Mutualization is the process of changing the structure of a business to one in which the owners of the company in question are also the company's clients.

Definition of Mutualization

In simple terms, mutualization can be defined as a change in the structure of a company to one where the owners of the company are also the clients. Once a company has been mutualized, all of the profits will be distributed to the company's customers every year. This distribution is proportional to each individual client's involvement in the company. These days, many companies choose to adopt this structure. This means that the policyholders have rights to a portion of the profits. In many cases, companies that adopt a mutual structure also choose to elect the company's managers.

Examples of companies that typically adopt a mutual structure include:

  • Insurance companies
  • Savings and loan associations
  • Savings banks

In other words, mutualization is the changing of a company's structure. The company's owners are able to receive financial distributions that are directly proportionate to the amount of money the company generates from each of its members. In some areas, the mutualization business structure is also referred to as a cooperative. This type of business structure is typically beneficial for members because each of the company's members are entitled to receive financial dividends as an incentive for conducting business with the mutual company. These distributions can be tax-free, depending on the specific laws in the area a particular member lives in.

In the case of most insurance companies, at the end of every calendar year, members of the company are issued distributions from the total of the company's profits during that year. In addition to this, members may also have the ability to elect the company's leadership, up to and including the company's directors. In these scenarios, the company's policyholders are considered members and have the right to receive financial distributions and participate in the voting process for determining the company's leadership. 

The opposite of mutualization is known by a few different terms:  

  • Privatization  
  • Demutualization  
  • Stocking the company  

Regardless of the name you choose to use, when a company is demutualized, the company's members and clients are no longer one and the same.

Definition of Demutualization

Demutualization is the term used to describe the process of converting a company from member-owned to shareholder-owned. This is usually one of the first steps in setting a company up for an Initial Public Offering or IPO. In the past, insurance companies have typically been structured as mutual companies. The easiest way to determine whether or not an insurance company is mutualized is by considering whether or not the company's name has the word "mutual" in it. However, there has been a trend in recent years that sees many insurance companies demutualizing and converting to a shareholder-owned business structure.

Usually, when an insurance company demutualizes, the policyholders will be offered compensation for their share of the ownership in the form of either cash or stock shares. Due to the fact that stock shares can be sold and traded on the market and ownership rights can't, the demutualization of these companies can actually increase potential profits for everybody involved. This also has the added benefit of helping to boost the economy. While the term "demutualization" originally referred specifically to the process of converting an insurance company from member-owned to a shareholder-owned business structure, it has since become more commonly used in relation to any type of company that undergoes a similar conversion.

Stock exchanges all over the world have begun to offer another noteworthy example in regards to the current trend of demutualization. Most of these exchanges have either already undergone, are in the process of, or are taking demutualization into consideration for themselves, including:  

  • The London Stock Exchange  
  • The New York Stock Exchange  
  • The Toronto Stock Exchange

Many of the largest companies in the world are finding themselves at a disadvantage to demutualized companies, despite their otherwise intimidating size and power in the market. In many cases, obtaining loans is one of their only options in terms of raising large sums of money. It's often impossible to fund acquisitions or the expansion of a company through borrowed money, which is a significant contributing factor to this disadvantage.

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