Select Committee on Treasury Minutes of Evidence

Memorandum from Mr Andrew Young, Managing Director, NFU Mutual

  Separately from my memorandum on behalf of MICA, I would like to make a number of points on behalf of NFU Mutual.

  The Board of the NFU Mutual believes that carpetbagging is immoral. The members of a mutual have every right to expect that all of the assets of the mutual are employed on their behalf or will be used to grow the business to enable mutuals to compete into the future. The only basis for demutualisation should be if the members believe that a different form of corporate structure will give them better value for money in relation to the products offered by the mutual. Demutualisation to obtain windfall payments, and the almost inevitable poorer value for money, is unjustifiable.

  At the heart of the problem is the statement, which so often is taken as read, that the members of a mutual organisation own it in exactly the same way as the shareholders of a stock company own their company. We do not believe that is the correct view.

  The customers of a mutual organisation become members, obviously, because of their business with the mutual—but their purpose is to do business, not to become members. They base their decision on the value of the deal—because they like the mutual's price, service, values, etc, along with, of course, the customer's own convenience. The decision they make is on where they will place their business—and it is in consequence of that decision to trade that they become members. They do not make a separate decision to become members and they do not pay anything for the rights of membership in the way that shareholders do. To us, therefore, the concept of a member of a mutual "realising his share" of the company's assets is unsoundly based, because he/she has never paid anything for that share in the first place. No-one asks nor expects them to pay in—yet carpetbaggers expect to be paid out.

  We think that a better analogy is that members own a mutual on a basis akin to trusteeship, ie they hold the assets in trust for the whole body of members. Those members are entitled to have the assets employed on their behalf, to ensure that their business continues as a going concern, and grows and develops. But they should not have the right to take the assets out.

  For security and long-term growth, the mutual needs to invest in the business and to build up reserves for the future. So long as demutualisation remains easy to achieve, the threat of the carpetbaggers remains, providing a disincentive to running the business properly. A well-run mutual will build up a substantial goodwill value over and above net asset value.

  In our view, members of a mutual should retain the ultimate right to decide how the business is run, and if they are not satisfied they should get rid of the Board and the management rather than demutualise. We believe current governance mechanisms give ample opportunity to do that.

  We would like to see windfall payments to members on demutualisation made illegal. I understand that, in France, any surplus left after the winding-up of a mutual either goes to another mutual or to charity.

  If the Government feel that stopping windfall payments to members would lessen the responsibility and pressure on the Board and management of mutuals (although, as I have said, all the other governance mechanisms are available to replace the Board) why not introduce a Mutuality Audit Commission, which could review the performance of individual mutuals in delivering customer value—and which could publish its findings?

  If something is not done to stop carpetbagging, we run the risk of seeing the demise of mutuality.

16 June 1999

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