When ‘windfalls’ can be shortfalls

AT a dinner party about a century ago George Bernard Shaw reputedly sat next to a rather large and pompous lady, past her prime. "If I offered you a million pounds, would you sleep with me?," Shaw asked. "Why yes, sir," she answered smiling. "And if I offered you one pound, would you do so?," Shaw continued. "Sir! What do you think I am," the lady responded angrily.
"We already know that," said the Irish playwright. "All we have to do now is determine the price."
Whether the story is true or not, holders of Standard Life policies might like to consider it before they decide whether to accept the management's demutualisation offer.
Half the members are expected to receive shares worth £ 500 to £ 1,000, with the others allocated shareholdings valued at more than £ 1,000.
We might try telling members that the surplus value held in the society does not morally belong to today's membership, having been built up by the society over 175 years. But it is unlikely that most members would listen to this ethical argument.
Yet assessing if these so-called ‘windfalls' are financially worth it to the individual members is also not simple.
The recent report on demutualisations – ‘Windfalls or Shortfalls? The true cost of demutualisation', from the All-Party Parliamentary Group for Building Societies and Financial Mutuals – helps us.
The committee was told by the Building Societies Association that it took on average four years for a demutualised PLC to claw back from customers the money paid out from windfalls, through higher expense ratios and reduced bonuses.
Moreover, any short-term gains for the members of those societies that have converted is put into the shade by the benefits won by the directors. Directors' salaries and bonuses rose by 26 per cent to 40 per cent in the first year after demutualisation.
It is not clear what will happen to the pay of Standard Life's directors following flotation. It is also fair to point out that the current group of directors are not entirely the same group of people who got Standard Life into the mess that forced them into the flotation to achieve improved solvency margins, after betting the society's assets on rising share values at a time when equity prices continued to fall. The highest paid director last year, just, was Sandy Crombie, the chief executive, at £ 1.4m.
Commitment
Crombie became chief executive of the society in 2004. Previously, for nine years, he had managed the society's investments. He has worked for Standard Life since the 1960s.
Crombie replaced Iain Lumsden, who had to go when the board decided that his commitment to mutuality was no longer realistic. It is worth noting that Standard Life's failure to win its bet was not a surprise.
The respected life insurance analyst Ned Cazalet had carefully researched Standard Life's equity holdings and predicted the exact crisis outcome – an assessment Standard Life resolutely, determinedly and wrongly rejected.
But Standard Life members will no doubt reflect on other factors, too, before they vote. Those members who read The Times may want to consider the advice of its business commentator Robert Cole.
"It is good for Standard to float because mutual ownership structure is outmoded," wrote Cole. "The model may retain use for some small organisations. But the bigger the business the greater the risk that mutuality encourages slack management. Standard Life is a big business. Demutualisation is more likely to help than hinder the accrual of benefits for with-profit policyholders."
Not surprisingly – given its strong antipathy to mutuals – the Mail on Sunday has gone on to link events at Standard Life with another embarrassment to the mutual sector, Royal Liver Assurance.
While rejecting the arguments of The Times and the Mail, let us look at why they reach their conclusions. Royal Liver, a friendly society, has just been fined £ 550,000 by the FSA for mis-selling with-profits savings policies. Persistently, the society's sales force sold policies containing life assurance cover to elderly customers for whom life cover was not appropriate. The price of the cover meant that it was unlikely that the policies would ever exceed their costs.
"This was a serious case of mis-selling," said the FSA's Director of Enforcement, Margaret Cole. She added: "The failings were systemic and arose from weaknesses in the firm's sales and compliance processes and persisted over a long period of time."
Another way of saying this is that the society had problems with its culture and that senior management should have made sure that sales practices were appropriate, without the need for an FSA investigation.
Guilty
It is particularly concerning that a mutual society, dedicated to members' interests, should have been found guilty of sharp selling practices.
So, as with Standard Life, it is worth examining who the top people at Royal Liver are. The chairman is David Woods, who is overseeing a cultural transformation at the society with greater focus on the selling of products sourced from elsewhere.
The chief executive is Steven Burnett, who commented in the last published annual report, apparently without irony, that the new strategy "will capitalise on what we believe we can be really great at, which is giving face to face advice".
Burnett was recruited in 2002 from Swiss Life, a PLC that converted from a mutual in 1997. Woods joined the Royal Liver board in 2003 from Scottish Provident – itself a demutualised society, bought by Abbey National. The takeover was conducted while Scottish Provident was led by Woods, with his support, and his latter responsibilities were to integrate the business into Abbey.
These facts suggest several questions, not least how accountable the directors of some mutuals are, and how involved members can be in the selection of their directors.
In the case of Royal Liver, AGM votes are determined by delegates not directly by members. As the Soviet Union found, this is an imperfect form of democracy.
AGMs can be attended by members – but that is not so easy when, as last year, the meeting of this Liverpool institution took place in Jersey.
The good news is that Royal Liver says that it has no intention of copying Standard Life, Swiss Life and Scottish Provident and demutualising. Personally, though, I would add the word ‘yet'.
In the meantime we can contemplate the cost to the reputation and sustainability of the mutual movement of having society directors who have little obvious commitment to the principles of mutuality.