1

September 2010

Thinking beyond the

public company
Robert E. Wright
Mutualization and partnerships were once common ownership structures. Could they once
again limit financial risks effectively?

Policy debates about business

reforms invariably rely on
one big assumption: the basic
mechanism of the public company
has malfunctioned, and corrective
regulation will help safeguard the
interests of shareholders and the
public. Look no further than the
current financial-reform bill, with
its plethora of new rules aimed at
correcting incentive mismatches
that led to excessive risk taking
at big, publicly traded Wall Street
firms. Or the debates on health
care reform, where the initial
political impulse was to impose
a government option to rein in
greedy publicly traded health
insurers.
An emphasis on regulating the
behavior of public companies
is understandable: their steady
spread across the US business
landscape since the 18th
century, partly in response to the
capital demands of widespread
industrialization, conveys an
impression that they are the
natural form for large enterprises.
Yet throughout much of modern
corporate history, other ownership

structures, such as mutuals,

partnerships, and cooperatives,
also played a prominent role,
coexisting with the joint stock
company. These structures
represent an alternative for tailoring
ownership and governance to the
risks and operating profiles of
specific economic sectors. They
might offer regulators cheaper and
more effective ways of limiting
financial crises and industry
implosions. Some entrepreneurs
may even find them a better way to
raise capital and manage the risks
of new businesses.
The financial-services industry
is a stunning example of recent
and dramatic change in the
prevailing corporate form. From
the 18th century up through at
least 1970, many savings and loans,
investment banks, and insurance
companies were organized as
mutuals, partnerships, or joint
stockmutual hybrids (exhibit). The
business models of insurers (fire,
health, life, livestock, and marine)
and of savings institutions (savings
banks and societies, savings and
loans) were characterized by long-

Thinking beyond the public company

Q4 2010
Stakeholder
Exhibit 1 of 1

Starting around 1970, joint stock companies surged across

much
the US
financial-services
landscape.
Startingof
around
1970,
joint stock companies
surged across much
of the US financial-services landscape.
Mutual/hybrid1
Joint stock

% of institutions
US investment
banks

US insurance
companies

US savings
banks

% of assets

17761860

1970

2010

100

100

100

17761860

1970

2010

45

50

55

50

17761860

1980

78

73

22

27

25
75

2010
12
88

1 For investment banks: partnership.

Source: for savings banks: Lawrence R. Cordell, Gregor D. MacDonald, and Mark E. Wohar, Corporate ownership and the thrift crisis,
Journal of Law and Economics, 1993, Volume 32, Number 2, pp., 71956; for insurance companies: George Zanjani, Regulation, capital,
and the evolution of the organizational form in US life insurance, American Economic Review, 2007, Volume 97,
Number 3, pp. 97383; for investment banks: Alan D. Morrison and William J. Wilhelm, Jr., The demise of investment-banking
partnerships: Theory and evidence, working paper, July 2004

term contracts and asymmetries

between what proprietors and
customers knew about the risks of
doing business with one another.
These conditions were well suited
to mutual charters stipulating
that customers should own the
organization and often entrusting
their aggregated interests to
independent sales agents.

Similarly, policy makers in the

late 18th and the 19th centuries
forced many mercantile houses,
brokerdealers, and investment
banks to remain partnerships
or sole proprietorships.1 They
worried about agency costs in
these businesses: skilled salaried
managers with good information
could defraud their companies,

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McKinsey & Company.
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customers, and shareholders by

trading on their own account and
engaging in other forms of selfdealing. To keep the incentives
of such firms aligned with those
of society, managers had to be
owners, and their ownership stakes
had to be illiquid and constitute a
large percentage of their net worth.

contain agency problems in the

finance industry, for example, could
design incentives that promote
mutuals or partnerships when
public companies divest units
or form joint ventures. Life and
property-and-casualty insurers
that have struggled as joint stock
companies could remutualize.

These views remained accepted

wisdom until recently. In the 1970s
and 80s, however, mutuals lost
their grip on the savings-andloan and insurance industries,
and by 2005 all the major US
investment banks had gone
public. This phenomenon was
not confined to the United States.
British building societies, for
example, demutualized thanks to
regulatory changes pursued by
the Conservative governments
of the 1980s. The transitions
causes, too complex to detail here,
are no doubt related to largely
positive shiftstoward a world
of more liberal markets, more
deeply integrated global financial
systems, and faster, cheaper
communications and information
processing.

Private equitywhich at its best

is rooted in the beneficial alliance
of management incentives and
investor interestsalso could
play a role in encouraging diverse
ownership structures. And at
the grassroots level, would-be
microfinanciers and community
bankers should seriously consider
mutual forms, such as credit
unions, that accommodate social
goals more readily than joint stock
companies do. Modest steps such
as these toward a broader portfolio
of organizational forms might help
rebalance risk and reward in these
volatile times.

Yet subsequent challenges,

including the US savings-andloan crisis of the 1980s and the
global financial crisis of 2008,
raise the question of unintended
consequences. The recently
passed US financial-reform act
suggests that theres little appetite
among policy makers for a broad
restoration of organizational
diversity. But more limited goals
may be useful. Policy makers
looking for sustainable ways to

 obert E. Wright, Corporate

R
entrepreneurship in the antebellum South,
in Susanna Delfino, Michele Gillespie,
and Louis Kyriakoudes, eds., The Transformations of Southern Society, 17901860,
Columbia, MO: University of Missouri
Press, 2011.

Robert Wright is the Nef

Family Chair of Political Economy at
Augustana College, in South
Dakota, and the author of
Fubarnomics: A Lighthearted, Serious
Look at Americas Economic Ills
(Prometheus, 2010).