Corporate Governance and Access to Finance - ESBG

3.3. Mutuals and cooperativesThis organizational structure presents three characteristics very relevantfor Corporate Governance:1. The voting rights may be not proportional to the size of the stake (forexample, one person, one vote).2. There is no separation between customer and owner, as ownershiprights can accrue by becoming a “customer”.3. Each owner has a claim to residual net worth, which is usually “nonexclusive”: typically new members can join on equal terms to those ofprevious ones. Ownership claims are not explicit and marketable, as ina limited company.If owners are also the customers, the implication is that the person withwhom business is done is the person for whom business is done (Penrose,2004). This has two important implications for Corporate Governance:(i) its definition is less clear, because of the ambiguity of the firms’objectives in the case of mutuals, due to the absence of an equivalent ofmaximizing shareholders’ value; and (ii) the main types of CorporateGovernance conflicts arise among the owners, since their interest tendto be different.The non exclusive claim implies that a mutualist cannot prevent thatthe mutual does business with new customers, who join the mutual withthe same rights than the former mutualists. Its capital is built fromaccumulated profits, leaving aside subordinated debt and similar financialinstruments. This has several implications:1. Market discipline is inexistent or very weak.2. There is no distribution of profits to owners, except the possibilityto dedicate part of these profits to improve the products in favor ofthe owners, as it is typical in insurance mutuals.3. Mutuals enjoy a theoretical advantage in the cost of capital, in thesense that it does not need to be explicitly remunerated.More details on Corporate Governance of mutual banks can be foundin Llewellyn (2007), in particular for British building societies.Although these entities are not members of WSBI, they are a goodexample of mutual banks.52