation would be based on their share of business: for instance, in years in which mutual companies represented half of the business, they would be responsible for half of the taxes paid by the industry.
Many savings and loan associations were also mutual companies, owned by their depositors.
As a form of corporate ownership the mutual has fallen out of favor in the U.S. since the 1980s. Savings and loan industry deregulation and the late 1980s S&L crisis led many to change to stock ownership, or in some cases into banks. Many large U.S.-based insurance companies, such as the Prudential Insurance Company of America, the Metropolitan Life Insurance Company, and the New York Life Insurance Company have demutualized, with shares of stock being distributed to their policyholders to represent the ownership interest they formerly had in the form of their interest as mutual policyholders.
The Mutual of Omaha Insurance Company has also investigated demutualization, even though its form of ownership is embedded in its name. It is noted that other formerly mutual companies such as Washington Mutual, a former savings and loan association, have been allowed to demutualize and yet retain their names.
The approximate British equivalent of the Saving and Loan is the building society. Building societies also went through an era of demutualisation in the 1980s and 1990s, leaving only one large national building society and a limited number of small regional and local ones. Significant demutualisation also occurred in Australia in the same era.
See also
Last updated: 05-13-2005 07:56:04
