Diversity in Financial Services:The future role of mutual providers

Professor Jonathan Michie

DirectorOxford Centre for Mutual and Employee-owned Business

Kellogg College, University of Oxford

4th November 2010

Kellogg is the University of Oxford’s largest and most international graduate college:

- over 600 students from more than 70 countries- more than 400 part-time and 200 full-time students

Kellogg is home to a number of Research Centres:

• Undertaking research and publishing the results

• Hosting Visiting Fellows, associates and DPhil students

• Running short courses and day-schools

Kellogg College

A centre of excellence in research and education for the mutual and co-owned business sectors:

1. Leading research on the performance of the mutual and co-owned sectors

2. Offering professional development programmes matched to the needs of the sector and the development of their current and future leaders

3. Encouraging debate and advancing new thinking about mutuality and co-ownership

4. Creating a national and international network of academics, practitioners, and policy makers

Oxford Centre for Mutual and Employee-owned Business

The 2007-08 Credit Crunch and 2009 Recession

• The 2007-08 global credit crunch was caused by:i. 30 years of privatisation, deregulation, demutualisation

ii. Promotion of a ‘greed is good’ corporate culture of maximising ‘shareholder value’

iii. Allowing financial markets to dominate, and the bonus culture to proliferate

• Crunch epitomised by the demutualised Northern Rock reinventing the ‘bank run’

• Crunch created the first global recession – with a fall in world output and income during 2009 – since the 1930s

Diversifying the financial services sector

• ‘We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.’

• A stronger mutual sector would deliver multiple benefits:i. Advantages of the mutual model itself, with the organisation and

its managers answerable to customers, not external shareholders

ii. Mutuals provide effective competition to shareholder-owned banks, which are therefore pressured to provide better service

iii. Organisations with different ownership structures and business models will react to events differently, so that a diversified sector is less prone to speculative bubbles, and more resilient

Policies to promote diversity

i. Break up the state-owned banks, returning relevant parts – such as Northern Rock – to the mutual sector

ii. Culture change amongst regulators, politicians and the media, to accept a diversity of corporate forms, rather than assuming the PLC form is the ‘norm’

iii. Require regulators to promote corporate diversity

iv. Appoint a Minister for Mutuals

v. Learn the lessons from the credit crunch:– Jack Welch (the original champion of ‘shareholder value’):

‘Shareholder value is the dumbest idea in the world’

Jonathan Michie

Oxford Centre for Mutual and Employee-owned BusinessKellogg College, University of Oxford

jonathan.michie@kellogg.ox.ac.uk

http://www.kellogg.ox.ac.uk/researchcentres/meob.php