Demutualisation and Social Profit
Keith Rankin, 13 May 1998
The demutualisation of AMP Insurance is being touted as a major source of stimulus to the New Zealand and Australian economies. Why should this be so? And what are the more general lesson that we can glean from the experience?
The AMP, like most insurance companies and building societies, has cooperative roots. Mutual societies were created and owned by their customers/members, so that they could get access to affordable means of spreading risk against various forms of misfortune, or so that they could raise capital to acquire homes or start small businesses. In effect, the profits were ploughed back to members in the form of low premiums or low interest rates.
In a modern capitalist economy, large mutually-owned corporations are in practice indistinguishable from publicly listed companies. The executive technostructures - the management elites who are the beneficiaries of corporate capitalism - are the same. It makes sense to make the ownership of these organisations more explicit, and to try to make the technostructure properly accountable to the owners.
The AMP is becoming a public company, just as Britain's "public schools" are or were public companies. Public companies are private companies which are publicly listed, so anyone in the public can buy an ownership stake in them. Thus, it is appropriate that ownership of such companies is transferable.
The demutualisation process makes good sense, although it does mean that the new shareholders gain a windfall which may be invested elsewhere, or spent on consumption. It is the latter option - increased consumption - that is touted as the stimulus to economic growth. In the process, the AMP will become under the control of corporate interests seeking a profit. So long as the industry doesn't raise its prices (and the industry as a whole might once the mutual companies have gone) the profits will have to be borne by the technostructure. The stimulus from demutualisation must ultimately derive from management efficiencies.
Interesting contrasts to the AMP are the Auckland Regional Services Trust (ARST) and the Auckland Energy Consumers Trust (AECT; owners of Mercury Energy). Making the connections can help us to understand that all assets return a profit; not just privately or exclusively owned assets. While the economic value of the assets can be imputed from the monetary value of the profit, the profits themselves may be experienced in non-monetary form. Public domain assets, like AMP assets, are mutually owned. Unlike AMP assets, they cannot be demutualised.
In effect, Messrs Williamson, Luxton and Birch wanted to demutualise the ARST. The counter-argument is that the ARST manages public utilities. Public utilities generate incomes just as private assets do. Such intrinsically public assets should not be sold. They provide profits in which everyone has an equal share. The mutual society that owns them is all of the residents of (in these cases) the cities of Auckland (ARST) and Auckland City (AECT). This contrasts with the origins of companies like the AMP, where the mutual society was more of a private club, representing only some of the members of a community.
It is appropriate that all of the residents of Auckland should remain in control of their utilities, or, where competition exists, at least one of the competing firms (thereby regulating the others). Utilities that are sold give public profits to private interests. The city residents should be drawing an annual profit from these assets, as if they were private owners; a profit that could be either retained for the future development of the city, or distributed as cash dividends to Auckland residents, or as a combination of cash and reinvestment. (For reasons of national equity, it is probably more appropriate that public profits derived from regional activity be reinvested, allowing more public profits to be distributed nationally.)
The process of demutualisation is one that helps us to understand some of the complex economic issues arising from joint property ownership, and can therefore help us to understand that members of the public are as entitled to enjoy the profits arising from their assets as are the members of the AMP mutual society to realise the profits from their assets. What we should never be able to do, however, as members of the public, is to sell our rights of membership to society itself. That would be selling our birthright; our citizenship. A private society has the right of exclusion; a public society does not.
While demutualisation is not appropriate to public utility trusts, a management shake-out certainly is. Mercury Energy should be paying much higher dividends, and paying the elite staff much lower salaries. The problem seems to be that a law firm - Russell McVeagh and Partners - is maintaining a barrier between the owners and the technostructure, resulting in the management becoming unaccountable to its owners. The solution is to remove that barrier, with the AECT directors of Mercury Energy directly insisting that the entire surplus arising from its electricity supply operations becomes the property of its community shareholders.
In the wider public domain, the same principles apply. The citizens of New Zealand are the owners of public domain assets; Parliament is the equivalent of the AECT, and the Executive is the management technostructure. The public should be making the government directly accountable through a parliament acting to maximise the long run social profit on public domain assets.
Rankin File | 1998 titles