Olivier Butzbach London Center for Corporate Governance & Ethics Birbeck , University of London

1. In search of alternative paths within liberal market economies: the case of British building societies Olivier Butzbach London Center for Corporate Governance & Ethics Birbeck, University of London December , 7 2012

2. 1. The starting point

3. 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

4. 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)

5. 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)

6. 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

7. Number of societies & members Source: Building Societies Association

8. De-mutualization in the building societies industry Source: Building Societies Association

9. British building societies pre-crisis share of the mortgage lending market, 1998-2007 Source: Building Societies Association

10. Monthly changes in total sterling lending to private clients, by bank category (in £ milion) Source: Bank of England

11. 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?

12. 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?

13. 2. Theory

14. Multiple theoretical approaches • To answer the question above one needs to turn to (at least) three strands of theories: • Theories on “national varieties of capitalism” • Theories of institutional change • 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

15. 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)

16. 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

17. 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

18. 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)

19. 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)

20. 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

21. 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

22. Hypotheses • British building societies have embodied, since their origins, peculiar logics of action • These logics of action were at odds with the prevailing higher-order logics of action at the time of their origin • At the same time, however, state institutions actually allowed for the persistent existence of different logics • In addition, over time, BS as alternative organizational forms have been sustained by multiple types of social mobilization • Their very persistence over time (“historical embeddedness”) have provided building societies additional resources – additional legitimacy • 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 • 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

23. 3. Research strategy

24. Two lines of research • Long-term research into the “persistence” of the BS path, from the XIXth century until the 1980s • Archival work • Research on organizational and institutional changes in the BS industry between the 1970s and 2007 • Archival work • Interviews

25. 4. Illustration/interpretation

26. 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

27. 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)

28. 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

29. 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!

30. 5. Implications of the research

31. 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