The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

Correspondence: 28/01/2002 - to John Tiner, FSA - The governance of Equitable in particular, and big mutuals in general
38 Swains Lane
N6 6QR.

Mr. John Tiner
Managing Director
Financial Services Authority
25 The North Colonnade

Canary Wharf

London E14 5HS

T: 020 7676 1000

F: 020 7676 0030

28th January, 2002.

Dear Mr. Tiner,

The governance of Equitable in particular and big mutual in general

The past difficulties of the Equitable, and the issue of failure to provide adequate information to which I have drawn your attention in recent letters, are due in part to shortcomings in the governance of Equitable, which in turn reflects the general issue of the weakness of the governance of mutuals.

The large mutuals have outgrown their origins as small groups of people banding together to pursue a common purpose, and they are now large organisations pursuing multiple purposes. In the process - along with importing mainstream corporate culture and changing titles from "General Manager" to "Chief Executive" - the basis of mutuality has been lost sight of. The Equitable, like many (if not all) mutual life offices, is constituted as a company, and this leads people to think that the governance and Board behaviour of a mutual should be like that of a public limited company (plc). But a mutual life office - even more so a closed mutual, which is in effect a private investment club - is very different to large plcs. In contrast to the Equitable, their boards conduct genuinely confidential businesses; they are subject to some sorts of checks from institutional shareholders; and their shareholders can get out at low transaction cost if they so wish.

In contrast even at the best of times the checks on mutuals are weak1, and in the case of Equitable are "designer" weak. For a start the Articles of Association impede direct action by members.

The obstacles to direct action by members

There is nothing in the Memorandum and Articles of Association of The Equitable that provides for members either to put a resolution to the AGM or to call for an extraordinary general meeting (EGM), and so members have to fall back on the provision in the Companies Act that an EGM must be called if holders of 10% of the shares require it. Although getting support of 10% of the votes of a FTSE company only requires the fund managers of a few major institutions to telephone each other, getting 10% of The Equitable's voting members to support a resolution would require a mail shot to all members. The cost of sending a letter to 350,000 members would be of the order of £105,000, which is prohibitively expensive for a group of members or an action group dependent on, at best, modest subscriptions. We note that the Building Societies Act 1986 prescribes the maximum number of members required to put a resolution to the AGM or to call an EGM on a sliding scale by size of Society. For the largest Society, The Nationwide, with 6 million members the maximum number of members is 500.

The voting for directors can be "arranged" so that those whom the chairman and incumbent Board want elected are voted in. In 2000, Mr. Edward Doogan, a member who expressed dissatisfaction with its investment performance, put himself forward for election to the Board. The chairman wrote a letter to members stating "Your Board strongly recommends that you vote to re-elect the existing directors who are retiring at the meeting?and against the resolution to elect Mr. Edward Doogan?the facts quoted in his candidate's statement are correct but are in our view selective". Mr. Doogan won 241,9392 votes for and 246,619 against, which was an achievement given the way the voting is run, an issue to which I now turn.

At first sight the results of the vote at last year's AGM for new directors appear to show overwhelming support for the recommended directors, each of whom gained an average of 386,400 votes and 73,698 against, and little for the "independents", each of whom gained an average of 81,616 votes and 376,698 votes against. But further analysis shows that the voting results were largely dependent upon the chairman's mandated proxy votes and his free proxy votes3. The majority of votes cast for those elected and against the "independents" were proxy votes cast by the chairman.

The voting arrangements are a direct consequence of the form of voting by resolution for each director, which requires members to vote for and against each resolution and allow proxy voting. Indeed if a voting paper is signed, but the votes are left blank, the voter is deemed to give the chairman power of proxy. The Building Societies Act 1986 allows for both voting by resolution and postal voting, which the Nationwide adopts. Under postal voting the yes votes for each candidate are totalled and those with the most votes are appointed. There is no proxy voting and signed blank forms are void).

Selecting a Board

The foregoing highlights the fundamental problems with elections to large mutuals, namely:-

  • few can be bothered to vote - even in the well publicised condition of the Equitable only 12% of the members bothered to vote at the last AGM (which compares very unfavourably with the 1.8m out of 6m members of Nationwide who voted in the last elections for directors)

  • the voters do not know what the candidates are like and in consequence many "subcontract" their voting rights either to those whom the chairman and Board recommends or to the chairman as a free proxy

Although we accept that the chairman and the incumbent Board should have a say in the election of some of the Board members (and indeed they have a common law obligation to recommend a suitable Board for carrying in a company's business), we do not believe that the incumbent Board or the chairman should have what amounts to patronage of them all. It may result in packing the Board with trusties, all of whom are to varying degrees beholden to the chairman for tenure.

Strengthening accountability and governance

We believe there is a need for an institutional framework which strengthens the governance of mutuals and ensures that they are directed by genuine members, and that there should be a number of directors who are elected on a "free vote" and who are independent of the chairmanand incumbent Board. Their role should be clearly to act as a "check and balance" and if necessary to "throw grit in the system". We recommend that there should be legislation covering (at least) mutual life offices that:-

  • Requires that the Memorandum and Articles of Association are written to allow reasonable opportunity for members to put resolutions to AGMs, and so that a reasonably small number of members can call EGMs. For example in the case of Equitable it could be 250 members, which would provide a serious enough hurdle to eliminate vexatious motions

  • Requires that directors have a minimum value policy holding of, say, £50,000 and also that the values of all directors' policy holdings are published in the Annual Report and Accounts

  • Requires that three or four "independent" directors are chosen on a completely free vote with no chairman or Board recommendations on the candidates for these positions and no proxy votes cast by the chairman4. This provision is analogous to section 16 of the Pensions Act of 1995 which requires that a third of the trustees of a company pension fund should be members of the fund. "Independent" candidates should be entitled to speak at the AGM if they wish

  • Bans negative voting, which is a consequence of the Companies' Act provision of putting a resolution requiring a for and against vote. The process can confuse members, and could lead to idiosyncratic results. The voting might be that members are provided with a list of X names and they vote for Y of them (Y < X)

  • Defines the responsibilities of the appointed actuary to the members. The position should be independent of the Board and definitely not a member of the Board. (It is a recent trend for executives of mutual life companies to be in the Board). In addition the role of auditor should be extended to provide an actuarial audit

  • Analogous to the provisions in the nationalisation statutes, requires that the Board should include a mix of specified relevant skills such as investment management, finance, legal, actuarial, information technology, and customer relations, possibly human relations

I copy this letter to Mr. Sandler and the EMAG website.

Yours sincerely,


1Weak governance facilitates a tendency for mutuals to be hijacked by "managerialist interests" at the expense of the interests of the mutual owners. For example:-

  • in the early 1990s the Nationwide Building Society pursued a managerial objective of growth by offering new investors higher rates than existing investors, yet (along with mortgagees) the later were notionally the owners of the Society

  • in 2000 Standard Life reportedly spent £10m of its members' money persuading them that the Society should remain a mutual. A report of the annual general meeting by the Financial Times (28 June 2000) quoted one member referring to a "biased and inflammatory campaign that put one point of view and not the other"

  • The Equitable ran a highly bonused sales force whose incentive was to sell policies regardless of whether they were in the interest of the members. The Equitable's provision of £153m for pensions mis-selling, which although fortunately modest compared with some other life offices, illustrates the incentive to sell. More recently the incentive to sell may underlie cases of mis-selling when sales people were claiming that prospective members would be insulated from the consequences of the House of Lords decision

2Note that members are entitled to up to ten votes each depending on the value of their policies - with inflation most have ten.

3 Figures showing influence of votes on which Chairman is mandated as a Proxy as against those where the Chairman exercises his proxy vote at his own choice.

Analysis of the average votes for each incumbent Board member

Total     Of which


  mandated to chairman chairman's proxy votes
  No. % No. %
386,400 278,415 72 101,818 26

Analysis of the average votes against each incumbent Board member

Total     Of which


  mandated to chairman chairman's proxy votes
  No. % No. %
376,698 152,798 41 203,936 54

4In order to reduce the risk of manifestly insensitive candidates self-promoting themselves, there may be a case for a procedure to prepare a list of suitable persons similar to the Occupational Pensions Regulatory Authority's list of independent trustees - admission to the list might be controlled by the FSA. Companies would be required to circulate the members with details of the candidates who had been put forward for Board vacancies together with their statement of why they should be elected, and each could prepare a video that could be played from the website.