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Answer on Economics of Enterprise Question for Jessica Yashiyi

Question #3288

How can demutualization contribute to a nation's stock market.

Expert's answer

Demutualization is the process by which a customer-owned mutual organization (mutual) or co-operative changes legal form to a joint stock company.[1] It is sometimes called stocking or privatization. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form of shares in the successor company, a cash payment, or a mixture of both. Mutualization or mutualisation is the opposite process, wherein a shareholder-owned company is converted into a mutual organization, typically through takeover by an existing mutual organization. Furthermore, re-mutualization depicts the process of aligning or refreshing the interest and objectives of the members of the mutual society.
Demutualization is the process through which a member-owned company becomes shareholder-owned; frequently this is a step toward the initial public offering (IPO) of a company. Insurance companies often have the word "mutual" in their name, when they are mutually owned by their policy holders as a group. In recent years, however, there has been a strong trend for these companies to demutualize, converting to a shareholder ownership base. Generally, policy holders are offered either shares or money in exchange for their ownership rights. Because shares can be traded or sold - in contrast to ownership rights, which can not - demutualization increases the possibility of profit for those involved, and tends also to benefit the economy.

Demutualization was originally used to refer specifically to this conversion process by insurance companies; the term has since become more broadly used to describe the process by which any member-owned organization becomes shareholder-owned. Worldwide, stock exchanges have offered another striking example of the trend towards demutualization, as the London Stock Exchange (LSE), New York Stock Exchange (NYSE), Toronto Stock Exchange (TSE) and most other exchanges across the globe have either recently converted, are currently in the process, or are considering demutualization.

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