Mutual ownership can’t beat out greed
Would society be better served if more businesses could be owned by their customers? A recent New York Times article prompted me to mull this over as I read an account of how some auto insurance companies, owned by their policyholders, pay out a significantly greater portion of their total premium revenue in claims to their customers. Companies owned by their customers have commonly been referred to as “mutual” companies, given the mutual interest between the owners and customers — as they are one and the same. It reminds me of the words to the old song “Mutual Admiration Society.”
Mutual ownership goes back to the earliest insurance companies, invented by Phoenician ship owners who shared the risk they all faced together — which made them both the owners and their own customers of the pool they established. More recently, a group of Army officers after World War I were unable to get auto insurance, so they started their own company, which became USAA.
The insurance industry has a history of having two types of companies struggling to make a case for their different ownership structures. On the one hand are companies owned conventionally by public stockholders. The others are owned by their policyholders. In the
latter type, owners benefit from their ownership by receiving dividends on an annual basis or by paying lower premiums — essentially company profits that are recycled in the form of premium reductions or in a higher ratio of claims paid to premiums collected.
The debate as to which is a better model has raged for as long as I have known anything about insurance. On the life insurance side, mutual insurance companies offer a better value, as dividends are used to reduce premiums over time. In auto insurance, it is clear that while premiums may be just competitive, the higher claims payout, according to recent studies, make mutual companies a better value for consumers. It stands to reason that a company that doesn’t have to hoard revenue to reward stockholders should offer better value and/or cheaper premiums.
In the mutual fund industry, the Vanguard fund company has now eclipsed all other competitors and is the largest in the industry. Its mutual ownership structure is largely responsible for its success as investors have slowly gotten the message that investment cost is the only aspect of investing over which they have 100 percent control. Vanguard’s profits that otherwise would be distributed to stockholders are instead offered to its customers in the form of investment costs so low they have embarrassed the rest of the industry.
It’s an industry, by the way, that is one of the world’s most profitable — earning, at last count, an average pretax return of more than 30 percent. On an account of $50,000 or more, the industrywide profit is as much as 90 percent. At Vanguard, all of this profit inures to investor/owners.
In the grocery business, many may remember the Berkeley Co-op with its 12 Bay Area stores, where many of us shopped and received a check at the end of the year based on how much we had spent. “Members” in those days were effectively owners of a company that was formed in the 1930s and lasted until 1988, when it drowned in that era’s political acrimony and a series of bad business decisions. While it lasted, it was a great place to shop, and a typical family received a check for about $150 at the end of the year — back when that was a lot of money.
Blue Cross was sort of a co-op in that it was operated as a nonprofit, which had the effect of putting it in business to service its policyholders.
What ended that constructive relationship was a law change that allowed the company to become a for-profit entity, triggering a bonus to a handful of senior managers totaling more than $300 million. Many of the original mutual life insurance companies have undergone a similar transition.
This trend illustrates the following point: As much as cooperative ownership has going for it, it has not developed the following that its economic benefits to society would dictate.
The answer might be that it doesn’t offer an outlet for the level of greed reflected in the income disparity between workers and top management in our public companies today.