Mutuals and co-operatives have been promoted as the acceptable side of business by both arms of the coalition. Nick Clegg has lauded the Waitrose and John Lewis model. Advisers to David Cameron, as well as Vince Cable, have argued that the banking sector would be more stable if more companies followed the mutual model.
But while the Cleggs may buy their Christmas goodies at Waitrose and John Lewis, those struggling with falling real incomes gravitate towards Aldi and Poundstretcher. So how realistic is it to aspire to the high street being dominated by co-operative retailers and mutual banks and insurers?
In fact, John Lewis was a “present” given by the original family owners to the workers. Such a gesture is unlikely to be anything but a rare event. If all the pensioners and other savers who rely on Tesco’s profits for their incomes were to donate their shares to Tesco’s workers, it would be like turkeys voting for Christmas.
So it is unlikely that many more co-operatives will be formed in the same way as John Lewis. But are such organisations especially desirable?
Mutuals and co-operatives come with two huge disadvantages. First, they can find it difficult to access capital. By definition, there is a limited group of people who can hold equity capital in the business and many of those people – especially in the case of a co-operative – may be poorly-paid.
Secondly, they can run in to real trouble when it comes to corporate governance. Their owners are customers or workers, but it is difficult to stop mutuals and co-operatives becoming captured by a management clique. If a shareholder does not like the way a business is being run, the shares can be sold. If a worker at a mutual does not like the way it is being run, he or she has to change jobs.
There have been success stories, such as John Lewis, but there have been failures too. The Equitable was probably the biggest life insurance failure in history and it was very badly managed.
Mutuals do some things well. In particular, they often manage conflicts of interest between customers and owners better than shareholder companies. That is why there were once so many of them – especially in finance and health. Unfortunately, these functions have been taken over by regulators.
The research is pretty clear that regulation and deposit insurance demolished the comparative advantage of the mutual organisation. Why invest with a sleepy, secure mutual when the regulator will compensate you when things go wrong with the alternative high street proprietary bank, offering higher returns at greater risk?
And this is the dilemma for Clegg, Cameron and Cable. Only radical deregulation will recreate the environment in which mutuals thrived in the financial sector.
Elsewhere, mutuals and co-operatives will remain bit-part players. They may provide the chattering classes with their turkeys but, for the rest of us, shareholder companies will remain the retailers of choice.
This article originally appeared in City AM.