The boards of mutual companies like LV= need better oversight

It isn’t often that organisations like investment firm Bain Capital suffer reverses but the great unwashed delivered a stinging one to its expensively tailored suits yesterday.

The members of LV=,  the mutually owned insurer formerly known as Liverpool Victoria, rebuffed a £530m takeover bid that would have delivered them a derisory £100 each, plus the promise of enhanced policy benefits further down the line.

For the controversial bid – already facing a potential legal challenge from rebel members – to go through, it required 75 per cent support, under provisions designed to make life difficult for potential carpetbaggers.

In the end, it secured just 69 per cent. A merger proposal was immediately submitted by rival mutual Royal London, which has said it could preserve LV=’s current status.

LV=, which has been taking sustained fire from MPs, dissident members, campaigners and much of the media, said it would consider the proposal. Regardless of whether or not it succeeds, the members of its board surely ought to consider their positions.

There’s a reason the deal they were trying to sell has been described as one of the worst in British corporate history.

But there are wider questions that shouldn’t be lost in the settling dust of the earthquake – and that’s what this is, because it is quite rare for boards that recommend bids to end up with egg all over their faces.

People like the idea of mutuals and with good reason. The concept of a company owned by its customers and run in their interests is a seductive one.

Trouble is, history tells us this fine principle has not always resulted in good practice on the part of financial mutuals.

The board of an institution founded in Liverpool to help people meet the cost of funerals playing footsie with a ruthless American private equity firm is far from the first example of a mutual’s membership being let down by directors.

Financial mutuals have, sadly, often been involved in the same sort of scandals that their Plc peers have. Pension mis-selling, dodgy mortgages, you know the drill.

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Some of the remaining building societies left untouched by the wave of demutualisation that started in the 1990s are really quite small. Their CEOs’ salaries sure aren’t.

A lot of bankers have found that a good way to make a second or third fortune is to become a big fish feasting on the great wads of cash that can be found in these tiddlers’ ponds.

The bitter irony is that the mutual movement’s strength – one member one vote – is also its weakness. It makes it hard for memberships to exercise proper oversight over executives. Boards are supposed to have non-executive directors capable of doing that in members’ interests. Time and again they have failed to do so.

While LV= has been saved from itself, or rather, while LV= has been saved from its management, the whole shabby affair should prompt a wider conversation about the future of a movement that could and should play an important role in the financial services marketplace.

Sometimes it still does. The Nationwide Building Society helps keep the banking industry honest. The products and services offered to consumers would probably be much diminished by its absence. It is capable of operating off a much lower level of profit than its rivals and can thus hold the line by continuing to offer good products when the economy gets difficult, a fact recognised by the Bank of England.

Fortunately, there’s no Bain on its horizon.

The failure of the latter’s bid for LV= counts as a small, but important, victory against the forces that have contributed to the concentration of wealth in a depressingly small number of hands in Britain. Often, as in the case of Bain, these are foreign hands although, really, nationality is basically a matter of convenience for the 0.1 per cent.

However, the victory may yet prove to be a pyrrhic one if LV=’s future isn’t secured.

There is an important job here for the MPs who stepped up to shake their fists at the bid.

The boards of mutual companies would benefit from better regulation. There ought to be a body capable of holding them to account when they fail to act in members’ interests, and of scrutinising, even potentially halting, deals like this one if necessary. The role that mutual companies ought to be playing is too important for this not to happen.

The Financial Conduct Authority could, I suppose, take on the role, but it sat this one out, so perhaps it requires something else.