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 mutualbut
their purpose is to do business, not to become members. They base
their decision on the value of the dealbecause 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 businessand 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 inyet 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
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
valueand 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