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Amutual organization, alsomutual society or simplymutual, is anorganization (which is often, but not always, acompany orbusiness) based on the principle of mutuality and governed by private law. Unlike acooperative, members usually do not directly contribute to thecapital of the organization, but derive their right to profits and votes through theircustomer relationship.
A mutual exists with the purpose of raisingfunds from its membership or customers (collectively called itsmembers), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members – it has no externalshareholders to pay in the form ofdividends, and as such does not usually seek to maximize and make largeprofits orcapital gains. Mutuals exist for the members to benefit from the services they provide and often do not payincome tax.[1]
Surplus revenue made will usually be re-invested in the mutual to sustain or grow the organization, though some mutuals operate adividend scheme similar to a cooperative.[2]
The primary form of financial business set up as a mutual company in theUnited States has beenmutual insurance. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policy owners. In mutual insurance companies, what would have beenprofits are instead rebated to the clients in the form ofdividend distributions, reduced future premiums or paid up additions to the policy value.
This is a competitive advantage to such companies—the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors. In the typical stock company, profits go to shareholders. In contrast, a mutual manages the company in the best interests of the customers. Furthermore, a mutual company is able to focus on a longer horizon than a typical company. Some mutual insurance companies make this claim explicitly.
In more general terms, mutual organizations are able to minimize theprincipal–agent problem by removing one stakeholder, the investor-owner, in favor of one of the other stakeholders, usually the customer, who becomes both user and joint owner of the business.[3]
However, the mutual form of ownership also has disadvantages. One example is that mutual companies have no shares to sell and hence no access toequity markets.
At one time,[when?] most major U.S. life insurers were mutual companies. For many years, the tax status of such organizations was open to dispute, as they were technicallynonprofit organizations. Eventually,[when?] it was agreed that federal taxation would be based on their share of business: for instance, in years in which mutual companies represented half of the business, they would be responsible for half of the taxes paid by the industry.
Manysavings and loan associations were also mutual companies, owned by their depositors.
As a form of corporate ownership the mutual has fallen out of favor in the U.S. since the 1980s. Savings and loan industryderegulation and the late 1980ssavings and loan crisis led many to change to stock ownership, or in some cases intobanks. Many large U.S.-based insurance companies, such as thePrudential Insurance Company of America and theMetropolitan Life Insurance Company havedemutualized, with shares of stock being distributed to their policyholders to represent the ownership interest they formerly had in the form of their interest as mutual policyholders.
TheMutual of Omaha Insurance Company has also investigated demutualization, even though its form of ownership is embedded in its name. It is noted that other formerly mutual companies such asWashington Mutual, a formersavings and loan association, have been allowed to demutualize and yet retain their names.
The approximateBritish equivalent of the savings and loan is thebuilding society. Building societies also went through an era of demutualisation in the 1980s and 1990s, leaving only one large national building society and around forty smaller regional and local ones. Significantdemutualisation also occurred in Australia and South Africa in the same era.
Cooperatives are very similar to mutual companies. They tend to deal in primarily tangible goods and services such as agricultural commodities or utilities rather than intangible products such asfinancial services. Nevertheless, banking institutions with close ties to the co-operative movement are usually known ascredit unions orcooperative banks rather than mutuals.
Various types offinancial institutions around the world are mutuals, and examples include:
Some mutual financial institutions offer services very similar to (if not the same as) those of acommercial bank. In some markets, mutuals offer very competitiveinterest rates and fee tariffs onsavings anddeposit accounts,mortgages andloans. The members who save and borrow with the mutual ultimately own the business.
Mutualization ormutualisation is the process by which ajoint stock company changes legal form to a mutual organization or acooperative, so that the majority of the stock isowned by employees or customers, thereafter known as members.[4]
Demutualization ordemutualisation is the reverse process, whereby a mutual may convert itself to a joint-stock company. In the United States, this process became increasingly common in the 1980s as a result of deregulation. Conversion may be full, to apublic company, or in many states, partial, to a mutualholding company.