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Overcoming the capital conundrum

Melina Morrision - BCCM - from website July 2023

Melina Morrison, CEO, the Business Council of Cooperatives and Mutuals (BCCM, Australia)

6 July 2023

“It can be difficult for co-operatives and mutuals to access the investment capital they need to prosper, grow and compete. This has been a significant impediment to their success, at a time when this way of doing business is more popular than ever,” writes Melina Morrison, CEO at ICMIF member the Business Council of Cooperatives and Mutuals (BCCM, Australia).

We are pleased to share this guest blog from Melina, which was written specially to be shared on the ICMIF website for the benefit of members.

Over the past ten years at the Australian Business Council for Co-operatives and Mutuals (BCCM) I’ve seen for myself the many advantages of co-operatives and mutuals, be it their fostering of a strong sense of community, bolstering economic resilience in economies through corporate diversity or the way they are able to operate with an inherent focus on social responsibility. Some of our member’s stories are truly remarkable. At the same time, it can be difficult for co-operatives and mutuals to access the investment capital they need to prosper, grow and compete. This has been a significant impediment to their success, at a time when this way of doing business is more popular than ever.

The challenge

This lack of access to capital – sometimes referred to as the ‘capital conundrum’ – ought to be a key focus for advocacy bodies like mine in every jurisdiction. As we know, unlike traditional companies, co-operatives and mutuals are not able to issue shares to external investors or access public capital markets, without risking losing member control. Instead, they rely on retained earnings and wholesale debt, which can limit the amount of funding that is available.

This can make it difficult for co-operatives and mutuals to access the funding they need to invest in growth opportunities, such as acquisitions, research and development, new products and other initiatives that can help them to remain competitive. The capital conundrum increases the threat of systemic risk as businesses demutualise and instead coalesce around the joint stock corporate form in order to prosper and grow. This reduces diversity in markets and means more businesses following the same objectives with inherent risks brought in from the short-term gain demanded by shareholders.

The clear lesson from around the world is that changes to legislation can fix this imbalance. To compete, co-operatives and mutuals should be able to issue investment capital that does not require their demutualisation or alter their core business purpose. Maintaining one vote per member and separating investors from control defuses the risk of external capital in mutuals.

The answer is to amend the capital regime for co-operatives and mutuals to permit the injection of external capital, whilst protecting and enhancing their mutuality. In Australia, we decided to meet this challenge head on.

There are many examples of where this type of capital has been permitted. In the UK, building societies have been able to issue Core Capital Deferred Shares since 2013 with some GBP 1.3bn so far invested to strengthen the sector. In the Netherlands, Rabobank has similarly raised over EUR 8bn and Desjardins Group in Canada over CAD 4bn. These capital instruments are designed to fit the nations and sectors they are issued from.

Through the BCCM’s two year-long Capital Partners Program, we drew together a coalition of our members and we worked patiently to build cross party-political support. We made strong policy-based argument for the reforms which ultimately received backing from all quarters. In 2019, this work culminated in the successful passage of the legislative amendments to enable mutuals under the Corporations Act to access capital without demutualising through a brand new instrument called Mutual Capital Instruments (MCIs) (and related provisions defining a Mutual Company under the Act for the first time.) Crucially, MCIs work for all companies with a mutual constitution (including prudentially regulated financial mutuals).

Having secured the legislative change, we continued our program of work to offer advice, insights, shared practice and networking to build knowledge and ecosystem interest to facilitate effective markets for MCI issuances.

So far, there have been three issuances of Mutual Capital Instruments in Australia by two entities (Australian Unity and Our Ark Mutual). In total these have raised a collective AUD 350m in MCIs. Australian Unity has also listed its mutual shares on the Australian Securities Exchange, demonstrating liquid markets for MCIs.

These reforms represent an important step for our sector, and for the Australian economy more widely. They present new opportunities for investment across a range of industries where mutuals operate. I very much hope they will be replicated elsewhere.

For member-only strategic content on the cooperative/mutual insurance sector, ICMIF members have exclusive access to a range of online resources through the ICMIF Knowledge Hub 

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