What are they?

A mutual is an organisation based on the principle of mutuality. It is owned by its members, who derive their right to profits and votes through their customer relationship.

A mutual exists for the purpose of raising money from its membership which can then be used to provide common services to all members of the organisation or society.

What kind of organisations have adopted the mutual format in the UK?

All building societies, such as Nationwide and Britannia are mutual organisations, as are some insurers, such as Royal London Insurance Group and Wesleyan Assurance Society. Friendly Societies, such as the Exeter Friendly Society, are also mutual organisations, as are credit unions and co-operatives.

What is the difference between a mutual and a public company listed on the stock exchange?

A mutual is owned by, and run for the benefit of, its members - it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximise and make large profits or capital gains. Mutuals exist for the members to benefit from the services they provide.

Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be required to sustain or grow the organisation, and to make sure it remains safe and secure.

What are the benefits of mutuality?

Advocates of mutuality argue that mutual companies can offer better deals to their customers because they are not handicapped by the need to pay out some of their profits to shareholders.

It is certainly the case that building societies are heavily represented in the savings and mortgage best buy tables.

The picture is less clear when it comes to the performance of insurance funds, with both mutuals and public companies featuring at the top of the tables.

Another plus point is that mutuals normally have a more democratic system of voting, with each member possessing one vote, whereas in public companies an individual with a large number of shares would have more votes than someone with fewer shares.

What are the disadvantages of being a mutual?

Mutual companies must generate capital for growth internally — they have no shares to sell and hence no access to equity markets. Another shortcoming is the tendency of the management of such companies to act as if they owned the company.

While major decisions are technically subject to the vote of members the reality is that many members will not really understand the daily workings of the company.

Critics of Equitable Life, the mutual insurer that nearly collapsed in 2000, argue that managers took the company in the wrong direction and were able to do so, in part, because few people understood what they were doing.

In addition, without large shareholders exerting pressure to maximise profits there is a possibility that management will have little incentive to control costs.

Can mutual societies demutualise?

Yes they can and this is what happened to a series of UK building societies and mutual insurers in the late 1980s and 1990s.

In exchange for agreeing to demutualise and convert to a public company they were given free shares in the newly created company, which resulted in some savers ending up with windfalls worth thousands of pounds.

Among the former building societies that demutualised were Halifax, Abbey National, Alliance & Leicester and Northern Rock, as well as insurers such as Standard Life.

Once they floated as publicly owned companies on the stock exchange the former mutuals are subject to the ups and downs of the market. Some, such as Abbey, have prospered, thanks, in Abbey’s case, to the takeover by Santander, the Spanish bank.

Others, such as Halifax, which has merged with Bank of Scotland to form HBOS, have fallen slightly in value since launch, while one former mutual - Northern Rock - has collapsed and had to be bailed out by the Government.

Five news stories

Business is booming for building societies

Well-rewarded chief has revived mutual sector

Standard faces fight over mutuality

Nationwide abandons same deals for all

The great windfall hunt is back on

Five features

The mutuality debate is back on the agenda

The feeling's far from mutual

Focus: On a slippery slope

Fallen angels of the best buy tables

Abbey congregation prays for salvation

Five websites

Building Societies Association

Association of Mutual Insurers

Friendly Societies

Co-operatives UK

Credit Unions

Five mutuals

Nationwide BS

Britannia BS

Royal Liver Assurance

The Children's Mutual

Co-operative Bank