Financial Mutuals Research Articles

An Evaluative Framework for Mutual and Employee-Owned Businesses

ABSTRACTMutual and employee-owned businesses (MEOBs) continue to experience a revival in the UK, be it through the growth of building societies and financial mutuals, or the success of employee-owned businesses. In addition, government has promoted MEOBs by transferring public services into new corporate forms, citing reports of resilience and long-term success of MEOBs.Yet despite these developments, there appears to be some ambiguity as to how to evaluate the performance of MEOBs. The lack of a coherent framework that takes the values, principles and structures into account when assessing outputs and outcomes results in a narrow understanding of MEOB performance, often focused on quantitative measures irrespective of the values and principles held by these types of organizations, and indeed their purpose.In an effort to advance such work, this paper seeks to outline a framework to evaluate mutual and employee-owned businesses taking account of a variety of dimensions that affect how MEOBs do business, and the outcomes they produce, to broaden the idea of performance by joining up values and principles that are at the centre of the mutual model with the outputs and outcomes that are being created.

INTRODUCTION: MUTUAL HELP IN AN ERA OF UNCERTAINTY

African communities are witnessing a perplexing proliferation of diverse arrangements of mutual security that draw upon old and new solidarities and inventively merge market logic with reciprocal forms of distribution and sharing. The dynamics of such voluntary arrangements and their broader social impacts emerge as increasingly important topics of study. The changing nature of global economies poses challenging questions about the novel relationships between state and market, and the potential of human agency to find alternatives to address growing inequalities. This collection focuses on local institutions of mutual security as alternative – yet also interdependent – forms of distribution that have become particularly relevant in the current era of global financialization and the changing dynamics between private and public social spheres. Various voluntary associations and informal economic networks, financial mutuals and savings/credit groups are becoming central in regulating access to resources and defining patterns of association in African communities. The articles in this themed part-issue explore these social security networks and organizations, concentrating on their ambiguous potential to empower the marginal as well as to contribute to social strife and political conflict. Ethnographic cases from diverse parts of Africa illustrate the impacts of the environments of uncertainty on the emergence of novel forms of association. The contributions suggest that contemporary mutual help arrangements should be seen as being central to the emergence of new social spaces and power configurations in such settings, revealing a broader social dynamic of globalization.

The Determinants of Ownership Structure: Evidence from Brazilian Agricultural Cooperatives

ABSTRACTThe separation of ownership and control observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, nonprofits, and cooperatives. This separation gives rise to control and influence cost problems in cooperatives. However, it is not observed in all Brazilian agricultural cooperatives, where certain members have both residual claim and formal control rights. In this article, we examine the allocation of decision management and control rights and the determinants of ownership structure in a sample of Brazilian agricultural cooperatives. Using survey data, we employ multivariate regression techniques to empirically investigate the factors determining the allocation of ownership rights and the separation of ownership and control. Our findings do not lend strong support to agency theory, but they help inform research seeking to shed light on the determinants of decision rights allocation in agricultural cooperatives. [EconLit classification: Q130].

FRONTIER EFFICIENCY MEASUREMENT IN DEPOSIT‐TAKING FINANCIAL MUTUALS: A REVIEW OF TECHNIQUES, APPLICATIONS, AND FUTURE RESEARCH DIRECTIONS

ABSTRACT**: Despite the global importance of mutuals in financial services, and the universal need to measure and improve organizational efficiency in all deposit‐taking institutions, it is only relatively recently that the most advanced econometric and mathematical programming frontier techniques have been applied. This paper provides a synoptic survey of the comparatively few empirical analyses of frontier efficiency measurement in deposit‐taking financial mutuals, comprising savings and loans, building societies and credit unions in Australia, the UK, and the USA. Both estimation and measurement techniques and the determinants of efficiency are examined. Particular focus is placed on how the results of these studies may help inform regulatory policy and managerial behaviour.

Understanding IT Governance

Legislators, regulators, and shareholders increasingly demand good governance over all aspects of their business. While much is made of financial governance, most legislation and regulation implicitly recognizes the need for prudent governance of information technology (IT) functions. In this study we conduct an exploratory collective case study of IT governance (ITG) in two financial mutuals–one in Australia and one in Canada--using a contextual lens. In one case, the mutual governs its IT through Board participation in a subsidiary. In the second, governance is delegated to management and a lead director. Both of these mechanisms appear to minimize ITG risk, and are the result of their respective regulatory environments. This research begins to lend some clarity regarding IT governance choices by firms, and denotes important contextual differences between countries’ regulatory environments. This will allow researchers, managers, and directors to better understand and discriminate between ITG processes and structures.

Frontier Efficiency Measurement in Deposit-Taking Financial Mutuals: A Review of Techniques, Applications, and Future Research Directions

Despite the global importance of mutuals in financial services, and the universal need to measure and improve organizational efficiency in all deposit-taking institutions, it is only relatively recently that the most advanced econometric and mathematical programming frontier techniques have been applied. This paper provides a synoptic survey of the comparatively few empirical analyses of frontier efficiency measurement in deposit-taking financial mutuals, comprising savings and loans, building societies and credit unions in Australia, the United Kingdom, and the United States. Both estimation and measurement techniques and the determinants of efficiency are examined. Particular focus is placed on how the results of these studies may help inform regulatory policy and managerial behaviour.

The Role of Market Governance in Financial Mutuals: Evidence from Variable Annuities

The Role of Market Governance in Financial Mutuals: Evidence from Variable Annuities

Diversification efficiency and deposit rates

There is an increased sophistication in the provision of financial services by UK financial mutuals. This article presents evidence of a more complex process of price setting by these firms. From a theoretical model of the determination of deposit rates, the rate setting behaviour of firms is estimated empirically. Controlling for different service provision and firm characteristics heterogeneous levels of deposit rates are found to be offered by different building societies. This is indicative of differing levels of efficiency achieved by these firms

Organizational Forms and Investment Decisions

This paper analyzes investment rules for various organizational forms that are distinguished by the characteristics of their residual claims. Different restrictions on residual claims lead to different decision rules. The analysis indicates that the investment decisions of open corporations, financial mutuals and nonprofits can be modeled by the value maximization rule. However, the decisions of proprietorships, partnerships, and closed corporations cannot in general be modeled by the market value rule.

Governance in financial mutuals

Summarizes the reasons for and methods of regulation in worldwide capital markets; and describes in detail the development, governance and regulatory structure of the Warsaw stock exchange (Poland). Uses a variance ratio approach based on Lo and MacKinlay (1988, 1989) to examine price behaviour in the exchange from 1991 to 1995, shows that it is not a random walk market and puts forward possible explanations for its market inefficiency. Considers the implications for the Polish economy and suggests that public policymakers could tighten securities laws and exchange rules to improve the efficiency of this emerging capital market.

Merger Activity and Employment: Evidence from the UK Mutual Sector

This paper approaches the performance consequences of mergers from a new direction; namely by analysing their impact on the acquiring firm's demand for labour. It employs a dynamic labour demand model, with an unbalanced panel of UK financial mutuals over the period 1981–1993. The data relate strictly to core financial intermediation activity and are thus particularly appropriate for the paper's purposes. The results are strongly supportive of an efficiency-enhancing interpretation of merger activity. A significant positive initial impact on the acquirer's demand for labour is followed by three years of significant negative effects, a result consistent with the acquisition and subsequent digestion of less efficient targets.

Separation of Ownership and Control

This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of ownership and control. Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.

Takeover activity among financial mutuals: An analysis of target characteristics

This paper presents an empirical investigation of the merger process among mutuals, using a large pooled cross section/time series sample of UK building societies between 1981 and 1993.The financial services industry is probably unique in having a substantial mutual sector coexisting with, and competing against, joint-stock firms. However, given the severely attenuated system of ownership claims in the financial mutual, it has been widely predicted that this form will exhibit strong behavioural differences from the stock sector. It is surprising, therefore, that despite the important governance role accorded to mergers in the corporate literature, the merger process among financial mutuals has been almost totally ignored. This paper explores the mutual merger process via an examination of the targets' characteristics. It finds little support for the ‘natural selection’ view of mutual acquisitions, but it does reveal the importance of the regulatory process. Above all, the results show a surprising similarity to those from studies of the merger process in joint-stock firms.

A Theory of Mutual Formation and Moral Hazard with Evidence from the History of the Insurance Industry

Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking industries. A first step in a systematic study of these financial mutuals is to examine the reasons for their formation. Doing so provides empirical support for the view that these mutuals arose as an efficient means of addressing contracting challenges caused by aggregate uncertainties and moral hazard. A formal model with this property is presented. We argue that information asymmetries do more to explain the kinds of contracts offered by financial mutuals than do agency problems between owners, managers, and customers.

Shareholder bonding in financial mutuals: An exploratory study of the relative effects of altruism and agency

It is argued that cooperatives allow for the increased use of more informal methods of control than those found in non-cooperative organizations. The extent to which these informal controls can be utilized may depend on the strength of shareholder bonding, the determinants of which are, inter alia, peer group pressure and altruism. Peculiar cooperative organizational arrangements might be associated with differential agency costs, however formal recognition of the role of altruism in economic behaviour provides a direct alternative to agency theory.

Organizational forms and investment decisions

This paper analyzes investment rules for various organizational forms that are distinguished by the characteristics of their residual claims. Different restrictions on residual claims lead to different decision rules. The analysis indicates that the investment decisions of open corporations, financial mutuals and non-profits can be modeled by the value maximization rule. However, the decisions of proprietorships, partnerships, and closed corporations cannot in general be modeled by the market value rule.

Organization Form, Residual Claimants, and Corporate Control

EUGENE FAMA and Michael Jensen's treatment of the "Separation of Ownership and Control" is both insightful and informative. It deepens our understanding of corporate control, and the analysis of residual claimants usefully extends the economics of internal organization to include partnerships, mutuals, nonprofits, and the like. The basic argument is this: specialized governance structures arise in response to the efficiency needs of each type of organization. This is an important argument and one with which I broadly concur. They couple this, however, with a strong suggestion that these structures have reached a high degree of refinement-on which account there is not now, if indeed there ever has been, an organization control problem with which scholars and others are legitimately concerned. On this point I have grave doubts. My discussion of the paper addresses three issues: What is the relation, if any, of the hierarchical organization of the firm to economic performance? What relation, if any, does residual claimant status have to the composition and character of the board of directors? And is there now or has there ever been a corporate control problem? I deal with each of these issues in order.

A Test of the Property-Rights Theory of the Firm: Water Utilities in the United States

CONTROVERSY over the relative efficiency of public versus private enterprise has a long history in economic thought. Many of the same issues that concerned Chadwick and Mill in their debates in the 1850s over nationalizing certain British industries and von Mises and Hayek versus Lange and Lerner in their well-known exchanges about the efficacy of a centrally planned economy continue to come up in the literature.1 In fact the modern property rights theory of the firm, postulated by theorists such as Alchian, Becker, and Demsetz follows in the tradition of von Mises and Hayek in stressing the impact on economic efficiency of alternative ownership forms. Special emphasis is placed on cost-reward arrangements within private and public enterprises in this approach to the theory of the firm. Where a direct connection between productivity and reward is severed, as in public enterprises, production will be less economically efficient. While this is a very appealing approach to firm behavior, it is yet to be subjected to a rigorous test with respect to firm costs. De Alessi purports to examine the implication of the property rights theory for managerial tenure.2