I had the great fortune to once interview Jack Bogle, founder of Vanguard. He was effortlessly charming, the classic patrician with revolutionary zeal. On a side note, I also thought he was the classic Lost Republican – an old school East coast liberal Republican who I am sure would have been horrified by the current President.
Anyway, I mention that political leaning because I think that in the eulogies waxing lyrically about Mr Bogle, we’ve lost one key insight: the importance of ownership structures and capitalism. Over the last few years, there’s been a slightly crazy argument advanced by some that passive funds are slightly unAmerican and inimical to capitalism. This debate slightly obscures Bogle’s more revolutionary innovation which was to make Vanguard a mutual. To be fair mutuals were not unheard of in America, especially in the insurance industry, but the impact of this innovation has been huge. At the very heart of an insanely competitive industry is a major player that is very much a capitalist beast but one owned by its investors, for its investors. At the very core of its DNA is an idea about lowering the cost of ownership for the end investor. Now obviously that aim is helped along by the sheer scale of the business (and its efficient management). Being a passive fund manager also helps, but we can’t ignore that question of ownership. It is an efficiently managed, profit-seeking mutual who’s key stakeholder is not its equity owners but its customers. And in this Vanguard shares a heritage with the Nationwide and the John Lewis Partnership, two other scale players in insanely competitive markets. I’d also add, with a few more reservations, the Coop as well. There are obviously crucial differences in the ownership model of each ranging from pure cooperative through the John Lewis employee model to Vanguard but the point is that one doesn’t have to have a completely private enterprise system to have successful capitalists.
Obviously, I’m mindful here of the idiosyncrasies of markets. There are myriad idiosyncratic reasons why these mutually owned capitalist enterprises have emerged and prospered. And there are plenty of terrible mutuals who only exist to line the pockets of the senior management team. But I think there are a few important takeaways here.
The first is that I have a sense that the mutual structure is arguably more amenable to the capitalist system than worker-owned enterprises. I’ve been quietly watching the ESOP based employee ownership movement for years and to date, I’ve not seen that many hugely successful examples. Successful mutual by contrast are many and numerous and all share one key bit of DNA – they have a core strategic objective which is to provide the very best value outcome for the customer. Whether they always achieve that varies, but that competitive DNA is obvious. In employee-owned enterprises, by contrast, I’ve not spotted that DNA.
The next key observation is that being a mutual can work brilliantly in insanely competitive markets where every last % matters to the end customer. Again, that competitive customer focused DNA helps, along with the ability to crush profit margins when necessary.
Lastly, I think mutual can – though not always – think long term. It is self evidently true that they don’t have the same short term investors on their back, worrying about declining dividends. To be fair one can easily point to the likes of Amazon as a counterexample but once we get past the big tech giants I struggle to think of many others in the world of privately owned enterprise. And on a side note, even these counterexamples frequently involve a single major shareholder who has a tendency to ignore the interests of some shareholders.
So, the political takeaway here is that if Jezza, aka the Leader of the Opposition Jeremy Corbyn and his right-hand man John McDonnell were serious about long term thinking and new modes of ownership, they’d embrace mutuals rather than the largely discredited ideas about employee ownership (which are also, I think a charade for state ownership). Mutuals and coops have long been championed by non-socialists and especially liberals – we’ve long argued that to have an efficient capitalist based private enterprise system we need proper competition from organizations with a different world view about how to serve the customer. What matters above all though is not the ownership structure but the existence of markets and competitive businesses.
To this end, I’d propose two radical ideas. The first has already been articulated in this blog which is that we need to do something about that great national broadband monopoly called OpenReach. I’m not convinced its current ownership structure within BT works for the wider body of stakeholders – or even for BT! Its success is too integral to the success of the UK economy to let it carry on its current, slow, path. Rather than nationalize it, why not turn it into a mutual utility – with a strict set of competitive rules governing its behavior and a requirement to always put the customer first.
My second idea is to think again about how we can help the local newspaper industry. My view is that we desperately need a vibrant local newspaper industry here in the UK if nothing else because it is so important for democracy. The bad news is that the current ownership structure – hugely indebted businesses, focused on cutting costs – isn’t working for anyone. Instead, we allow the BBC (why not turn that into a mutual?) to drip feed money into slightly arcane schemes to help local news content. Time for a rethink. Let’s centralize all the public sector money being used to help local newspapers into a Local papers Trust. Let this organization take over as many local papers as it can and then run them as efficiently and profitably as possible, with a focus on investing in local content as much as possible. As with the BBC, its focus would be on the best content possible but in ownership terms, it would have zero involvement with the UK government.
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