Mutualization

What Is Mutualization?

Mutualization is the process of changing a firm's business structure from a joint stock company to a mutual structure where the stockholders or customers own a majority of shares. They become eligible to receive cash distributions from the company in direct proportion to the amount of revenue the company earns from each member.

This form of business structure is also known as a cooperative. The opposite of mutualization is privatization or demutualization.

How Mutualization Works

The mutual business structure can be highly beneficial to members, each of whom will receive a dividend for doing business with the company. However, this distribution may be a tax-free event, depending on the laws of the jurisdiction in which the member lives. An example of a mutualized company is a grocery chain in which each shopper can become a member and receive money each year for shopping at that grocery chain. The bank and insurance company Mutual of Omaha and Liberty Mutual (respectively) are prime examples of mutual companies. The organization that started Liberty Mutual is in fact, owned by policyholders.

In effect, the owners of the company that undergoes mutualization, are still active clients in that they still patronize the services in question, just as they did before the company shifted its business model. And in most cases, the members are given the power to help make decisions regarding electing senior management personnel. In some cases, members can elect board members, as well as board chairmen.

While many ills of businesses can adopt the mutualization paradigm, this activity is chiefly favored by the following types of interests:

1. Savings banks
2. Savings and loan companies
3. Insurance companies

With most insurance companies, at the conclusion of every calendar year, company members receive distributions from the entire profits earned throughout the previous 12 months. But banks and other financial institutions would not enter into this arrangement with such gusto, if they didn’t see a high likelihood of gain, on their ends. And this usually comes in the form of cost-cutting measures. These institutions effectively share reduce their own costs in infrastructure and operations, by mutualizing their assets.

The Demutualization Flipside

Many institutions tend to take their structures in the opposite direction of mutualization by electing to demutualize their assets, in a process wherein member-owned companies transform their model to a shareholder-owned structure. This step is often a precursor to the company launching of an initial public offering (IPO). This would suggest a departure from insurance companies that have the actual word “mutual” embedded in their names because the act of demutualizing runs counter to the kind of culture that their handles suggest.

But in any case, in these scenarios, policy-holders are either offered money, or shares in the company, in exchange for surrendering their rights of ownership, shares, or money in exchange for their ownership rights.

[Important: The term mutualization may also be applied to any process where two parties come to an agreement that satisfies both sides, such as a mediation, as a method of legal remedy or conflict resolution.]