DEMUTUALISATION: by Dr Race MatthewsNews Weekly
Credit unions an endangered species
, June 19, 2004
Credit unions and credit unionism are an endangered species, says former Labor MP and minister, Dr Race Mathews. Thanks to a demutualisation feeding frenzy, which has targetted permanent building societies, friendly societies and mutual assurance societies, credit unions could rapidly become as extinct as the dodo and the dinosaur.Let us recall the nature, purpose and proud history of the worldwide mutualist movement of which credit unions are an integral part. Mutualism is about self-help through co-operation - about resolute and principled households combining to bring about, through their shared efforts and enterprise, outcomes that would be unachievable for them in isolation from one another. Mutuals invariably emerge consequent on unsatisfied needs, as a means whereby access is obtained to goods and services that otherwise would be unavailable or unaffordable.
For example, the Rochdale Pioneers - the 28 poor cotton-weavers who established their co-operative store in 1844 and thereby gave rise to the modern consumer or retail co-operative movement - were responding to an unsatisfied need for affordable household necessities such as food and fuel.Response to need
Friendly societies were a response initially to an unsatisfied need for funeral benefits, and later for unemployment benefits, sickness benefits and medical and hospital care. Access to affordable life assurance was offered by mutual life assurance societies, as was access to affordable home loans by building societies.
Agricultural processing and marketing co-operatives met a pressing need on the part of farmers to share in the value-added component of their produce beyond the farm gate. Worker co-operatives responded to the need on the part of workers for secure employment by enabling them to own their workplaces and jobs - by enabling labour to hire capital rather than capital labour. Trade unions were originally mutualist bodies or co-operatives, formed by employees in response to the need to obtain better working conditions and a just price for their labour.
Credit unions in their turn were at first a response to the need for affordable carry-on loans for smallholder farmers, and later for affordable consumer finance.
Australian hire-purchase companies in the late 1950s were charging interest rates of up to 60 and 70 per cent on loans for such things as a simple refrigerator in the kitchen or a single-tub washing machine in the laundry.
As a result, families in the outer suburban Catholic parishes of Australia's major cities began to gather round card tables after Mass, pool such savings as they had and queue to borrow from the pool at interest rates that were affordable for them. In this way, parish credit unions were born.
A little later, neighbouring non-Catholic households looked over the church fences, saw what a good thing the Catholics had going for them and secured admission, thereby causing the parish credit unions to become community credit unions.
Later again, some trade unions recognised that workplaces were every bit as much communities as were suburbs, and industrial credit unions were established. So obviously right was the credit union idea, and so urgent the need for affordable consumer loans, that Australian credit unions now have more than three million accounts - equal to one in every six of our population - and assets under management of more than $A23 billion.Flexibility
What follows logically is that mutuals must be sufficiently flexible to adapt to changing needs and circumstances - must be able to recognise when the needs for which they are established no longer exist, are less pressing, or are being met on as favourable terms by other businesses and agencies.
Mutuals must constantly reinvent themselves and re-target their resources so as to respond to new needs or those that are being experienced more widely or with greater urgency. In this way they avoid becoming what is referred to technically as "frozen" mutuals.
What is central here is respect for the principle of the conservation of mutualist capital. Each generation of members of a mutual adds to its store of savings in the expectation that they will be passed on for the benefit of generations still to come.
Mutualist bodies are in this sense trustees for the intentions of the dead and the inheritance of the unborn. It was not by accident that the names of some early mutuals included the word "perpetual". Mutuals take seriously Chesterton's definition of tradition as "the democracy of the dead".
There is no shortage of mutualist bodies that have adapted to new community needs and thereby re-invigorated themselves, re-established their relevance and retained the involvement of their members.
For example, a major US co-operative - Co-operative Services Inc of Oak Park in Michigan - was formed in the 1930s in response to an urgent local need for affordable, hygienic household milk delivery services.
When the commercial dairies moved in with comparable services at a comparable price, the co-operative re-invented and re-tasked itself, so that the community capital it had accumulated was applied to meeting the need for affordable eye-testing and spectacles.
Following the arrival of the optometric services corporations, the co-operative re-tasked its capital again, to meet the need for affordable accommodation and support services for older people. It now operates large apartment complexes - self-governing co-operatives within the over-arching structure of the parent body - in several states.
Closer to home - and on a much more modest scale - the Cobar Co-operative in NSW began as a traditional co-operative butter factory, and is now a retail co-operative meeting the needs of its customers and also keeping honest conventional competitors such as the giant supermarket chains.
The former Macleay butter factory co-operative also has become a retail co-operative, and currently is planning an expansion into petrol sales and the establishment of a parking station and entertainment complex.
Faced as the respective communities of Cobar and Macleay have each found themselves with the question of whether the assets of these mutuals should be re-targeted in response to a perceived new need or demutualised and distributed to its members, each of them has favoured the re-targeting option.
Unhappily, where Australia is concerned, re-invention of mutuals such as at Cobar and Macleay remains the exception rather than the rule. For example, we have not, like Mondragon in the Basque region of Spain, harnessed mutualism to bring about regional and local economic development on a scale and of a quality of truly awe-inspiring proportions.
We have not, like the Canadian Desjardins credit unions, positioned mutualism not only as banking with a human face, but also as an engine for job-creation, not least in rural and regional areas. We have not, like the United States, developed new generation agricultural co-operatives as a means of enabling farmers to earn decent livelihoods and retain their rural lifestyles. We have not, like Holland, demonstrated through its Rabobank the triumphant effect to which mutualist principles and practices can guide and shape the growth, development and destinies of pre-eminent international financial intermediaries.
We have not, like Japan, positioned consumer or retail co-operatives at the cutting edge for new standards of consumer education and protection. We have not, like Scandanavia, used co-operatives as a key remedy for the burgeoning problem of people who are homeless, inappropriately housed or impoverished by the high cost of private rental housing.
There is no Australian counterpart for Britain's Co-operative Party to represent the mutualist interest in mainstream politics, and promote informed public debate by means such as the Co-operative Party's current "New Mutuality" publications.
Enabling mutuals to more readily re-invent themselves will necessarily involve mutualism's adopting a much more prominent public profile, so that the public once again understands and values mutualism, and our political parties again take mutualism seriously.
All that is best and finest about mutualism has its antithesis - its dark side - in demutualisation. Demutualisation - the conversion of member-owned mutualist bodies such as mutual assurance and insurance societies, friendly societies, credit unions and co-operatives into shareholder-owned proprietary limited companies - has recently become so widespread as to call into question the survival of mutualism as a significant force for economic and social well-being and community renewal in our new century.
It is so prevalent as to have acquired its own vocabulary. The term "carpet-bagger" is widely used in Britain for the large numbers of people who have been joining permanent building societies in order to vote for their demutualisation and share in the distribution of their assets.
That claims for demutualisation on the grounds of efficiency and effectiveness are not necessarily well-based, that major ethical and social issues arising from demutualisation have not been addressed and that the demutualisation process is dangerously open to misrepresentation and manipulation is apparent from demutualisations such as of the Sunstate Credit Union and the insurance arm of the National Roads and Motorists' Association (NRMA).
Anecdotal evidence suggests that further credit unions are already in the sights of predatory demutualisers.Greed
Demutualisations all too often are consequent on perverse incentives - on a vilification of mutualism and massive contravention of the public interest, driven by the naked greed of their directors and senior managers for lavish allocations of stock options and grotesquely inflated remuneration packages.
Perverse incentives are likewise apparent as regards the corporate law, accounting and public relations interests that benefit financially on so massive a scale from favouring and facilitating demutualisations.
Amendments to Canada's Insurance Companies Act in 1999 disqualify directors and employees in demutualising insurance societies from benefits other than their entitlements as eligible policy-holders. Basque legislation requires that the assets of demutualising mutuals should be paid into a revolving fund for further developing current mutuals and creating new ones.
The UK Parliament is currently considering legislation whereby mutuals would be enabled to adopt asset locks as a means of protecting their assets against would-be demutualisers, and thereby render attempted demutualisations less likely.What precautions?
Why, it may well be asked, have no such elementary statutory precautions been so much as foreshadowed in Australia, much less enacted?
Might it not also be proper and prudent for board members and senior managers pushing for demutualisations to be required to give clear evidence that that their advice and decisions have not been tainted by the expectation of benefits that the Canadian legislation would disallow?
Might it not be reasonable that they be asked to provide legally-binding undertakings that, in the event that a demutualisation proceeds and they retain their positions or are otherwise employed by the demutualised entity, they will not for a period of - say - five years accept overall remuneration greater in real terms than that to which they were previously entitled?
We today should dream of a new mutualism whereby credit unions revitalise themselves and re-connect to their members by responding as effectively to current as to past needs - where they rise as effectively to new challenges such, for example, as regional economic development, job-creation and the provision of affordable rental housing, as effectively as hitherto to the need for affordable personal loans and countering the hire-purchase racket.
We in the mutualist movement - be it through credit unions, building, friendly societies, general co-operatives or mutual assurance societies - are the custodians of one of the most powerful ideas of which history has record.
At a time when the advocates of the statutory corporation school of state socialism, and their "greed is good" counterparts in the corporate sphere such as Enron, Worldcom and HIH, have comprehensively discredited themselves, the way is open for mutualism to assume the larger role - locally, regionally, nationally and internationally - to which its merits so plainly entitle it.
- Dr Race Mathews is an adjunct professor in the Faulty of Business and Law at Deakin University and national secretary of the Australian Fabian Society. He was previously an ALP federal MP and state MP and minister, a municipal councillor, chief-of-staff to Gough Whitlam as Leader of the Opposition and a board member and chairman of the Waverley Credit Union. His books include Australia's First Fabians: Middle-Class Radicals, Labour Activists and the Early Labour Movement (1994) and Jobs of Our Own: Building a Stakeholder Society (1999).
- The above article is an extract from a speech Dr Mathews delivered at the 41st Annual Conference of the New Zealand Association of Credit Unions in Hamilton, New Zealand, in September last year. Copies of his full speech - plus details about the availability of his other mutualism papers - are available from News Weekly on request.