On 19 January 2012 David Cameron MP, Prime Minister of Britain, said: “Capitalism will never be popular unless there are genuine opportunities for everyone to participate and benefit.”
And at the beginning of this year, David Cameron announced the Government’s intention to bring forward a Co-operatives Bill to make it easier for entrepreneurs to establish co-operatively owned businesses.
Why did he single out mutually-owned business to promote the Government’s aim of building a fairer and more productive economy?
Currently, the UK financial services sector is dominated by a single business model: the shareholder-owned plc banks.
The incentives and cultures that developed in some of these institutions have led to behaviours that are now being seen as damaging to society and the businesses themselves.
The LIBOR rigging scandal, PPI mis-selling and interest rate swaps are just some of the events which have contributed to a growing sense of disillusionment in our nation’s corporate structures.
As a result, the search for ’ethical capitalism’ is the name of the game for political parties battling with an electorate as jaded with business and industry as they are with politicians.
The Government set out its principles for the financial services sector within the Coalition Agreement:
“We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, to promote mutuals and to create a more competitive banking industry”. Coalition Agreement, May 2010
They clearly see the benefits of a more diverse financial services sector and have started to follow-through with the discussion paper published by the Treasury on the future of building societies. The consultation ended last week but the paper makes government views clear:
“The Government believes that building societies have an important role to play in the future of UK financial services [and contribute] to diversity in the financial services sector.” HM Treasury 2012
This was a sentiment echoed by KPMG last week in their 2012 Building Society Database.
In it they predicted that building societies are entering a renewed period of potential growth and success which could lead to them fulfilling a new regional banking role by the end of the decade.
So how do building societies contribute to ethical capitalism?
Simply put, as building societies are owned collectively by their members, who are also customers.
This fact means that they do not face the conflicts of interest which can arise between plc customers and shareholders.
The culture and governance structures of societies and other mutuals also add to the more ’ethical’ way in which they do business, including the important principle of ‘one member, one vote’.
Earlier this year Secretary of State for Business, Vince Cable MP, was quoted as saying that FTSE 100 chief executive remuneration increased on average by over 13.6% per year from 1999 to 2010.
Over the same period, the average annual growth rate in total pay for chief executives of building societies was only 5.4%.
In the ten years to 2010 average annual pay growth across the financial sector as a whole was 5.2%.
In 2011, executive remuneration at building societies was 80% salary and 20% performance related bonuses, where performance is often assessed on range of measures, including non-financial factors such as customer satisfaction and even on areas such as the number of hours devoted to community volunteering.
Societies tend to be dynamic in the way that they engage with their customers, as they are the owners of the business. Events such as “meet the directors”, panels looking at different aspects of business operations, road shows, questionnaires and surveys, community involvement and the active promotion of AGM voting are typical.
The difference in culture also means that they have been far less involved in areas such as PPI which was not a major product for building societies.
So far the banks have set aside around £7bn in redress for consumers who were mis-sold, whilst BSA members have in total set aside around £200m, much of which is to cover the cost of dealing with claims management companies submitting bogus claims.
Consumer research has consistently shown that mutuals are more trusted than banks.
Recent independent research commissioned by the BSA shows that since the recent banking scandals, the gap between mutuals and banks on many aspects of service has widened.
This includes the proportion of customers who consider their provider to be open and honest.
Building societies and other mutuals already espouse much that is now being described as ‘ethical capitalism’.
They have been doing this for over 150 years and look forward to doing so well into the next century – now aided by a new found focus both from Government and consumers.