What is a mutual? Ask Milton...

First, some history… how did shareholder value become the dominant paradigm of modern management?

When management emerged as a profession in the early 20th century, “manager” was synonymous with “administrator.” As more and more businesses required analytical professional management apart from owners themselves, business schools were established, supported by entrepreneurs and academics who “saw the need for creating a managerial class that would run America’s large corporations in a way that served the broader interests of society rather than the narrowly defined ones of capital or labor.”[1]

This remained our shared conception of the job of management until the rise of several economists at the University of Chicago, who originated the principal-agent theory.  These academics critically examined the role of the manager in the context of a corporation, arguing that the manager, the “agent” of the owner, was insufficiently incentivized to act on the owner’s behalf, often distracted by, for example, placating labor unions and the surrounding community’s charities, and/or preserving his or her paycheck rather than maximizing the value of the firm.

These views culminated in Milton Friedman’s 1970 essay in the New York Times, which popularized the notion that the “the [only] social responsibility of business is to increases its profits,” and lambasted executives who considered environmental or social impact in their decision-making as “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”  For the next 50 years, this would become the dominant paradigm taught in America’s business schools.  Concerns about rising CEO pay were met with a solution that matched the theory: more stock options, which aligned interests, but further exacerbated income inequality in the context of a booming stock market.

Only very recently has there been (small) cracks in this doctrine, and a renewed interest from some founders (whether starting or retiring) to explore ownership structures that better balance the needs of all stakeholders of a business more holistically (our friends at KEAP Candle are a great examples of local entrepreneurs looking at steward ownership, who make candles… but also write eloquently about regenerative agriculture & sustainability, but I digress…).  We will not explore these in detail here except to say that the most prominent form in the US, the ESOP (Employee Owned Stock Option Plan), has limitations: misaligned incentives and, often, a highly leveraged pension plan that constrains growth and can sometimes place the company’s independence at risk.[2] But private companies that are transparent with employees and disclose their financial results often get the question, “what happens to the profits?”  The truth – “it belongs to our owners” – is not a particularly satisfying answer in the context of a mission-driven organization.  But if these owners were customers, the business takes on a new purpose, one in which returning profits to customers (which includes most employees here) – in our case in the form of higher interest rates, lower fees, dividends or more services – offers the company a perfectly aligned, elegant foundation from which to build a strategy.

Many companies organize around the simple idea that "customers come first," knowing that this is the ultimate driver of success or failure... but their governance / ownership structure doesn't share that alignment.  Vanguard Group is the best example of how powerful it can be when the entirety of the organization is aligned around it[3]…if only they were also aligned around social and environmental impact!  

Distinct from agricultural cooperatives (owned by producers), the mutual form has been a common form of organization for insurance and other financial institutions in the US, most notably Vanguard.  Vanguard, owned by the investors of their funds, is now the largest provider of mutual funds and the second largest provider of ETFs in the world, with over $6.2 trillion under management.  Over its 46-year history, Vanguard effectively destroyed the old guard of the mutual fund industry by returning profits to fund investors in the form of lower and lower fees.  Typical mutual fund fees have fallen by 50% since 2000,[4] largely as a result of Vanguard’s core competitive advantage: its owners.

Mutual banks have a long and successful history in New England.  We New Englanders also have a longtime commitment to direct democracy in the form of town meeting governance, so it is only natural we would mold our first banks with this in mind.  New Hampshire, in fact, has the third largest legislative body in the world (400 representatives, each with just over 3,000 constituents).  Mutual savings banks accounted for almost 80% of deposits in New England in 1914, with over 650 institutions serving more than 8 million depositors in 1914 (vs. just 9 commercial banks).  These institutions also “largely avoided financial panics”[5] during a time of regular cyclical financial upheavals. Only 4 of 481 mutual banks closed during the panic of 1893 and just 1 of 453 closed in 1907. In total, 28% of mutuals closed in the 44 year period from 1870-1914, vs. 42% of national banks and 76% of state banks.

Originally created as philanthropic endeavors to serve poor and immigrant populations and to encourage savings among low to middle class citizens through sizable but safe interest rates, early mutual banks essentially operated as pass through vehicles in which profits were returned in the form of interest.  Some mutual banks even actively discouraged large accounts, paying lower interest on higher balances.

The mutual form remains a popular one, particularly outside the US: Rabobank holds nearly 50% of Danish citizens as members.[6] Inside the US, mutuals dominated the savings industry until the 1980s, particularly in the Northeast.  Studies at the time again found mutuals had higher levels of capital reserves than corporate banks and failed at lower rates given more conservative investment policies and lower loan losses [7].  Although some persist, most remaining mutuals converted into stock form following deregulation in the 1980s, or following regulatory reforms in 2008.  We hope to reinvigorate this unique form of governance for the modern era, because we believe it is uniquely suited to build an organization focused on metrics beyond profit, including the long term growth of truly sustainable food & agriculture in New England.

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[1] For the definitive history of management as a profession and how we got here, read: Rakesh Khurana’s From Higher Aims to Hired Hands: The Social Transformation of America’s Business Schools and the Unfulfilled Promise of Management as a Profession, 2007.

[2] See New Belgium Brewing, Full Sail Brewery and Organically Grown Company as examples

[3] check out their advertising, which reinforces this “radical” approach: https://investor.vanguard.com/corporate-portal/

[4] https://www.evidenceinvestor.com/us-fund-fees-cut-in-half-in-20-years/

[5] https://commons.colgate.edu/cgi/viewcontent.cgi?article=1043&context=econ_facschol

[6] https://www.hamilton.edu/documents/Bunger%20paper.pdf

[7] https://www.hamilton.edu/documents/Bunger%20paper.pdf