In search of alternative paths within liberal market economies: the case of British building societies

Olivier ButzbachLondon Center for Corporate Governance & Ethics

Birbeck, University of London

December , 7 2012

1. The starting point

Banking reforms in the post-crisis environment Calls for a “new model” of banking in the UK

and the US “Sound banking” (Draft reform bill, October 2012) “Narrow banking” (De Grauwe, Volcker)

Regulatory reforms driven by the need to change the governance and incentives of banks

The discussion on banks can be contextualized within a broader debate about “alternatives” TINA

The question seems all the more relevant in a LME context Prevailing market orientation

Building societies: an alternative business model? Characteristics of building societies’ business model

today: Asset specialization: mortgage lending Liabilities specialization: shares Mutual status No dividends

Additional characteristics Small average size Local rooting

Two key observations Their business model incorporates governance structures,

legal status, specialization Their business model is very much the product of history

(see later discussion)

Building societies & Victorian values “Among the various methods by which a person in comparatively

humble circumstances may improve his condition, and rise in the social scale, is that of becoming, by a course of economic management and saving, the proprietor of a house, in which he and his family may dwell in respectability and comfort”. (Chambers, 1863, p.1)

“The moral and social effects of such a society are not to be overlooked. The best security for a comfortable and contented people is the possession of property, in the acquisition of which this society will aid industrious and persevering persons. The directors feel confident, from past experience, that it will tend, as similar institutions have done, to cement that union of interest and good-feeling between the operative and the wealthier classes which has happily commenced; the effects of which must be to render the rights of property more sacred, by making them better understood, and to diffuse a kindlier feeling and better understanding throughout the population of this industrial locality”. (Prospectus for the Birmingham Building Society, quoted in Chambers, 1863: 24; emphasis added)

Building societies throughout the past century Two features are relevant for us here

Long-term “cohabitation” of building societies alongside joint-stock banks in the UK

Resilience of the model in times of growing environmental homogeneity

First, a few numbers

Number of societies & members

1860 1880 1900 1920 1940 1960 1980 2000 20200

500

1000

1500

2000

2500

3000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

n. of societies (left axis) n. of members (in thd; right axis)

Source: Building Societies Association

De-mutualization in the building societies industry

Building society Year of conversion Subsequent moves Recent changesAbbey 1989 Taken over by Banco Santander in

1994Rebranded to Santander in 2010

Cheltenham and Gloucester

1995 Taken over by Lloyds Bank in 1995 Exists as trading name of Lloyds Banking Group

Halifax 1997 Merger with Leeds; merged with Bank of Scotland to form HBOS in 2001

HBOS taken over by Lloyds Banking Group in January 2009

Leeds Permanent 1997 Merger with Halifax (see above) Ceased to exist as a trading name

National and Provincial 1997 Taken over by Abbey national, part of Santander Group, in 1997

Ceased to exist as a trading name

Woolwich 1997 Taken over by Barclays Bank in 2000

Exists as trading name of Barclays

Alliance & Leicester 1997 Acquired by Santander Group in 2008

Rebranded as Santander in 2010

Northern Rock 1997 Nationalized in 2008 Split and sold to Virgin Money in 2011

Bristol & West 1997 Acquired by Bank of Ireland in 1997

Assets successively transferred to Britannia

Bradford and Bingley 2000 Part-nationalized in 2008; sold to Abbey (Santander Group)

Rebranded to Santander in 2010

Source: Building Societies Association

British building societies pre-crisis share of the mortgage lending market, 1998-2007

01/10

/1998

01/02

/1999

01/06

/1999

01/10

/1999

01/02

/2000

01/06

/2000

01/10

/2000

01/02

/2001

01/06

/2001

01/10

/2001

01/02

/2002

01/06

/2002

01/10

/2002

01/02

/2003

01/06

/2003

01/10

/2003

01/02

/2004

01/06

/2004

01/10

/2004

01/02

/2005

01/06

/2005

01/10

/2005

01/02

/2006

01/06

/2006

01/10

/2006

01/02

/2007

01/06

/2007

01/10

/2007

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Source: Building Societies Association

Monthly changes in total sterling lending to private clients, by bank category (in £ milion)

01/09

/1997

01/02

/1998

01/07

/1998

01/12

/1998

01/05

/1999

01/10

/1999

01/03

/2000

01/08

/2000

01/01

/2001

01/06

/2001

01/11

/2001

01/04

/2002

01/09

/2002

01/02

/2003

01/07

/2003

01/12

/2003

01/05

/2004

01/10

/2004

01/03

/2005

01/08

/2005

01/01

/2006

01/06

/2006

01/11

/2006

01/04

/2007

01/09

/2007

- 10,000

- 5,000

0

+ 5,000

+ 10,000

+ 15,000

+ 20,000

+ 25,000

+ 30,000

+ 35,000

MBBGbuilding societies

Source: Bank of England

Non profit maximizing organizations in a liberal market economy Why does it sound like a paradox? Answer: the peculiar “logic of action” embedded in liberal

market institutions The question then becomes: how can organizations

survive/prosper in an environment that is a priori hostile? 3 sub-questions

How can we assess that an organization survives (against the “illusion of nominalism”)

How can we gauge the hostility of the environment? How do we think about the relationship between organizations

and their environment in a dynamic fashion? Broader implication: how can we understand the

persistence of alternative paths in (similarly) constraining institutional environments?

The research questions How can Building Societies exist/resist in an

environment favorable to joint-stock banks? How can one understand this “persistent

alternative” in the broader context of systemic institutional change? In other words, to what extent has the

“alternative” business model embodied in BS persisted over time?

2. Theory

Multiple theoretical approaches To answer the question above one needs to

turn to (at least) three strands of theories:1. Theories on “national varieties of capitalism”2. Theories of institutional change3. Organizational ecology theories

Each group of theories is necessary but insufficient to answer the question

Building on all three one can formulate specific hypotheses about the case

1. Theories on “national varieties of capitalism” Starting point: concern with simplistic accounts of convergence of

national systems Empirical reaction: persistence of national varieties of capitalism

Various theoretical efforts aimed at explaining this persistence Hall and Soskice (2001): institutional lock-in & comparative institutional

advantage Governance literature (Campbell & Lindberg, 1991)

How the system hold together: institutional complementarities Reinforcing & compensating complementarities (Crouch, 2010; Campbell, 2011)

Key problem / limitation: systemic coherence Two expressions: logic of congruence & functional heterogeneity

When a “logic of congruence” is assumed to exist (Crouch, 2005), any incongruence can therefore be dismissed as irrelevant, temporary, or an artificial state created by state policies Which somehow relates to the implicit assumption of a “natural” coherence

unencumbered by state intervention On the other hand, heterogeneity (for instance: of organizational forms) might be

simply seen as functional to the system, since it provides adaptability (Grabher & Stark, 1997; Quack & Morgan, 1999)

Institutions, agency and behaviour Two additional (interrelated) problems with this literature

The problem of change The problem of agency

The issue of institutional change is tackled in the next group of theories. What about agency?

Recent developments in institutional theory have somehow started to address this issue For instance, Hall and Thelen (2009): institutions should be seen

as “sets of regularized practices with rule-like quality” “Logics of action”

Jackson & Deeg (2006): “typical strategies, routine approaches to problems, and shared decision-making rules that produce predictable patterns of behavior by actors within the system”

Etienne & Schnyder (forthcoming): logic of action as a set of goal / motivations

2. Theories on institutional change Dissatisfaction with static theories in the VoC vein has led

scholars to develop their own theories of institutional change Three hypotheses

Institutions are always changing The stability of institutions “is the stability of the person riding a bicycle,

not that of the person standing still” (Crouch, 2010) A key factor in institutional change has to do with conflicts

Since institutions have distributional effects, conflicts around distribution may (always?) arise (Thelen & Steinmo, 1992; Thelen, 2010)

Incremental institutional change is paramount Five mechanisms: layering, drift, conversion, exhaustion, displacement

(Streeck & Thelen, 2005; Mahoney and Thelen, 2010) Two problems

Is all change “institutional”? We are looking at organizations here Agency

Path dependency theories Although path-dependency as been identified by “institutional change”

scholars with the static models within the VoC literature it might still be relevant here

In particular, Pierson’s and Mahoney’s elaborations on increasing returns Path reproduction is the outcome of increasing returns that might be related to

the legitimacy of the path/actions/organization (Pierson, 2000) Problems with the PD literature

Narrowing of definition of PD (Vergne & Durand, 2010; Sydow et al, 2009;Schreyogg et al, 2011) Path as the adoption of “social standards” shaping the choice of actors (Dobusch &

Kapeller, 2011) Way out:

Re-introducing agency: emphasis of path creation (Garud et al., 2010) “Self-reinforcing” mechanisms are strategically manipulated / “contingencies” are

emergent contexts for action Mechanisms of path reproduction can actually lead to disruption as well

Beyer (2010)’s emphasis on conformity and legitimacy Redundant institutional repertoires (Crouch & Farrell, 2004)

3. Organizational ecology Primary concern: to explain the evolution of an

organizational field 3 bases

Evolutionary economics (Nelson & Winter, 1982) Changes in the population of organizations occur because of

evolutionary mechanisms such as selection & adaptation (Hannan & Freeman, 1977)

Changes in the form of organizations (DiMaggio & Powell, 1983)

Various problems Lack of agency in some accounts Under-theorizing of the “environment” (or the “structuration

process”, in DiMaggio and Powell) Often reduced to a measure of “market selection” (see Bottazzi et al,

2010)

Thrifts in the “age of the corporation” in the US A few works have made more interesting use of evolutionary insights in a

case that is very similar to the present research concern Agency and organizational ecology: the role of social movements

Thrifts in XIXth century US represent a form of “countervailing power” to corporate capitalism (Schneiberg, 2011)

They could persist thanks to social movements (Schneiberg, 2007, & 2012) There’s agency! “Institutional change can rest fundamentally on the combination of standard diffusion

processes and collective mobilization in support of new practices.” (Schneiberg, 2012) Reflexivity: institutional innovation, deliberation and experimentation (Berk &

Schneiberg, 2005) Values and logics of action

Schneiberg (2007) & Schneiberg et.al (2008) explain that social movements embraced thrifts because the latter carried “ideas of community, economic self-sufficiency, local ownership, regional development and workplace democracy”

Alternative to shareholder-based views A different view of the “system”

US capitalism viewed as “heterogeneous and loosely coupled set of institutional projects, paths, and systems” (Berk & Schneiberg, 2005)

What is missing here? The State

Organizational ecology, ideas and institutions Co-evolution of institutions and organizational forms

Focus on changes within the US thrift industry According to Mason (2012), this evolution marks the end of the

“cooperative spirit” Successive institutional logics embodied in different

organizational forms “Theories of Moral Sentiments” (Haveman & Rao, 1997) i.e. “a system of logic and ethics that combined stoic prudence and

self-command with Christian benevolence” Recursive relationship between institutions and organizational

forms Key explanatory variables: demographics and social

movements Limitation

Again, under-appreciation of the role played by national / state institutions

Hypotheses1. British building societies have embodied, since their origins, peculiar logics

of action 2. These logics of action were at odds with the prevailing higher-order logics of

action at the time of their origin3. At the same time, however, state institutions actually allowed for the

persistent existence of different logics4. In addition, over time, BS as alternative organizational forms have been

sustained by multiple types of social mobilization5. Their very persistence over time (“historical embeddedness”) have

provided building societies additional resources – additional legitimacy6. The extent to which BS were successful at embodying a continuous

alternative reflects their ability to strategically use their historical legitimacy & social mobilization to legitimize their peculiar logics of action in changing contexts – while the very existence of these peculiar logics of action fed back into the heterogeneous nature of the context itself

7. The looseness of the selection environment associated with state policies is, itself, a variable – and one might argue that neo-liberalism precisely restricts the heterogeneity of organizational forms by favoring the maximum dominance of one logic of action

3. Research strategy

Two lines of research1. Long-term research into the “persistence” of

the BS path, from the XIXth century until the 1980s

Archival work2. Research on organizational and institutional

changes in the BS industry between the 1970s and 2007

Archival work Interviews

4. Illustration/interpretation

a. The State and the origins of the building societies movement The movement started off in a pub

A “bottom-up” creation However, very soon, state legislation & policies intervened

1834 Friendly Societies Act recognized the existence of BS 1836 statute

Delineated the characteristics of building societies (their mutual nature, their liabilities) and the kinds of mortgage lending they could engage in

1874 Building Societies Act Precise definition of what societies should do Recognition of the banking activities of BS Regulation of the industry: financial information to be sent to the

Registrar’s Office 1894 Act

“very stringent auditing regulations” (Hellman, 1933) At the same time, favorable tax treatment of the small

deposits & savings accounts at Building Societies

Effects of state regulation: strengthening BS’ business model “the Building Societies Acts themselves

provide such stringent restraints on the method of operation of the societies that good conduct is almost inevitable… One great advantage of these restraints has been that building societies have hardly ever been used in our generation as instruments for exploiting the public” (Chief Registrar Sir George Stuart Robinson, quoted in Hellman, 1933)

b. Building Societies before and after the 1986 Act By the early 1980s, differences of opinion

within the BS industry Some actors (within and outside the industry)

criticize BS for their “legal and accounting mentality” (Marshall, 1997)

In the 1990s, “carpetbaggers” movement puts pressure for demutualizing BS Some BS react by setting up defenses

Such as the Charitable Foundation set up by the Leeds BS

c. Corporate governance, the State, and building societies Revised UK Corporate Governance Code released by

the Financial Reporting Council in September 2012 Addressed to publicly quoted companies However, in its Building Societies Regulatory Guide

(BSOG), the FSA states that building societies “should have regard to the Code when establishing and reviewing their own corporate governance arrangements” (section 1.3.2 G of BSOG)

The Code is driven by the will to improve communications with shareholders, but its function is explicitly stated to “help boards discharge their duties in the best interests of their companies” Interestingly, far away from the maximizing shareholder

value theory!

5. Implications of the research

A broader agenda This nascent/elusive/partial theoretical

framework could be used to understand the existence/persistence of alternatives in other fields

Indeed, in many fields, alternative, secondary paths seem to exist besides primary paths Corporate law Financial regulations Corporate governance…

In addition, it might help us to re-think LMEs and the relationship between the various “logics of action” inside them