Research and Reports

When we talk of businesses, we tend to assume a shareholder-owned company in which the ownership and control are vested in a distinct stakeholder group whose primary interest is in profits and asset-growth. We know that there are other stakeholders - customers, workers, managers, the wider community, local and national government - but assume that these have a different relationship to the firm: as buyers of goods and services; as providers of labour and expertise; as communities who benefit or suffer from the activities of the company; and as a tax-raising and regulating body. This form of organisation is usually contrasted with a widely discredited form, the public corporation, in which the state owns or has a majority share in the company. Together, these two forms tend to carry almost all the meaning we invest in the words 'private ' and 'public ' sectors. However, these are not the only ways to organise a business. In fact, if we trace the history of the 'firm ' in the first industrialised nation, Great Britain, we find that the joint stock company is a comparatively recent invention, and that it was predated by a mutual and co-operative sector which also still exists today, but which tends to be overlooked. The aims of this paper are:

• to identify the main features of the co-operative and mutual form of business
• to provide a brief outline of its history in Britain
• to show how recently it has been under threat from a process of 'demutualisation ' in which societies are converted to conventional shareholding companies
• to identify the advantages and disadvantages of co-operatives and mutuals when compared to shareholding companies
• to assess the ability of the sector to adapt and survive into the next century

Britain is generally acknowledged to be the first industrialised country (Kemp, 1985). The industrial revolution that occurred here created new forms of organisation which were then copied and adapted to suit the needs of countries going through a similar transformation. In Britain, until the 1840s businesses took three distinct forms: family firms, partnerships and friendly societies. The family firm is self-explanatory, being regulated by the relationships between family members, and with property rights based on laws of inheritance. The partnership was the usual form through which commercial and industrial projects were undertaken. It proved to be a costly and unstable form of organisation: large investments required large numbers of partners, each had to take unlimited liability, and yet if one of them defrauded the others it was very difficult for them to take legal action (they were seen as co-partners and common law did not apply). The only way partners could limit their liability was through setting up a company by a private act of Parliament, but this was expensive and generally applied only to large, public utility-type companies (Cole, 1944). It was only in 1844 that joint stock companies became legally recognised, and it took until 1855 before they acquired general limited liability. The 'capitalist ' firm which is so taken for granted at the end of the twentieth century is, then, a comparatively recent invention.

The third form that businesses took was the friendly society, a form invented by groups of working class people who wanted to protect themselves against life 's hazards through mutual insurance. People joined a friendly society not by investing capital but by agreeing to pay a regular contribution to a fund, which then conferred rights to sickness and death benefits. It was regulated by law as early as 1793, but this Act was designed mainly for societies under upper-class patronage, and it was not until 1834 that the working class societies (of which there were over a million) were persuaded to register and obtain full legal protection. Another variant of the same basic form of organisation, the building society, provided a fund through which members could save towards the cost of building a house. Usually these were 'terminating ' societies; once all their members had been housed their work was ended. The 1834 Act allowed societies to engage in any activities 'not contrary to law ' and so the early co-operative societies, which were manufacturing and retailing concerns, were also able to register. However, it took until 1852 before they were recognised as a special category of 'industrial and provident society ', and until 1862 before their members were given the limited liability granted to joint stock companies in 1855 (Cole, 1944). What we see, then, is a gradual evolution of mutual and co-operative businesses, the one to provide mutual insurance and housing finance, the other to trade on behalf of its customer-members. The only real difference was one of purpose, but mutuals and co-ops were all 'member-owned ' businesses, existing to provide benefits to members rather than to generate profits for shareholders.

They were different manifestations of one impulse, a working class self-help movement (Hopkins, 1995), a conscious and well thought-out reaction to the insecurities and reliance on wage labour brought about by the industrial revolution (Polanyi, 1957). They were closely allied to each other in practice. For instance, when the Rochdale Pioneers wanted to draft some rules for their famous co-operative society (generally seen as the founder of the worldwide co-operative sector), they adapted the rules of a local friendly society and among the businesses they set up were secondary wholesaling and manufacturing co-ops, housing and worker co-partnerships, building, insurance and friendly societies (Cole, 1944; Birchall, 1994). The Co-operative Permanent Building Society, now known as the Nationwide, is the largest remaining mutual building society in the UK.

The co-operative and mutual sectors then began to evolve in different directions. The consumer co-operatives became so powerful and so well integrated into their own 'movement ' that they were able to provide house mortgages, insurance and banking for their own members, and they tended to see themselves as the third arm of a labour movement rather than as part of a wider self-help movement. Agricultural co-ops began much later, and were never integrated with the consumer societies, though they did have membership of the apex body, the Co-operative Union. The building society movement underwent a fundamental change in character, with terminating societies giving way to permanent financial institutions. By 1875 the link between savers, borrowers and membership had become so tenuous that a Royal Commission concluded they needed separate legislation and their own system of regulation (enshrined in the Building Societies Act of 1875).

Friendly societies remained genuinely democratic, working class institutions right up to the Second World War, though their involvement in a system of compulsory employment insurance, which had been introduced before the First World War and was elaborated during the mass unemployment of the 1920s and 1930s, led to their virtual incorporation into a state system. Had the criteria for being accepted as an `approved society' been their mutual, member-owned basis, perhaps the system could have continued with the founding of the post-war welfare state. However, the idea of a statutory scheme run by independent companies had been discredited, not by the friendly societies but by some very large commercial insurance companies which had proved to have unreasonably high expenses and operating profits (Beveridge, 1947). In 1947, the state took over completely the running of the new comprehensive social insurance scheme. Cut off from their roots in working class self-help, friendly societies switched to offering small, tax-free savings plans, small life insurance, sickness, medical and funeral insurance, though most continued to be organised for particular occupational groups such as dentists and fire-fighters. Some of the larger societies offered life insurance, and these grew into a distinct, and much bigger, mutual insurance sector.

In other countries, similar mutual and co-operative organisations also grew up, under similar conditions of industrialisation and urbanisation. In the British colonies they took a similar form, but elsewhere they evolved independently: for instance, in Norway and Sweden housing co-operatives became an important form of tenure; in Germany co-operative banks flourished and mutual insurers found a role within the state social insurance system; in France mutuals were seen as part of a 'social economy '; while in Denmark agricultural co-operatives developed to a high degree (see Birchall, 1997). Most industrialised countries now have mutual and co-operative business sectors. Their size and character depends on a variety of factors: the type and speed of industrialisation; different national political cultures; distinctive legal systems; complex institutional histories; and so on. Recently, there has been a wave of demutualisation in several countries, notably the UK, Australia, South Africa, Canada and the USA, culminating in the decision of the world 's largest mutual insurer - Prudential Insurance of the US - to demutualise (Brown-Humes, 1998). There has been a separate wave of conversion of agricultural co-operatives to company status, particularly in the USA, Ireland and Denmark, and another quite distinct wave of privatisations of co-operatives in Eastern and Central Europe (Birchall, 1997). This article will focus on the UK experience.

Just as in the 1980s the UK led the way in privatisation of utilities, in the 1990s it has led with the demutualisation of the mutual and co-operative sectors. Over the last few years, the building society sector in Britain has shrunk to around 30 percent of its original size. The Abbey National was the first to convert, and then it merged with another society, the National and Provincial. The Halifax and Leeds Permanent merged, and then became a bank. The Cheltenham and Gloucester was taken over by Lloyds Bank. The Alliance and Leicester took over a bank (Girobank) and then converted. The Woolwich and Northern Rock both converted, and Bristol and West merged with the Bank of Ireland. In all these cases, members of societies received large windfall payments of well over '1000. Some commentators predicted the complete demise of the sector, but the pace of conversion slowed and a movement to defend mutuality began. The Nationwide Building Society decided to remain mutual, on the grounds that it could offer a market advantage to its members. An organised group of members who wanted to convert forced a vote on the issue, but despite the promise of a large payout on conversion, members voted overwhelmingly to remain mutual. In 1998 only one society, Birmingham Midshires, is under threat (with rival takeover bids by two banks), but the future of the sector remains uncertain.

Similar pressures have affected the mutual insurance sector, with two societies demutualising, and another five being taken over by banks or insurance companies. First, Colonial Mutual and Norwich Union (the second largest society), decided to convert. Norwich Union provided a windfall of '500 to its three million life-policy shareholders; the aim was quite openly to `liberate' a surplus of '1 billion locked in the life fund, and to raise another '1.5 billions on the stock market. It provided a clear example of how mutual funds, built up over generations, are being raided and replaced by investor capital. While other large mutuals remained committed to mutuality, medium-sized societies were at risk from takeovers. Clerical Medical was taken over by the Halifax (which had been the largest building society before it demutualised). London Life, Scottish Mutual, Scottish Equitable, Provident Mutual all went the same way. Scottish Amicable planned to demutualise gradually, beginning with the sale of a 20 percent stake in its business to a Swiss insurer, but its members were persuaded to accept a takeover bid by the Prudential Insurance Company. Some observers estimate that half of the 75 mutual life insurers could eventually be demutualised.

In the Co-operative sector, four out of the 20 largest farmer controlled businesses have converted, and `a number of others are considering the option' (UKCC, 1996, p.5). It was thought that the consumer co-operatives were safe from takeover bids and pressures to convert. Yet, in April 1997 a takeover bid was launched for Europe 's largest consumer co-operative, the Co-operative Wholesale Society (CWS). CWS used to be the British Co-operative Movement 's wholesaler and manufacturer, but from the 1970s onwards it became, along with Co-operative Retail Services, an 'ambulance ' for ailing retail societies, in the process turning into a major retailer. While it still organises a large buying group for 16 retail societies, it is now really a group of businesses: food retailing; optical services; pharmacy; farming; travel agency; funeral services; car sales; and so on. It owns the Co-operative Bank and Co-operative Insurance Society (CIS), both of which are successful large businesses in their own right. However, taken as a whole, CWS was under-performing, and according to City analysts it was ripe for takeover.

In 1994, a young entrepreneur, Andrew Regan, bought the CWS 's manufacturing arm for '111 millions. CWS saw an opportunity to divest itself of factories that had been running below capacity, while Regan, after closing some factories and boosting profits in others, sold the whole package on for '120 millions. He then offered to buy CWS 's non-foods businesses for '500 millions, but was met with a flat refusal. He prepared a hostile takeover bid for the whole group, setting up potential purchasers of parts of the business. CWS was protected by its complex ownership structure: part-owned by 300 other businesses (including 51 retail societies), part by individual members of its retail arm (organised in seven regions), it was a complex target at which to aim. Regan planned to put the bid to the CWS Board, forcing them to ask the members, both corporate and individual, to vote on the issue. He offered individual members a windfall of '1000 each. Backed by several banks, including the Nomura Bank of Japan, he laid his plans carefully.

He might have succeeded, but the bid had to be withdrawn before it was made. First, CWS officials discovered that a mysterious payment of '2.4 millions had been made into an offshore account as part of a deal between Regan and two CWS managers for his factories to supply CWS with 'Co-op Brand ' goods. Then, as a result of the two managers being put under surveillance by a private investigation company hired by CWS, one of them was filmed handing over a box of information to Regan and his associate in a car park. CWS then gained a court injunction preventing the use by Regan of confidential information gained illegally, and the bid had to be postponed. The CWS manager then admitted handing over masses of information, which had been circulated openly by Regan 's company, Lanica, to 17 banks and companies in the City. In the resulting scandal, CWS obtained apologies and financial compensation from Lanica 's backers, and had the injunction made permanent, thus ending all chances of the bid being revived. However, the prospect remains of another possible takeover bid, either for CWS or perhaps for an easier target, one of the retail co-operative societies.

Several reasons have been cited for the conversion of mutuals and co-ops to shareholder companies. Seen from an international perspective, the forces at work are globalization, deregulation of markets, and technological change (Brown-Humes, 1998). More specifically, the reasons for conversion include:

• changes in the markets leading to a need to merge and restructure businesses
• the chance to raise capital cheaply in the money markets
• freedom from legal restrictions
• ignorance of what mutuality means
• short-term self-interest among members and managers.

First, there have been important changes in the markets. In the building society sector, an Act of 1986 brought intense competition between building societies and banks, and for the first time allowed societies to demutualise. Then in the early 1990s there was a crisis in the UK housing market caused by 'a fundamental change in the way the housing market behaves' (Coles, 1997, p.2), with lower rates of inflation; reduction in government assistance with mortgage interest tax relief; the move to a much more uncertain labour market; and demographic change which reduced the numbers of first time buyers. With mortgage advances down from '40 billions in 1988 to '16 billions in 1996, there was substantial over-supply in the market. Mergers and takeovers were planned within the sector, even before demutualisation was thought of. There was a perverse incentive for building societies to demutualise; a rule which exempted them from takeover for five years after conversion led some managers to seek conversion to a bank in order to safeguard the society 's independence.

In the mutual insurance sector, deregulation of the financial markets meant intense competition and over-supply, with depressed margins all round. The 1990 Financial Services Act made insurers sell their policies through either tied staff or independent financial advisors, and this disadvantaged small mutuals. As in the building society sector, there are pressures to reduce the number and increase the size of societies through mergers. Medium-sized societies are particularly vulnerable to takeover because they lack economies of scale and some have expanded more rapidly than their capital base allows. Yet they have products and distribution networks to offer, and a number of banks are keen to buy them in order to be able to offer a wider range of financial services. In the agricultural co-operative sector, market factors have also been important. There are continuing downward pressures on prices, due both to global and European trends towards a freer market (Thirkell, 1998).

Second, conversion allows societies to raise capital in the money markets. In the building society sector this reason has to be taken with some scepticism; the main problem seems to be how to unlock the vast financial reserves built up over generations, not how to gain access to more credit. It carries more conviction in the mutual insurance sector, where life insurance companies need generous free asset ratios in order to be able to invest in riskier ventures (Scottish Amicable demutualised in order to be able to invest more in equities), though critics argue that it is possible to raise capital by other means such as subordinated debt and financial reinsurance. It is the main reason for demutualisation in the agricultural sector, where farmer co-ops have had difficulties in capitalising quickly enough to ensure that they compete effectively in a fast-changing agri-food market. However, while some have converted, others have found different ways of raising funds, for instance by setting up new secondary businesses with outside shareholders, or by asking the members to invest more and providing benefits linked to performance (Langdon, 1996, Hynholt, 1996).

Third, it is argued that becoming a shareholding company frees societies from restrictive legislation. This argument applies mainly to the building society sector, and if it was true it is so no longer; a process of deregulation begun with the 1986 Building Societies Act has been completed by an Act of 1997. One society chief executive argues that because of this 'there is no longer any business reason to convert ' (Brian Davis, quoted in Brown-Humes, 1998). Fourth, there has been widespread ignorance about what mutuality means. Press coverage was initially quite negative, portraying mutuals as an old-fashioned form which had 'had its day ', and was no longer applicable in large, modern businesses. Later coverage became more thoughtful, and began to discover potential economic advantages to mutuals and ethical arguments against distributing surpluses built up by previous generations.

However, the main reason for conversion in all sectors is clearly self-interest among top managers, society members, and investment bankers. The initial decision to convert has not come from the members but from the boardrooms of societies: top managers have been keen to convert because of the prospect of personal gain. They have seen large increases in salaries, in some cases topped up by bonuses and share options. One ex-building society chief executive received share-options worth '2 millions after takeover by a bank, while another made a profit of over '440,000 on his share options in a few months after flotation (Guardian, 31.1.98). While only one society set up a wider executive share-option scheme on conversion, several others are currently (1998) asking their shareholders to approve lavish share and bonus schemes for the top layer of 100 to 150 managers (Jones, 1998). The realisation that there could be windfall profits for members came about almost by accident. In order to secure a large branch network, The Cheltenham and Gloucester Building Society agreed to a takeover by Lloyds Bank; the resulting payout of over '2000 per member led to a frenzy of excitement among members of other societies, with speculators (known as 'carpet-baggers ') quickly investing in as many societies as possible in the hope of a quick profit. Windfalls in the mutual insurance sector have been lower and some members have received much less than they expected, but even here they have been the driving force for conversions. Investment bankers stand to gain because the conversions require large amounts of capital to buy out the members ' share, and create new investment opportunities.

Some of these reasons for conversion are common to mutuals in other countries as well, but some are different, and a cross-national study is needed to identify the strengths and weaknesses of mutuality under different conditions. For instance, in some countries there is a desire to obtain bank status because mutuals are regarded as second rate institutions. Even worse, in the USA there is a legacy of fraud and corruption stemming from the Savings and Loans scandal. This reason is not relevant in the UK, where the mutuals probably have a better reputation and are more trusted by customers than the banks.

There are good economic reasons for believing in mutuality. In the financial services sectors, the arguments flow from one crucial point, that mutuals do not have to pay dividends to shareholders. This means that they can afford to take a longer term view than the banks, can build up reserves against adverse trading results, and do not have to search out risky investments, all of which makes them a safer place to put one 's money. In fact, no building society member has ever lost their money, and they are more trusted than the banks (Llewellyn, 1996). It also follows that societies find it easier than do shareholding companies to make an ethical stand against making certain kinds of investment. Most important of all, because they do not have a separate set of investors they `do not need to pay for their capital' (Coles, 1997, p.10) and should be able to gain a market advantage over their competitors. This is shown by the fact that over the last decade the ten cheapest mortgage lenders have been building societies. Bank savers `lost a massive '24 billions between 1986 and 1995 compared to what they would have received if they had saved with mutual building societies (Ireland, 1996). Societies are consistently coming out on top in customer surveys, and are gaining market share: in the second half of 1997, societies accounted for 40 percent of net lending, against a 22 percent share of the existing market (Brown-Humes, 1998).

Similarly, mutual insurers have been shown in a number of independent surveys to produce better returns and have lower lapse rates and costs than companies. For instance, the Personal Investment Authority found that the maturity values on their life policies are 4.4 percent higher than those of shareholder companies (Brown-Humes, 1998). This means that if the mutual sector were to vanish the market would be dominated by large `bancassurers' whose primary motivation is profit to shareholders, and costs to consumers would undoubtedly rise (Llewellyn, 1996). At present, banks can only compete by offering cash back deals, discounts and fixed interest rates, and absorbing the cost of mortgage indemnity guarantees; they cannot compete on the most straightforward measure, the variable loan interest rate (Mackintosh, 1998). Lastly, the lack of a separate shareholder interest means that mutuals can focus more single-mindedly on the needs of their customers. As one chief executive explains:

The argument can be taken a stage further; in the financial services sector mutuality can be seen as the natural form and investor-owned companies an aberration. There is no need to have a `specialist supplier of capital independently of the customers' (Llewellyn, 1996, p.59). It merely adds complexity to the organisation, and introduces potential and unnecessary conflict between the two sets of interests. In a mutual, the customer is at both ends of what Llewellyn calls a `value loop', and it is difficult to see what added value external shareholders bring to it; mutuality avoids unnecessary conflict between investors and customers. On the other hand, it creates an interesting ethical issue about how far current members should take rewards or leave them for future generations, but this is an issue to be solved as part of the democratic governance process. And so, as one influential report states `There is nothing necessarily archaic or inefficient about the mutual form of ownership' (Mills, 1994 p.14).

In agricultural co-ops, the argument is all about who controls the organisation. Farmers set up co-ops initially in order to protect their interests against monopoly suppliers of farm inputs and buyers of their produce, and in order to secure the added value which derives from food processing. It is in the nature of their business that they are easily disadvantaged in relation to suppliers; income fluctuates over the farm year, and from one harvest to another. Farmers can easily become indebted to their suppliers who tide them over the lean times with credit. Only farmer co-ops or state-funded agricultural banks can overcome this problem (Smith, 1961). Similarly, in relation to farm outputs farmers find they have to sell perishable products, even if there is an oversupply in the market and the price falls. Buyers can hoard stocks, especially if they have control of the infrastructure by which produce is exported. For these reasons, again either marketing co-ops or state marketing boards have to step in to ensure a fair price to the farmer. In the UK, as elsewhere, there is a move away from state-subsidy and marketing boards, and so there is an even greater need for farmers to control the inputs and outputs of their businesses. It is significant that the recent privatisation of the Milk Marketing Board was into a co-operative of dairy farmers, Milk Marque, and not a shareholding company (Dare, 1998). Where there is an active farmer membership in a co-operative, we can expect them to avoid conversion, and where they convert to maintain a majority farmer-shareholding. The 'new wave ' farmer co-ops in the Mid-West of the USA show how the co-operative form, suitably modified, can still provide competitive advantages (Stefanson et al, 1995).

In contrast, the arguments for consumer co-operatives are more uncertain. They generally does the same job as the 'multiples ' but all the indicators (profits per square metre, return on capital etc) show that they are under performing. They no longer provide a significant payback to members in the form of the dividend on purchases (CWS is now doing so, but there are doubts about whether it can afford to). They have a strong commitment to keeping open small shops in areas where they are needed by less mobile shoppers, and have had some success in converting these to convenience stores (Birchall, 1987). However, many small shops, particularly in villages, will never achieve the profits made by edge-of-town superstores, and this lowers the Co-op 's profitability. The ethical stance taken in this respect has been worthy but not well communicated to either market analysts or the general public (Walks, 1998). Similarly, though it takes an ethical stance towards purity of food, clear labelling, genetically-engineered products and so on, again the Co-op has been let down by poor public relations. Only the Co-operative Bank has become well-known for its ethical stance, and in the retail sector other companies have been just as effective in taking an ethical line (see Birchall, forthcoming). Democratic control of societies is a reality, but the extremely efficient and competitive state of the market in the UK means that there is not much room for members to go against the advice of their top managers. Some regional societies have managed to become both profitable and innovative, with an active membership policy based on the new 'smart-card ' technology and a recognisable dividend on purchases. However, their competitors offer a quasi-dividend in their own loyalty cards which confuses the public perception, and the recent incursion of two large multiples into banking threatens to match the advantages societies gain from in-store banking provided by the Co-operative Bank. The consumer co-operative sector, therefore, has still to prove that its form of organisation has inbuilt advantages over a conventional business.

Finally, there is a strong counter-argument that mutuals are inherently less efficient because they lack the disciplines and accountability imposed by having a separate group of shareholders. It is not an easy argument to falsify, because any example of under-performance by a mutual can be attributed to it. Llewellyn has pointed out that in the argument between defenders of mutuality and the conversionists four logical starting points can be chosen: that of an ideal shareholder company, an ideal mutual, an actual company or an actual mutual. Those who argue for the company form frequently make the mistake of comparing an actual mutual against an ideal conception of the company, failing to notice the actual shortcomings of shareholder companies, which include:

• their lack of accountability to (particularly small) shareholders
• the fact that the 'discipline ' of the market is so imperfect
• the fact that managers follow a wide range of objectives not all concerned with maximising value to shareholders (Llewellyn, 1996).

In reality, both the mutual and the company are imperfect forms. Further research is needed to compare their actual performance, and to isolate the effects of organisational form from those of other factors such as the quality of management.

Do the mutual and co-operative sectors have enough resources to mount an effective defence of their form of organisation? The 70 remaining building societies in the UK are now repositioning themselves in a crowded market for financial products by emphasising their mutual status. As one general manager says `We see tremendous competitive advantages from mutuality for our members' (Ireland, 1996, p.21). Societies can operate on narrower margins than the banks, and several (including Nationwide, Bradford and Bingley, Yorkshire and Britannia) have pledged not to convert and, in order to show the benefits of having a large reserve of mutual funds, are offering a variety of incentives to members. Bradford and Bingley and Nationwide are doing this through setting their rate of interest to savers higher, and their rates to mortgage holders lower, than those of the banks. Britannia has developed a Members' Loyalty Bonus Scheme to borrowers who stay with them for a long time, reversing the recent trend towards making offers which tempt borrowers away from other lenders. The bonus is a real `dividend on purchases' which grows as members take more of the Society's products, and in the first year they expect to pay out around '35 millions, a third of their profits. Their corporate goals have shifted away from market-share and towards enhancing benefits to members (Gregory, 1996). Societies have also begun to change their rules to prevent 'carpet-bagging '; people joining in order to benefit from windfall payments. At first, societies increased their minimum savings amount from '1 to '2000 or even '5000 to discourage speculators. Then the Nationwide insisted that new customers sign an agreement assigning any possible windfall benefits to a foundation that will distribute funds to charities in the event of demutualisation. The Yorkshire has introduced a rule preventing customers from becoming full members until they have held an account for two years. These two societies have been able to go back to accepting small savers.

They are also beginning to take member democracy seriously. Societies that believe in `the new mutuality' are reserving places on their boards for member-representatives and finding ways of encouraging postal voting. This could be seen as no more than a superficial commitment, based more on the desire to find a market niche than on a belief in participatory democracy. Certainly, there are all the problems already encountered by large consumer co-ops in attracting and keeping active members (see International Joint Project, 1995). But some of this commitment to renewing membership is genuine, and in any case it is difficult to see how the logic of offering member benefits can fail to be linked to that of member control. There is potential for such a link in the new smart-card technology; it has been suggested that membership cards could hold a record of a member's relationship with a mutual which is then used to calculate dividends, and could also be used for electronic voting (Worthington, 1996). There are also some signs that some members are becoming organised; a new group called Save Our Building Societies has begun to defend societies threatened with takeover.

The co-operative sector is also mounting a vigorous defence as a result of the attempted takeover of the CWS. Societies began by changing their rules to make conversions more difficult, but they are also keenly aware that they have to earn the loyalty of their members. CWS had begun a strategic review in 1996, before the attempted takeover. The remarkable growth of the Co-operative Bank, mainly because of its ethical and environmental policies and vigorous advertising, was leading to a rethink of the marketing style of CWS as a whole. CWS had always positioned itself as a 'responsible community retailer ', emphasising the honest labelling of foods, putting a health warning on alcoholic drinks, and identifying misleading label information. It was now trying out a dividend card in its Scottish and Northern Irish shops, prior to launching it nationwide. In contrast, its main rival, CRS, had adopted a simple slogan, calling itself 'Co-operative ' and being committed to a thorough revamp of its food stores and to a policy of low prices rather than dividend. There is continued criticism at the inability of these two giant co-operatives, each working in several regions and in similar areas of business, to find a way to merge into one national society.

In April 1997, CWS 's search for a new corporate image was interrupted by the need to fight an unexpected battle against the takeover. When it resumed its overhaul of the business, managers identified the need to create a closer marketing relationship between the businesses, a more distinct identity such as the Co-operative Bank has achieved, a more unified approach to branding and marketing, a need to build on the ethical policies (with a campaign to improve food labelling), and to cut costs by streamlining the business. In the light of the 'Lanica affair ' they embarked on a major training programme for managers, aimed at giving them a clear sense of the difference between a co-operative and a shareholder business, and persuading them to be committed to co-operative values and principles. Meanwhile, the Co-operative Bank continued to boost the CWS 's performance, with results for the first half of 1997 showing a profit of '33 millions. However, on sales of '1440 millions, the rest of the business could only produce profits of '20.5 millions. Much needs to be done to turn the business round, but there is a clear commitment to restore customers ' faith in the Society (see Birchall, forthcoming).

As a symbol of corporate commitment, the CWS and CRS funeral departments recently restored a memorial to the philosopher of Co-operation, Robert Owen, in Kensal Green cemetery. However, they have failed to find a formula for merger, and are pursuing different strategies. CWS is concentrating on smaller, convenience stores, CRS on maintaining its superstores. CWS is providing a generous five percent dividend on its own brand goods, CRS is concentrating on low prices. It remains to be seen whether such a fragmented approach will win the confidence of customer-members.

The co-operative and mutual sectors have considerable support in Parliament. For historical reasons, the consumer co-operatives still have their own political party in Britain, allied to the Labour Party which is now in power. It has its own 'Labour and Co-operative ' members of Parliament and of the House of Lords. An all-party Building Societies Group is active in both houses, trying to convince the Government that it should act to make it more difficult for predatory bids to succeed. The Government is less sympathetic than we might expect, partly because of a lack of Parliamentary time, partly because ministers are concerned to respect the rights of members who, in the last analysis, should have the right to convert their societies if they wish. The Government has changed building society rules so that 50 percent of members have to vote 'yes ' for a conversion to go ahead (it was formerly only 20 percent), and may be persuaded to abolish a 'five year rule ' which gives protection from takeover to newly converted societies on the grounds that it is a perverse incentive. Yet ministers have so far refused to promote a rule stopping society members from benefiting from windfall gains until they have been members for two years, or to increase the number of members needed to nominate someone for the board (Graham, 1977; Love, 1998). Behind this uncertain defence of mutuality lies the problem that building societies had for a long time neglected members' democracy, and were not demonstrating any benefits from mutuality. They have not been very popular institutions with people on the left of politics: they over-lent to first time buyers in the late 1980s and then, in the resulting property slump began repossessing the homes of hundreds of thousands of families. Similarly, mutual insurers and pension companies have only recently been part of a widespread pensions scandal in which millions of employees were persuaded by sales staff to abandon their occupational pensions in favour of personal ones; customers who had lost out are only now beginning to be compensated. So it is understandable if politicians are now asking the mutual sector to live up to its principles. On the other hand, there is widespread support among politicians; one poll found that 87 percent of MPs considered it 'important to maintain a viable mutual sector ' (Building Society News, September 1997). Treasury ministers are concerned about the wider effects of large amounts of windfall money being spent by consumers: by the end of 1997 '36 billions had been released into the economy.

If mutuals and co-operatives do succeed in redefining what it is to be a member-owned business, and do find ways of rewarding members and involving them in decision-making, then there is the potential for the emergence of a real `third sector' with its own ideology and distinctive place in the market. There are signs that such a `third sector' is coming into being; the UK Building Societies Association is holding talks with other representative organisations which might see the founding of a new apex body to include the building societies, friendly societies, mutual life companies, other member-owned businesses, and, via the UK Co-operative Council, the various co-operative sectors. There are signs of a new interest in the potential of mutuality. It is too early to be sure what directions this will take, but we can identify at least four possible growth areas:

• Mutuality is being studied as a possible alternative form for privatised utilities such as water companies, where regulation is seen to have failed and consumer control is seen as an alternative (Kay 1996, Holtham, 1996).
• There is a new interest in credit unions which, if they were deregulated could grow rapidly and meet the needs of low income people
• Friendly societies would also benefit from deregulation, and, having been cut out of the welfare system 50 years ago, could have a role in the Government 's plans for a mutualised welfare system, offering stakeholder pensions and tax-free individual savings accounts.
• As bank branches close, and telephone and internet banking become the norm for higher income earners, small building societies, credit unions and friendly societies could provide a vital support for local communities.

The cultural impact of such a self-conscious `third sector' would not run very deep, but it could be broadly-based and long-lasting, the equivalent in the `Anglo-Saxon' world to the French and Italian `social economy', a sector which has values distinct from both public and private sectors. It would enable mutual and co-operative managers to become more self-confident about the `co-operative difference' in management, and to express very different values from their private sector counterparts (see Davis, 1996). It would enable the `relationship marketing' of goods and services in which this third sector emphasises its accountability to customer-members and its basic honesty and probity (Webb, 1996). It would enable 'social entrepreneurs ' to set up new types of co-operative without having always to explain and justify this form of organisation to potential funders. Of course, the real test of the strength of this organisational form is whether a shareholder company will one day decide to convert into a mutual.

Beveridge, W (1947) Voluntary Action

Birchall, J (1987) Save Our Shop: the fall and rise of the small co-operative store, Manchester: Holyoake Press

-----(1988) Building Communities: the Co-operative Way London: Routledge

-----(1994) Co-op: the People's Business Manchester University Press

-----(1996) `Neither public nor private: the Co-operative third way' in Journal of Cooperative Studies No.85

---- (1997) The International Co-operative Movement Manchester University Press

----- (forthcoming) 'The Lanica affair: an attempted takeover of a consumer co-operative ' Journal of Co-operative Studies

Brown-Humes, C (1998) 'Survival depends on differentiation ' Financial Times 10.3.98

Cole, GDH (1944) A Century of Co-operation London: George Allen and Unwin

Coles, A (1997) `Building societies at a cross-roads', Journal of Co-operative Studies 89.3

Gregory, G (1997) `The future of mutuality' Journal of Co-operative Studies 89.3

Ireland, P (1996) `The future of mutuality' in Journal of Co-operative Studies Vol 29.2

Jones, R (1998) 'New banks ' bosses queue up for cream ' in the Guardian, 18.4.98

Kemp, T (1985) Industrialisation in Nineteenth Century Europe London: Longman

Mackintosh, J (1998) 'Self-help schemes branch out ', Financial Times, 10.3.98

Smith, L (1961) The Evolution of Agricultural Co-operation, Oxford: Blackwell

UK Co-operative Council (1996) Mutuality Manchester

RJB 19.4.98