2013

Issue 15

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BoardWorks International
Issue 15, 2013

Distinguishing Owners from Customers

The New Zealand Government has begun selling minority stakes in a range of power generation companies that were previously fully Crown owned. It intends that most of the available shares should be sold to the public. For many who successfully bid for shares it will be their first direct shareholding in a publicly listed company. However, there is a problem with many new and inexperienced shareholders. A director of a formerly Crown-owned company recently observed (on the basis of experience) that many do not understand the difference between being an owner and being a customer. When they go the company AGM for the first time it is more likely it will be to complain about their power bill than to congratulate their board on improving their returns as shareholders!

Boards must adopt an ownership perspective. They have no choice. In a legal and practical sense directors are a sub-set of the owners. It is to an organisation's owners that directors are ultimately accountable. It is the shareholders and other owner equivalents (e.g. members of an incorporated society) who determine (in theory at least) who is on the board. Owners also have reserved powers that exceed those of the board. For example, they determine constitutional issues through general or special meetings. 

The board acts for all owners, including those who are absent. As a small business grows and needs more capital more shareholders are introduced. At some point, however, not all shareholders will want to be on the board or, if the board is to be kept to a reasonable size, be able to be at the table.

An owner's perspective

Central to ownership is a concern for asset value. Something you own is usually yours to do what you want with it.  With most assets it is likely you will want to maintain and perhaps even increase their value.  You are likely to be concerned with each asset as a whole even though some parts of it may not be to your liking (e.g. the location of the second bathroom in your house). You want it to continue to be useful (e.g. your home entertainment system) and safe (e.g. your car). You are also likely to care for your asset's value beyond your own personal use of it because you might want to sell it at some stage. It is only when it becomes less valuable - perhaps because it is damaged or worn out - that you might care less about it (i.e. when it ceases to be an asset).

Identifying the owners (i.e. shareholders) of a commercial entity is easy. It is a matter of fact even though some shareholders' ownership interest may be nominal at best (1). By contrast, in non-commercial entities it is easy for owners (or their equivalents) to become confused with other types of stakeholders. For example, it is common for major funders to act, and expect to be treated, like de facto owners because of the impact they can have on the organisation's well-being. While such stakeholders have an important, perhaps even a determining interest in the organisation it is not a true ownership interest. Unless stakeholders can be seen to care for the value of the organisation beyond its ability to meet their own needs and desires they do not have an ownership interest (2).

Avoiding confusion between owners and customers

It is important to avoid confusion between owners and stakeholders who are 'merely' customers. It is interesting how this confusion was avoided by a local authority we worked with in Texas. At the start of each council meeting 30 minutes was allowed for members of the public to speak to their interests or concerns. Council members saw that as valuable opportunity to take the pulse of their community and to obtain specific feedback. However, the Council was also quite clear about the conversation they wanted to have with their citizens - the ownership one. To remind them of this they had a question taped to the back of the nameplates that sat in front of them as they faced their electors: 'Is this person speaking as an owner or as a customer?' If customer issues were raised the Mayor politely, but firmly, directed speakers to use well developed processes for lodging 'customer complaints' and suggestions.

We can use the subject of public transport to illustrate the distinction this council was trying to make. Most public transit systems belong directly to the community they serve - usually through some form of local or state government. From a governance perspective the transport system should be thought of as no more than a means to an end. Owners' interests are collective and the rationale for investing in a public transport service is that the community wishes to enhance the functionality of its city. For example, does the public transport system move people around the city efficiently? Does it support the desired pattern of urban growth? Does it keep road congestion down? Are transport subsidies well targeted compared to alternative forms of public expenditure? Is the system financially self-sufficient?

As individuals, citizens may or may not ride the system's trams, ferries, trains or buses but whether to do so is likely to reflect their thinking as a 'customer'. For example, does the timetable suit? Are bus stops are conveniently located? Are bus drivers friendly and helpful? Is the ride comfortable? Are the fares reasonable and affordable?

The intention of our Texan client was not to diminish customer concerns but, by characterising the fundamental differences between owners and customers, to be sure they were engaged in the right conversations. Customer satisfaction is vital from the perspective of management but a governing body faces wider and higher level questions.

A board's responsibilities are even higher than to (individual) owners

Directors' fiduciary duties are owed to the organisation they govern. When the interests of the organisation and those that appoint or elect them (i.e. owners) conflict, the directors' first duty is to the wellbeing of the organisation. This means that sometimes a board must protect owners from themselves. A responsible director must take the view that 'I support decisions my owners would support if they:

Not getting this distinction between owners and customers right is problematic. Boards get drawn into the wrong types of conversation and they often make poor decisions. Because they are drawn into customer-facing conversations they also compromise their ability to hold their chief executives accountable for delivering customer service.

 

Notes

(1) This is more nuanced in a large listed company which is likely to have many shareholders who are only nominal owners. They are investors at best and perhaps even just traders with only a fleeting interest in the company.

(2) In preparing this article I am in debt to one of the better explanations of the role and nature of ownership in a governance context (See Caroline Oliver (2009). Getting Started with Policy Governance. San Francisco, Jossey-Bass)

 

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