Setting up a mutual

Typically every mutual will need to be set up as a company of some kind if it is to operate a business of any meaningful size. This gives the stakeholders the protection of limited liability and makes entering into contracts easier as the company is a separate legal entity. It also facilitates fund-raising through share issues, rather than just debt.

But for mutuals, the type of limited liability vehicle used, and the way in which the ownership structure is set up, will be dictated by the organisation's altruistic and/or financial goals.

What is a mutual?

There is no single legal definition, but it is generally an organisation that is owned by, and run for the benefit of, current and future members. In its purest form, it would have no external shareholders, although there are often compelling commercial or financial reasons for it to do so. Whether it does or not, it is a business established to run for the long-term, where employee opinions can make a difference.

Which mutual model to follow? A mutual organisation can come in a number of different guises including charities (typically companies limited by guarantee), friendly societies, credit unions and building societies, as well as co-operative companies and social, industrial and provident societies. Mutual models to consider include:

  • Co-operatives - a type of mutual run for the mutual benefit of its members, with any profit usually being ploughed back into the organisation to provide better services and facilities. This type of mutual follows the seven principles of co-operation, such as equal voting rights on a one member, one vote basis. All profits are distributed to members or re invested in the organisation.
  • Employee owned businesses - an organisation owned and controlled by the employees working for it. This can be achieved through, for example, a co-operative structure, a not-for-profit company for the public benefit, or ownership directly through shares or indirectly through an employee benefit trust (as with John Lewis).
  • Social enterprises - an organisation whose business or services provided have primarily social objectives or purposes. Any profit is re-injected into the organisation to achieve its social objectives rather than distributed as profit to its shareholders.
  • Joint venture co-operative - a mutual model in which employees have a stake along with one or more partner organisation. This can combine the improved productivity associated with employee ownership with additional expertise and capital investment.
  • Community interest company (CIC) - a type of limited company for people wishing to establish businesses which trade for a social purpose or to carry on other activities for the benefit of the community. In order to be registered as a CIC, a community interest test must be passed annually.

Key issues and challenges

Employees

Engagement, consultation and openness with employees are key. The new organisation will need the buy-in of employees who may not be willing to take the risks involved in the set up of a new business and the potential short-term sacrifices, in terms of pay and other benefits, and loss of long-term employment rights. A mutual cannot be imposed on employees and most public sector employees did not enter the sector to take entrepreneurial risk, although there is no reason why the model should not be attractive to them. This highlights the importance of communications with employees and emphasising the selling points of a mutual organisation.

Employees will need to agree to any changes to terms and conditions and be made fully aware of the risks and potential benefits. There will also need to be appropriate terms of employment under the new organisation.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply to the change in employer. If so, the contracts of employment of staff engaged in the activity to be mutualised would transfer to the mutual.

Choosing the right structure

In deciding which of the above or other mutual models to pursue, a number of factors need to be considered:

  • What service(s) are to be provided?
  • Is the mutual model right for the service(s) to be provided?
  • Are there any sector-specific constraints?
  • Is flexibility needed over the distribution of profits and ownership of assets?
  • Does the organisation need to be a registered company?
  • Would the organisation see a high turnover of staff or service-users?
  • Will the mutual need a private sector partner or other external investor? If so, how will its interests be balanced with the objects of the mutual?
  • Will the mutual be entering a well established highly competitive market?
  • What are the core objectives? Is the aim to maximise the capital returns of the current generation of employees, or to secure the long-term best interests of current and future generations of employees and other stakeholders?
  • How will profits be treated? Will they be ploughed back into the business or will some of the stakeholders be expecting some form of return?
  • Is the mutual likely to participate in a public procurement exercise for the in-scope services alongside private sector competition? If so, what are the likely pre-qualification requirements?

Business plan

A business plan is crucial for any new organisation especially if it is to be run as a viable and successful business. It would need to ensure that it has a market with space to grow and a future demand for the services. It cannot be reliant on a single client. It would need to establish the skills inherent in the business and any future skills required to grow.

Other considerations include the organisation's governance (which partly depends on the chosen structure - how an organisation is organised and controlled and how power is shared) and tax implications.

Finance

Securing affordable working capital is a vital ingredient to the success of a business - the organisation will need the ability to generate independent revenue streams and raise investment for future expansion.

How will the working capital (for salaries etc) and funding to build the business infrastructure, equipment and back office services be generated? Capital will be required to pay for certain essentials such as legal and financial expertise, human resources and pensions advice and other external tools and strategic support.

Funding may be available through grants, banks or stakeholders. However, some banks may be reticent to lend to organisations they deem to be high risk. If any funding is provided by a public sector body to the new organisation then state aid rules may apply.

Competition and procurement

The awarding of a contract to a new mutual organisation by a public sector body is likely to be subject to public procurement rules, therefore putting the organisation in the same position as any other tenderer of public service contracts. This will put the organisation in direct competition with large and more experienced service providers with access to the necessary funding and resources required to provide competitive bids.

Cabinet Office Minister Francis Maude has called on the EU to allow temporary exemptions for employee-led organisations/mutuals, to enable employees to gain experience of running public services prior to full and open competition.

Identifying assets to transfer and services which the mutual will be dependent on post-transfer

All of these will need to be clearly identified so that all issues relating to the transfer of the in-scope assets are properly dealt with. Identifying these assets and services will also help ensure that the mutual is not left without a legal right to use key services (such as IT or payroll) after the mutual goes live.

Treatment of authority assets

Existing public sector assets will generally be vested in the new organisation by way of asset transfer, licence agreement or a combination of both. Consideration should be given to whether there should be a 'lock' on assets when the organisation is established. This would protect publicly funded assets from being sold on and in effect, privatised, with the financial benefits accruing to managers and staff in the organisation and in the public's interest.

To mutualise or not to mutualise?

It is clear that there are many benefits to running a business as a mutual - it can create a better place to work, with better engagement from employees, greater commitment and a more open and honest working environment. But it is not a case of one size fits all. Careful analysis, supported by specialist advice, will be needed to establish what the right model is in each case.

It could be that a number of the "mutual" structures available meet the long-term needs and requirements of your organisation. Equally, a "mutual" may not be the right structure for you at all.

However, if you think it might be and it is something you want to explore further, it is important to take expert advice to ensure you consider the important factors and set off on the right path. Our breadth of knowledge on public services, company and governance structures and employee trusts, combined with our sector-focused experience, means we understand the questions that need answering to devise the best and most appropriate structure for your business; be it a mutual or not.