Understanding Mutual Companies
There are many banks, savings associations and insurance companies in the U.S. that are organized as mutual companies. By definition these are companies whose profits are distributed based upon the extent of the exposure and business each participant does with the company.
Some examples of mutual companies include mutual insurance companies, savings banks, and federal savings and loan associations, although each of these types of companies operates differently to a certain extent.
Basically mutual companies are owned by (and run for the benefit of) their membership or customers (collectively called members) instead of public or private shareholders. The members benefit from the provided services and there are no external shareholders to pay dividends to.
The members of a mutual insurance company are the company's policyholders. As for the mutual savings associations and mutual savings banks, their members are the depositors of the financial institution.
Disadvantages of Mutual Ownership
The main disadvantages of the mutual form of ownership is that the capital for growth for the mutual companies has to be generated internally since there are no shares to sell and therefore no access to equity markets.
Additionally, since there are no shareholders to urge the necessity of maximizing profits, the management of mutual companies has little reason to control costs.
Another flaw of the mutual form of ownership is that members often remain unaware of the daily operations of the mutual company, despite the fact that technically they have the right to vote for the major decisions. The mutual company management just tend to manage the company as if they are the owners.
Mutual companies may choose to convert their mutual form of ownership to a stock form of ownership for a number of reasons - in order to raise money, to increase the employee benefit options, to expand their operations, etc.
The mutual-to-stock conversion of banks and savings associations is governed by a number of federal and state banking laws. As for the insurance company mutual-to-stock conversions, they are governed by state insurance laws.
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