Archive for August, 2013

No Democracy in the Mutuals: 20 August

August 20, 2013

UK Mutual Building Societies are anti-democratic. A sad discovery of this year.

A few years ago I put some inheritance money into a couple of mutual Building Societies. Most UK companies, and therefore the stock market, are in trouble. Their inherent flaws are being worked out. Better to put money in a more love-your-neighbour-as-you-love-yourself pot, where it will be used simply to help other people buy their own homes.

This year I went to my first Building Society Annual Meeting, for the West Brom Society. The members of the Board sat elevated in front of us, behind a table and tablecloth bright and substantial. The Annual Report explained that they were all financial services experts nominated by other Board members, to be approved without contest.

One of the ordinary members had asked how other people could be nominated. The procedure and the form were explained to him. Bizarrely, the Society expected the nominator to draw up their own form, there being no standard form in use. One indication of how very extraordinary, it is deemed, that members of a mutual organisation might want to nominate people to make decisions about their organisation.

A senior West Brom employee sitting next to me, explained that the UK Government Financial Services Regulators insist that all Board members have prior expertise in Financial Services. Even if members did nominate one of their own to the Board, this person would be deemed inadmissible unless they had worked at a high level in a similar organisation.

UK Building Societies are technocratic rather than democratic. Ordinary members are effectively excluded from the Board, and from nominating to the Board. Yet the technocrats have made bad decisions. A few years ago the West Brom Board decided to increase its lending for commercial property development and decrease lending to homeowners. At the time it seemed a good way to make a profit. It turned out to be a disaster, creating substantial ongoing losses for the Society.

The Board of Financial Services experts, who had created the West Brom mess, was replaced by another group of Financial Services experts. The expert and well-paid opinion of the new Board is that the Society should stop the kind of lending which has made losses and go back to traditional lending to home owners. In other words simple, blindingly obvious, common sense which any member of the Society could have come up with.

What if there had been an ordinary Society member or two on the Board when it was considering its disastrous policy? It is likely that a West Brom saver would have said ‘I didn’t put my money in a mutual Building Society in order to finance new distribution centres. I think we should carry on lending to people to buy homes.’ It is likely that a West Brom home owner would have said ‘But our staff know about mortgages to home owners, isn’t commercial property a different ball game?’

Mutual Societies should be run by their members (and employees) not by technocrats appointed under a pretence of democracy. The members serving on the Board could buy in the technical advice they need. There could be a requirement for 3 Advisors to be appointed who do not and have not hitherto worked together. (At present Board members nominate people they know, often having worked with them.) This would ensure that no decisions are taken which conflict with the requirements of the Regulators. Board members would also receive training in any technical area they need, in the same way that, for instance, parent and community School Governors are trained.

The technical aspects of decision making would be covered. These, however, are the minor aspects. More important are the broad direction decisions. How many local branches should the Society maintain? With far more savers and borrowers outside the Black Country than within it, how much of a local foundation should be retained? How much should the West Brom continue as independent and how much should it develop partnerships with complementary Societies? Some smaller regional Societies, for instance the Derbyshire Building Society, have become part of larger national Societies, in this instance the Nationwide. These decisions are far more than technical. They should be taken by people truly representing the members, with expert advice.

Researching for a book on my grandfather’s life, I have been shocked how widespread was the scorn for democracy in Germany in the late 1920s and early 1930s. A warning from history. If we allow those who insist they know best to control our common life, we are heading for disaster.

Roger Harper