Everything about Mutual Organization totally explained
A
mutual,
mutual organization, or
mutual society is an
organization (which is often, but not always, a
company or
business) based on the principle of mutuality. Unlike a true
cooperative, members usually don't contribute to the
capital of the company by direct investment, but derive their right to profits and votes through their
customer relationship. A mutual organization or
society is often simply referred to as
a mutual.
A mutual exists with the purpose of raising funds (or
money), from its membership or customers (collectively called its
members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members - it has no external
shareholders to pay in the form of
dividends, and as such doesn't usually seek to maximize and make large
profits or
capital gains. Mutuals exist for the members to benefit from the services they provide.
Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be necessary in the case of mutuals to sustain or grow the organization, and to make sure it remains safe and secure.
Background
The primary form of financial business set up as a mutual company in the
United States has been
mutual insurance. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policy owners. 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've 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 technically 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, management has little incentive to control costs.
At one time, most major U.S. life insurers 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'd 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 and the
Metropolitan 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.
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.
Banking institutions with closer ties to the cooperative movement are usually known as
credit unions or
cooperative banks rather than mutuals.
Modern mutuality
Various types of
financial institutions around the world are mutuals, and examples include:
Modern mutual financial institutions usually offer services very similar (if not the same) to those of a
bank, except a mutual may pay higher
interest rates on
savings and
deposit accounts, charge lower interest rates on
mortgages and
loans, have fewer or lower fees and charges on the services or products it offers, and the members who save and borrow with the mutual ultimately own the business.
Conversion
A mutual may convert itself to a non-mutual through the process of
demutualization. This process became increasingly common in the
1980s as a result of "
Thatcherite" policies and ideology. In the United States, conversion may be full, to a
public company, or, in many states, partial, to a
mutual holding company.
Further Information
Get more info on 'Mutual Organization'.
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