In most standard definitions, mutuality means “Having the same relationship, each to the other”. Mutual “members” are identical in that they know from the outset that any perceived risk and reward is shared equally between all members, irrespective of size of business or bank balance. Crucially, however, members of a mutual know that they contribute equally and fairly to the financial overheads in return for an equal and fair share of any possible benefits. A mutual relies on a sound business model and the common purpose of its membership and does not restrict the activities of its members.
A mutual that is set up to benefit a niche and finite business community requiring specific services needs to be set up commercially, but not as a profit making enterprise. These services should be priced at a sustainable level which will, under the direction of the mutual company, settle within the first couple of years to be the actual cost of providing the service that the members want and need.
Any profits generated can be re-invested in the mutual for the benefit of all the members in equal measure, for the creation of new services for the consumer, or can be gifted to charity. Some profit may be necessary for internal financing to sustain or grow the organisation, and to make sure it remains safe and secure. Mutual members would not usually be asked to contribute to the capital of the company by direct investment.
Mutual companies are often “companies limited by guarantee” (CLG), which broadly means that they cannot be sold without the permission of the majority of the members.
What is less well known is that certain CLG structures can create a subsidiary company limited by shares. A limited number of shares in the company can then be sold to other “investors”. Part of the investment money received is then used to purchase the business of the CLG, which is then dissolved. In this way, the original mutual transforms itself from a CLG to a company limited by shares. The new company now has the structure that allows future equity investment. On dissolution, the CLG will distribute the sale proceeds according to its constitution.
What it means in practice is that a mutual, if certain checks and balances are not in place, is still capable of being transformed into a traditional, profit-motivated business, funded and driven by investors and shareholders.
A mutual created to serve the specific needs of a business community can be constitutionally guaranteed to remain aligned with Members’ interests. A starting point is one firm (not one company), equals one member, which equals one vote. This is an important distinction because companies can be sub-divided - 'Acme Ltd' with 40 offices can become 'Acme (North) Ltd'; 'Acme (South) Ltd'; 'Acme (East) Ltd'; and 'Acme (West) Ltd' and immediately has four votes but one group company.
Such a mutual should not provide incentives or discounts for one member without the same being available to all members along with the same outcome. A mutual avoids different risk reward structures for different classes of membership because they are anathema to the whole concept of a reciprocal relationship between two or more people or things, thus ensuring that no members can become “more equal than others”.
This can be further reinforced at Board level with, for example, member representatives out numbering the executive directors. Member representatives, a voting majority, should be nominated by all the members of the mutual. In the fullness of time there can be external board appointees proposed to the membership to strengthen the knowledge and credibility of the board.
A mutual structured in this way is capable of mitigating the risk of large member firms dominating smaller member firms. Any firm, large or small, if the desire and talent exists, has an equal opportunity to be nominated for one of the Member Representative Board seats.
If a mutual wishes to raise £1,000,000, it approaches its members on the basis of the amount required divided by the total membership. For example, 1,000 members would contribute £1,000 each to become an annual member; or 500 members would contribute £2,000 each.
We are not aware of a more equitable and transparent way for a business to raise finance and remain a mutual and PropertyMutual is the only live mutual for the property industry with these checks and balances in place.
Andrew Goldthorpe MRICS
CEO and Founder, www.PropertyMutual.co.uk
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