Saturday, July 18, 2009

(No.40) Greed,the mindless 'free market' & mutuality

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Since the appearance of my previous column (No.39) on "Sun & Manulife: dull perhaps but not dumb", several former colleagues wondered why I favoured Sun Life in my comments. To quote one: "I often describe Sun Life as "huge" but it is only half the company Mutual Life was." [Sun Life took over a demutualized Mutual Life of Canada, by then renamed Clarica Life.] The question was interesting. After all I had been a public critic of Sun Life for a great deal longer than the period I worked for it. 

My response in part was that "my comments about Sun's current share value were prompted by what I regard as ridiculous comparisons with Manulife by the 'talking heads' of financial services as well as blindness for too long about Manulife and the management that ultimately made its financial status a public issue. They were not prompted because I consider Sun Life to be the model. As you say, Sun is not the old Mutual Life but then neither was Clarica Life which is why, even though I was an officer of Mutual Life, I refused to endorse or support Mutual's demutualization. " 

I have written previously that for me, as a participant in the Canadian life insurance business, 'the day the music died' was Dec 8,1997 when the intended demutualization of the the Mutual Life of Canada was announced. It foreshadowed not only the unnecessary and (for its par policyholders, among others) undesirable end of Canada's first and finest mutual life insurance company but also guaranteed the demutualized company's eventual disappearance. 

Mutual's board and senior management were uninterested in having Ottawa include Mutual Life under the feds' takeover protection, calibrated so that (among the big Canadian mutual companies) it protected only Sun Life and Manulife. So, as it turned out, once Mutual Life had demutualized the inevitable end of its 130 years of existence could be and was made real on Dec 17, 2001 when the acquisition of Clarica Life by Sun Life was announced.

During most of my years in the Canadian life insurance business, i.e., the years prior to the rush by the big life companies to demutualize and the subsequent financial aggrandizement of their senior managements, stock company rules and objectives had not yet made management by quarterly shareholder dividend the priority it has now so widely become. A desire to manage a large Canadian life insurance company in the long term interests of a company's par policyholder-owners had not yet disappeared -- as a potential reference point for senior management --  from the operations of many of the larger life companies in Canada and the U.S.

Looking to the future in those years could still be a hopeful process rather than a reflection of an ongoing search for repetitive novelty with which to impress the 'groupies' of company quarterly results among financial journalists, rating agencies and others. Most possess only a nodding acquaintance at most with the reality of the various sectors of the North American life insurance business as well as with the nature of the mutually beneficial long term relationships companies could have with both policyholders-owners and those by whom they were sold insurance.

It was once fairly common to have mutual insurance companies (i.e., companies owned by their policyholders rather than by shareholders) denigrated in the financial services world by the mindless 'free market' ideologues who considered anything other than a stock company to be inferior or defective. The meltdown in the financial services world was a crash brought about by the corporate class, too many of whose members espoused financial codswallop and whose greed masqueraded as financial sophistication and support for 'market efficiency'. I am not hopeful that the recent catastrophe will prompt within big financial institutions much more than the further manifestation of the sort of superficial and self-serving thinking which helped  produce it.

I do not amend my comments in No.39 about Sun Life's under-appreciated share value and financial probity. While I continue to disagree with aspects of Sun's operations I think its senior management led by CEO Donald Stewart will continue to operate the company in a way that augurs well for its ability  to meet its future obligations to clients, agents, staff and pensioners.

You may think: that is a modest sort of praise. It actually carries genuine substance.  Indeed it is considerably more than I am prepared to say (all the more so given the 'post-meltdown' revelations) about any number of other financial services companies in the U.S. and in Canada. 

God save us all from the malign consequences if the 'best and brightest' on Wall St. and Bay St. are able once again to hold so much sway in our financial system. 

Alastair Rickard