Mutual Company

Mutual companies are owned by their clients.
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Definition: A mutual company is owned by its clients or customers, and thus strives to operate in a manner approximating a nonprofit basis. Many banks (especially savings banks), credit unions and insurance companies originally were organized as mutual companies.

A mutual company is supposed to operate in the best interests of its clients, returning excess profits to them. At a mutual bank or credit union, depositors thus tend to receive higher rates of interest on their money than at shareholder-owned banks.

Additionally, a mutual credit union normally will offer loans at lower interest rates to its members than can be obtained at shareholder-owned banks.

At a mutual insurance company, policy holders typically pay significantly lower premiums than identical policies will fetch at shareholder-owned rivals. Moreover, policy holders also can expect to receive an annual rebate on their premium payments if a mutual insurance company enjoys a profit, with this rebate usually called a dividend.

Conversions to Shareholder Owned Corporations: When mutual companies convert to stockholder-owned public companies, the existing clients (depositors or policy holders) normally are given the first right of refusal to purchase stock in the reorganized company. Those who exercise this option often receive their shares at discounted prices compared to what members of the general public will pay. As a result, savvy investors often look to become depositors or policy holders in anticipation of such conversions, which typically have resulted in significant investment gains.

The number of mutual companies is steadily shrinking, as firms organized under this structure find shareholder-owned corporate status to offer more flexibility in raising funds, especially in the form of equity capital, to support existing operations or expansion. One among many examples is that of Hudson City Savings Bank, regularly cited in the business and financial press for excellent management and high levels of client satisfaction.

Its management found the mutual structure to be constraining, and thus became a publicly-traded shareholder-owned entity. Fast on the heels of that conversion, management then found it advantageous to merge with another publicly-traded bank. Follow the link for details.

Mutual Funds: Do not confuse a mutual company with a mutual fund company. The former reflects the manner in which the company is organized, as described above. The latter is a type of investment company, in which investors purchase proportionate shares of a pool of stocks, bonds, real estate or other investments.

Mutual fund company Vanguard is also a mutual company in the sense of being owned by its clients, and its commitment to cost control and low fees stems from this mode of organization. Vanguard, however, presents an exception rather than the rule. The great majority of mutual fund companies actually are organized as for-profit shareholder-owned corporations, either privately held or publicly-traded. 

Also Known As: Co-operative, Cooperative, Co-op