Mutual Company

A type of company wherein the ownership is held by the depositors, customers, or policyholders of an institution

Written by CFI Team

What is a Mutual Company?

A mutual company is a type of company wherein the ownership is held by the depositors, customers, or policyholders of an institution. A mutual company’s structure is different from other types of companies like a privately-held organization or public company. Mutual companies distribute income among its members/owners, generally directly within proportion to the ownership of those within the mutual company.

Mutual Company

Mutual companies are not owned by shareholders, and its members hold much of the risk involved in the company’s operations. Thus, the policyholders, customers, or depositors become larger stakeholders in the rules and regulations that govern the mutual company.

In countries like Canada, the term mutual company is almost used exclusively to describe companies within the insurance industry, but the use of the word varies globally within different types of business environments.

Summary

Mutual companies are not privately owned but are owned by various groups of stakeholders. They often distribute dividends or premium reductions to their members.
Examples of mutual companies include insurance companies and some types of credit unions.
Mutual companies exist as a method of raising funds from their members to help provide a set of shared services to the individuals belonging to the mutual company.

Why Do Mutual Companies Exist?

Mutual companies exist as a method of raising funds from their members to help provide a set of shared services to the individuals belonging to the mutual company. As there are no external stakeholders or shareholders, the mutual company is run for the strategic benefit of its sole members. For potential members thinking about joining a mutual company, the idea of becoming such a critical member can help entice them to join.

Mutual companies often distribute dividends or premium reductions to their members. It allows for a strategic focus within the company that is more vested in the customer/member rather than a traditional company that is more vested in the shareholder. The underlying theory behind the fact is that a mutual company takes a longer-term view of corporate profitability and strategic decision-making, whereby a traditional company is more focused on quarterly results.

The Intangible Benefits of Mutual Companies

There are intangible benefits to a company being run as a mutual company. For example, there exists the goodwill generated by a company that is more focused on the community/customers for which it operates, rather than global investors who may only be profit-driven and not hold a long-term stake in the company’s growth.

It can be argued that a mutual company can provide a more stakeholder-oriented mindset, therefore making them more concerned with the well-being and long-term success of the communities they belong to.

Cooperatives vs. Mutual Companies

Cooperatives and mutual companies are terms that are often used interchangeably; however, there are key differences, which are outlined below:

1. Mutual company members receive dividends – cooperative members leverage for lower prices.

2. Cooperative members bargain for lower pricing – mutual company members have an ownership stake.

3. Cooperative members can be producers of a good (e.g., farmers) wishing to market as a whole.

4. Both types consist of large pools of clients who own them.

Falling Out of Favor

Mutual companies within the United States are falling out of favor for the more traditional style of corporations. The deregulation of the savings and loan industry that occurred throughout the United States in the 1980s led to many mutual insurance companies moving towards more traditional stock ownership and investor-owned business models.

The change can be attributed to several reasons, including the ability to raise larger amounts of capital by listing on a stock exchange that can help raise the funds necessary to address a financial crisis.