I agree and commend the hon. Gentleman for his comments. Co-operatives spring up from local communities; they are bottom-up, grassroots organisations—certainly not top-down.
As I said, alongside investor-owned firms, co-operatives, mutual insurers and friendly societies have an important part to play in the biodiversity of our economy. They need a business environment that facilitates this: Government policy that understands and supports the mutual business difference; and legislation that is up to date, flexible and permits co-operatives, mutuals and friendly societies to undertake their purpose of serving their members’ needs in the best way possible. Only by working in a modern and supportive business environment will co-operatives, mutuals and friendly societies be able to make a full contribution to the prosperity of our country by serving the interests of customers and citizens. Yet demutualisation remains a real and present threat to the mutual sector, which is, unfortunately, incentivised by the system.
My Bill is about giving mutuals the option to maintain mutual capital for the purpose it was intended. There is a fundamental distinction between the rights of members of a mutual society and members of an investor-owned company. Members of a company—shareholders—have the right both to a pro rata share of distributed profits, or dividends, based on their shareholding, and also to a pro rata share of the underlying value of the company. The more capital they own, the greater their share of the profits and of the value of the company. Members of a mutual society, by contrast, generally have neither of these rights, because in mutuals profits are generally not used as a mechanism for rewarding capital, and members of a mutual do not have any expectation of any entitlement to a share in the increased value of their society.
Since members of a mutual are not entitled to any share of its increased value, the amount by which the net asset value of a society exceeds the capital provided by members—commonly referred to as the “capital surplus on a solvent winding up”—has no specific owner. It is effectively a legacy asset, held by the society for future generations, and enables it to provide for, and invest in, its future. It is a core part of its mutual identity. It represents the trading surplus accumulated by previous generations of members participating in their society’s business, in which they were always content to have no personal share. By implication, it is held for the benefit of future generations. Societies were originally set up not to make a capital surplus to reward members, but to provide goods and services for those who need them; that was the purpose, and this was the basis upon which previous generations have taken part in the trade.
Seen through the lens of investor-ownership, a capital surplus is a tempting asset—a windfall or unearned profit —which, if mutual members were to be replaced by
investor-shareholders, could be shared out among those shareholders. Capturing this asset is the usual incentive for a “demutualisation”, which is when a capital surplus or legacy asset is divided up between shareholders—when the mutual agreement between the former members, whereby they engaged in their society on the basis that they would not personally profit from its trade, is broken up. In short, it is when a mutual purpose for the common good is replaced by a profit-driven purpose for private benefit.
In UK law there is no generic or principled recognition of the value to wider society of mutuality or of the legacy asset of a mutual society. As a result, the ability to access legacy assets actively incentivises demutualisation.