Reasons for demutualisation

Historically, most stock exchanges globally (including the ZSE) were established as mutual entities where the members enjoy rights of ownership, decision-making and trading. Over time however, technological advancement, globalisation, growing competition and concern for investors’ interests all put increasing emphasis on the need for stock exchanges to be cost-efficient, transparent and more widely accountable which led to the concept of demutualisation.

Demutualisation induces a change in the objectives of the exchange. The exchange becomes a profit oriented entity focused on maximizing shareholder value. This induces the management of an exchange to be very pro active and to engage in more revenue generating measures to improve performance.

As a profit oriented firm, a Demutualised Exchange paves way for majority based decision making accountable to shareholders with a greater focus on the strategic interests of the exchange over the self interests of the members.

Stock exchanges owned by members tend to work towards the interest of members alone, which could on occasion be detrimental to rights of other stakeholders. This inherent conflict of interest in a mutual exchange is also recognised as a significant competitive handicap.

Separation of ownership and management from trading rights of members can therefore lead to a balanced approach, remove conflicts of interest, create greater management accountability, and take into consideration the interest of all other stakeholders.

Among the more practical reasons for demutualisation of many exchanges has been the fact that the mutual structure generally limits an exchange’s ability to mobilise capital, which, among other things, could be used in systems upgrade and to attract high-calibre personnel.

In simpler terms, the drive towards demutualisation of stock exchanges has therefore been mainly as a result of their need for capitalisation, more flexible decision making, quick response to a fast changing and competitive market place, improved accountability and transparency. Therefore a demutualised exchange would be better equipped to face market competition than a mutual structure.