To what extent should members of Mutual organisations behave like shareholders?


02 June 2016

The following article has been written by Christopher Critchlow, OAC Director and Consultant Actuary, who oversees OAC's professional services. Christopher has vast experience of the insurance sector, and especially with Mutuals.  The issue of member involvement in the governance of Mutual insurance companies and Friendly Societies is actively and regularly discussed in the boardroom, partly stimulated by an increase in regulatory interest in recent years.  In this article he presents his views about one aspect of the discussions in which he had participated in – namely, to what extent should members of Mutual organisations behave like shareholders?

At a recent conference by the Association of Financial Mutuals for Non-Executive Directors discussing the governance of Mutuals there was a discussion around what firms did to promote greater member engagement, which has been a key regulatory focus in recent years.  During the discussion it became clear that the reason behind this focus was an expectation that members should act more like shareholders in the governance of the Mutual organisations.

This, at first, sounds like a sensible approach.  Members should be able to hold Board’s feet to the fire.  But the more I think about it, the more uncomfortable I feel.  Why is this?

This article explores the issues around proprietary and Mutual governance and argues that they are not necessarily the same.

How proprietary companies operate

As we all know, proprietary companies have policyholders – some non-profit, some with-profits – from which they make a profit.  In the case of non-profit policies, including unit linked policies, they make a profit when premiums and charges exceed the benefits and expenses paid out.  In the case of traditional with-profits policies they get a share of the profits, typically one 9th of that distributed to with-profits policyholders.

Shareholders, who are generally large institutions themselves, then receive these profits in the form of dividends.  If performance falls short, these shareholders can hold management’s feet to the fire and ultimately hire or fire directors in the hope of achieving a better outcome.  This has a sound logic and it is easy to see how the active involvement of shareholders can act as an additional control on the governance of that business.

How Mutual companies operate

Mutual companies also have non-profit and with-profits policies.  All the profits arising on with-profits policies are allocated to the with-profits policyholders, and profits arising on non-profit policies may be allocated to with-profits policies or for the benefit of the membership as a whole.

If performance falls short, members (who are generally policyholders themselves) can, through the AGM, hold management’s feet to the fire and hire or fire directors in the hope of achieving a better outcome.

So does the active involvement of members have the same positive control on the governance of that business?

Unlike proprietary companies, members of a Mutual are generally the policyholders within that fund.  As such their primary interest is driven by increasing returns on their policy and not necessarily by maximising profits.  But, I hear you ask, shouldn’t these both be the same?

The answer is no because profit (which is what shareholders of a proprietary company are most interested in) is based on the performance of the business as a whole, whereas the interests of members in a Mutual organisation will be much more narrowly focused on the performance of their own individual policy.

An example may illustrate how this could have an adverse impact:

  • Members may be keen to see annual bonuses set at higher levels because they perceive this improves the benefits they will receive on maturity, rather than pay benefits in final bonus form.
  • This places a good and positive control on a Board to improve investment returns. However there is pressure to declare high annual bonuses relative to these returns so that there is reduced scope to change payouts should an unexpected event arise.
  • When the unexpected shock does happen, the firm may not have the financial resources it needs to weather the storm. This in turn may cause it to sell equities at a depressed price and then get locked into low fixed interest return environment which ultimately disadvantages all its policyholders.

This “conflict” to pay high annual bonuses would not necessarily arise within a proprietary business because shareholders want to maximise profit and so will bring pressure to bear on achieving good overall investment returns whether that is paid in annual or final bonus form. In effect the active shareholders are more likely to be institutions who will understand the profit drivers and capital requirements of the business rather better than individual policyholders.

The important point is that unlike proprietary businesses, too much member (or even individual) interest can create an inherent conflict of interest with the sound financial management of that business.  This is a subtle but very important point in understanding the appropriate governance requirements of mutuals.

So is it wrong to encourage member engagement?

Absolutely not!  Members of Mutuals are the ultimate owners of the business and their interests must be taken into account in any decisions Boards may take.  It is important that Boards proactively seek to engage with their members to understand (amongst other things):

  • Their motivations and requirements.
  • Their experiences - what works well and perhaps more importantly what doesn’t work well.
  • What the business should be doing of that it isn’t doing currently; or even what it should be doing less of.
  • How the firm can best use its financial resources over and above that needed for the sound financial management of the business.


So should members of Mutual organisations behave like shareholders?  I argue that the interests of members and shareholders are not necessarily one and the same and as such the shareholder governance model is not necessarily appropriate for the Mutual sector.

So if that can’t work for Mutuals, what can?  I hope in the next article, to expand on what practical steps mutuals can take to demonstrate effective governance standards and what that might mean in practice.

I invite comments to my article so please feel free to contact me using the email address below.

Christopher Critchlow

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Christopher Critchlow
Director | Head of Professional Services

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