Recent figures show that companies have increased their profits much faster than the wages of their workers, with finance leading that change. But there is a sector of the financial industry where workers have maintained an above-average share.
- Research commissioned by BCCM shows that mutuals in the financial sector pay 68% of their profits to their staff compared to less than 30% across the industry.
- Mutuals say this is because they see staff as key stakeholders valued by their members.
- Lower efficiencies of scale and less automation are also likely factors in the disparity
It is the cooperative and mutual sector, where companies are generally owned by their clients or, sometimes, are a collective of producers or workers.
After reading a recent ABC News story reporting on the decline in the national income share of wages and the rise in the profit share, industry lobby group the Business Council of Cooperatives and Mutuals (BCCM) commissioned an investigation.
Andrew McDougall, director and partner of SGS Planning and Economics, which is itself an employee-owned company, put together the figures for how much of a typical mutual’s income went to its workers.
“We reproduce those results to the best of our ability given the available data,” he told ABC News.
“And we found that more than two-thirds of total income is delivered through wages, so that’s significantly higher than more traditional business structures in Australia.”
According to the Reserve Bank, the average share of employees in all companies outside the financial sector was about 60 percent of profits.
But the results were “totally different” in the financial sector, according to McDougall.
RBA data shows, across the economy, workers at finance and insurance companies received less than 30 percent of total earnings.
But the SGS analysis estimates that banking and insurance cooperatives and mutuals, which include credit unions and private nonprofit health insurers, paid about 68 percent of their profits to staff.
‘We do not pay dividends to a third party’
BCCM CEO Melina Morrison argued that it was the result of not having shareholders demanding an ever-increasing return.
“Business is really about options,” he told ABC News.
“In a cooperative or mutual, they choose to use their income in a way that rewards the people they serve, their customers and their owners, and the people who provide that service, their employees.”
Mark Genovese runs Westfund, a member-owned health fund serving more than 50,000 client-members, the majority of whom live in the New South Wales and Queensland regions.
“I have worked in mutual banks and credit unions for 35 years, and now I have three years in private health,” he said.
“And every day that I wake up, I go to work [and] we only think about how we can return the money to our stakeholders, which is our members and our staff.
“We have no one else to focus on. We do not pay dividends to a third party. I don’t have those pressures.
“As a company, the pressure we have is to make sure we run our business efficiently, which can bring the greatest possible benefit to members and staff.”
Captured by staff?
One risk in any organization where day-to-day management is divorced from ownership, whether large public companies or local cooperatives, is that staff may put their interests before those of the owners.
Talking to those who run mutual business, it is clear that they see their staff as vital stakeholders alongside their member-customers.
“In our merger with HCF, our entire organization came into HCF intact with all the staff and the brand, the history, the legacy and all the people,” said Simone Tregeagle, CEO of the privately held, member-owned company based in Sydney. health fund rt health.
“Now, in a profit-driven environment, I would be looking for synergies and 75 percent of those people would have walked out the door on day one.
“So that mutual spirit, which is about how we also benefit the people who work here, we saw it unfold incredibly vividly in that merger.”
However, Ms. Tregeagle said that was exactly the way her members expected staff working for them to be treated.
“We invested in a really personalized, high-touch level of service, making sure people can talk to us directly, without jumping through hoops, without forcing people into channels they don’t want, without timing phone calls,” he said.
He argued that, despite the fact that workers in the mutual sector received a larger share of the income from the business, members also received a larger share of their insurance premiums in the form of benefits.
“We are deliberately aiming for narrower margins,” he said.
“We are deliberately trying not to take advantage of our members.
“The evidence is that we give back more to members than the big for-profit funds.”
That statement is backed up by the most recent Private Health Insurance Ombudsman report for fiscal year 2020-21, which showed that most member-owned funds returned 85 to 90 percent of premiums to members through benefits, compared to 83-84 per cent for the three largest for-profit funds, BUPA, Medibank and NIB.
However, many member-owned funds had higher administration costs as a percentage of premiums than the big three for-profit funds, including rt health, which also had a lower return to members in benefits in the year. fiscal 2020-21, before its merger. with HCF.
‘It’s a very democratic system’
Westfund is based in Lithgow, about two hours west of Sydney, and employs around 100 people in the city, which is also where many of its members/clients live.
Genovese said that brought its own kind of market discipline to running the business.
“When I’m making a decision, the test is, if I walk down Lithgow’s high street, am I going to be stopped and criticized?” he said.
Mr. Genovese said that even in mutuals without such a close geographical connection to their members, there was a high level of management responsibility.
“If you don’t engage with your members and keep in touch with them, they come to the AGM and there’s something that’s not making them happy, you’ll know,” he said.
“They have the opportunity to make changes, they vote for the directors who sit around the board. It’s a very democratic system.”
One of the reasons why the share of profits in revenue dwarfs the share of wages in the broader financial sector is that information technology has created massive efficiencies in recent decades.
Reserve Bank research from 2019 found that there were fewer workers in the sector in Australia than in 1990.
The Australian Banking Association said that could explain why finance has a much lower wage share than most other sectors.
“Banking has perhaps seen more technological change than most others, as consumer preferences have radically changed and new technologies have improved service offerings,” a spokesman said.
As organizations much smaller than the big four banks, and even regional banks, mutuals have not necessarily had access to as many benefits of technology and the economies of scale it offers.
Mr. Genovese also said that his organisation, like many mutuals, had made a conscious decision not to drastically reduce staff and the personalized service they offered.
“We are not closing branches in regional areas,” he said.
“So we put another layer of service into what we do for our members, which our members enjoy, our members like, and that obviously comes at a cost.
“There’s no question that automation for any business needs to be focused and considered, but we’re not cutting and trimming and making big sweeping changes.
“We certainly don’t outsource our contact centers abroad and that sort of thing. I don’t know of any mutual or cooperative that has done that.”
‘Balance in the economy’
Ms Morrison said that mutuals were not immune from cost cutting, but were seeking to balance the interests of their shareholders.
“They have to be efficient. They exist in the same real-world economy as all other businesses,” he said.
“If you look at financial services, for example, they’re in very competitive markets, the cost of capital is higher [for mutuals]regulation costs are proportionally higher for cooperatives and mutuals”.
Certainly, the Big Four banks and, to a lesser extent, the large regional banks and other major financial institutions can raise money on world markets at a lower cost than smaller mutual banks and credit unions.
Mutual banks also have to balance the competing demands of their members, some of whom are savers seeking higher deposit rates, while others are borrowers seeking lower interest rates.
However, even if they can’t always provide the lowest-cost product, Ms. Morrison argued that they helped control how much for-profit financial institutions could charge.
“They provide a mitigation against speculation, or even price inflation, by offering transparent pricing that reflects the true value of that pricing structure to customers without the need to reward or share profits with shareholders,” he argued.
“So they are like the balance in the economy, brought about by diversification.”
Disclosure: The author was once paid by BCCM to moderate panel discussions at its annual leaders summit in November 2017. He is also a Teachers Health client-member.