Sir Brian Jenkins - Chairman of the Woolwich Building Society and companion of the IM.
This summer, if all continues according to plan, a handful of building societies will succeed in extending share ownership significantly to millions, many of whom might never have dreamed that they would ever be stakeholders in a dynamic, expanding sector of the economy.
By converting from mutual societies to public companies, the Woolwich, the Halifax, the Alliance & Leicester and the Northern Rock building societies will, between them, be giving shares to around 16 million of their investing and borrowing members. Much attention has been focused on the anticipated value of these windfalls, both to individuals and in total. Estimates of more than £20 billion are probably near the mark.
There are wider financial implications. The unprecedented distribution of shares on the scale that is being generated can be viewed as the second wave of popular capitalism. It is fundamentally different from the first wave - the privatisations which took place in the 1980s and early 1990s - in that the opportunity to become a shareholder is not limited only to those who can afford to buy shares. The conversion into shares of what is, in effect, the portion of the building society already 'owned' by each member will undoubtedly extend stakeholding beyond the usual AB social groups, who have traditionally been viewed as the primary participants in the mass privatisations. Thus, it can be argued that the building society conversions are not only widening but also deepening share ownership on a scale which proved difficult to achieve by the privatisation programme.
For many, it will be their first experience of direct ownership of a business and the potential value of the new shares will represent a sizeable, disposable lump sum. The windfall factor is unavoidable and has been heavily - perhaps excessively - promoted by some sections of the media, which have at times presented the conversion process as if it were a spin-off of the National Lottery. Some newly created shareholders are choosing to sell their new assets straightaway, encouraged by the presence of an immediate institutional demand creating a ready market. A proportion of the cash thus released will, inevitably, be spent.
However, amid the excitement at the prospect of ringing tills and a surge in the sale of cars and round-the-world cruises, those who perceive the effects of demutualisation solely in terms of cash flooding into the economy may be underestimating the financial acumen of many of those building society members who are about to become shareholders. I would suggest that a large proportion of these new shareholders will give serious consideration to retaining their shares.
There would be good reasons for them to think twice before selling their shares. Such factors are among the reasons why a number of societies have opted for conversion in the first place. The financial services industry has changed dramatically over the past 10 to 15 years with a more sophisticated customer demanding an ever-increasing range of products and services.
Media coverage of personal finance topics has mushroomed, as evidenced by the ever-expanding supplements in newspapers, and individuals are increasingly recognising the need to safeguard their future prosperity themselves, through insurance and assurance products, investments and personal pensions, for example.
An effect of this increased awareness and understanding of the importance of personal financial provision has been greater competition and diversification on the part of many financial institutions, accompanied by considerable regrouping among businesses operating in the industry. Most, though, would agree that, despite the highly competitive nature of the industry, the prospects for the most effective providers of these personal financial services are excellent. However, to satisfy consumer demand, successful organisations in the future must decide whether they wish to be providers of a full range of financial services or smaller niche players. This has been, and for some remains, the dilemma faced by the mutual societies.
For those mutuals which have made a commitment to serving a small, niche market, remaining as building societies is a viable option. However, those who wish to satisfy their customers' demands for a wider product range face many obstacles. As mutuals, building societies are inhibited in that their access to capital is restricted. Despite the additional freedoms granted under new building societies legislation, any planned growth could be hampered by an inability to raise equity finance. The need to have this key flexibility is one of the main arguments that has been propounded in favour of demutualisation.
Having gone through the long process of conversion primarily to secure access to additional sources of capital, it will be no surprise to see the converted societies managing their existing capital much more actively immediately after conversion. Traditionally, building societies have been content to build up reserves, producing what would be regarded as a fairly low return on capital. As public companies, they will not have this latitude.
A company with capital that is not producing an efficient return is unlikely to be attractive to investors but likely to be attractive to potential predators. Shareholders will therefore expect to see growth, perhaps through acquisitions, mergers or accelerating existing development plans. However, where this growth cannot be achieved at the desired level of returns, it is inevitable that the option of returning capital to shareholders will have to be considered.
In this set of circumstances, many would see the retention of shares by building society members as a sound decision.
An attractive scenario has the new shareholders actively assessing their companies' past performances and future prospects before deciding that their interests are best served by remaining as investors and sharing in the long-term prosperity of the business. If this can be achieved, then it could be argued that the share-owning democracy, - or stakeholder economy - has arrived for real.