View from City Road: The mutuals deserve a place, minus warts

Beware of analysts and investment bankers who enthuse about the death of the mutual society in the wake of the Lloyds bid for Cheltenham & Gloucester. They are talking their own books.

A takeover or flotation brings in mouth-watering fees; it's therefore hardly surprising that professionals argue that joint stock companies are the only rational form of corporate organisation.

There can be little doubt that mutuals are an outdated mode of corporate set-up; it is, after all, hard to remember when the last one was started afresh. They also have serious drawbacks, of which the most important is lack of accountability.

With large and diffuse memberships, there are no market mechanisms for disciplining incompetent, dishonest or over-ambitious boards of directors. Shareholders in public companies are often a lethargic bunch, but when push comes to shove they can get things done (or stopped.)

Mutuals have one important advantage, however: they do not distribute dividends and so plough everything back into the business. If it were a public company with a twice-covered dividend this year, C&G might be distributing pounds 80m.

For life assurance companies, mutual status has clear-cut advantages. They have relatively low capital needs anyway, and rather than paying dividends, all profits can be distributed to the policy- holders. The case has never been as compelling for building societies.

Building societies need more capital than insurers, because they are savings and mortgage banks in all but name. The lure of cheap loans from the wholesale markets and the hope that quoted shares will smooth the path to raising new expansion capital are powerful pressures to go public.

Despite this, the expected wave of conversions after Abbey National became a bank in 1988 never materialised, mainly because the law makes third-party takeovers hard to accomplish - as Lloyds and Cheltenham & Gloucester have discovered.

Mutual status has in any case become less of a drawback to building societies with the easing of the restrictions on societies' capital- raising and borrowing. Abbey has done little as a bank that Halifax could not as a mutual.

When it comes down to it, the only clear-cut justification for conversion is one of money - a powerful enough influence but not one that should be allowed to swamp all other concerns.

Building societies should be encouraged to remain as mutuals, in the interests of corporate diversity if nothing else. The best way to do this would be to allow societies with adequate management to be run even more like banks, while merging the Building Societies Commission into the Bank of England's supervision department so that they operate to similar ground rules. It will also be vital, however, to inject new thinking on accountability, perhaps with formal elected structures to represent members' interests.