- Posted by David Gray
- On June 20, 2019
- Owners and Ownership
It is sometimes said that owner-accountability is the holy grail of governance. Boards are encouraged to understand who their owners are, to differentiate between legal owners and moral owners, to connect meaningfully with those owners in order to understand their values and aspirations, to translate those values and aspirations (ultimately) into organizational performance, and to hold themselves accountable to the owners for their success in doing so.
Obviously, a key part of organisational performance is ensuring, on behalf of the organisation’s owners, that its customers are also satisfied.
In most governance scenarios, it is fairly easy for a board to distinguish between the organisation’s owners and its customers. For example, the owners of a for-profit manufacturing business are its shareholders, and its customers are those who purchase its finished products. The owners of a not-for-profit social services agency are the community in which the agency operates, and its customers are those individuals who receive its services.
In other scenarios, however, it’s not quite so easy. For example, the owners of a country club are the individuals who have purchased memberships in the club, and its customers are the same individuals. The owners of a federation of professional service firms are the firms which comprise the federation, and its customers are the same firms. These kinds of scenarios aren’t uncommon.
For the boards of such organisations, there are some special challenges. The board is a subset of the owners and is accountable to these owners for the effective governance of the organisation, but the effective governance of the organisation includes ensuring that the needs of its customers, who are also the owners, are satisfied.
The particular skill which the boards of such organisations need to learn is to limit their engagement with their owners to owner-relevant issues—typically to do with the longer-term impact the organisation is intended to have on behalf of those owners—and to leave dealing with the organisation’s customers—who also happen to be its owners—to the CEO. Granted, this distinction may seem somewhat academic, but a board which fails to make the distinction will quickly find itself mired in customer issues that are really none of its business.
You might be wondering, how can the interests of the owners be so different from those of the customers, if the two groups are one and the same? Actually, the difference can be quite significant. The owners of the country club have an owner-relevant interest in the strength of the club’s brand, the projected future value of the club’s assets and investments, trends in the market for country-club memberships, and so on. The customers of the country club, on the other hand, have a customer-relevant interest in the quality of fixtures and fittings in the clubhouse, the nature and variety of entertainment and recreation services available to club members, the temperature of the swimming pool, and so on.
Of course, there will be occasions on which customer-relevant issues need to be escalated to the governance level for whatever reason—perhaps a catastrophic failure in service delivery requiring the attention of the board. The boards of such organisations should ensure that there is a pathway for such issues to be escalated from the management domain to the governance domain, provided such a pathway is expressed in terms of the CEO’s obligation to produce certain outcomes and to comply with certain limitations.
An additional challenge is that board members themselves may also be customers of the organisation or employees or board members of customers. In such situations, board members’ day-to-day interactions with the organisation will typically be as customers, so there is a strong temptation for board members to bring a customer perspective, instead of an owner perspective, to the board table. This is where effective governance process policies, especially relating to governance philosophy, the board’s job description and the role of the chairperson, are important.
A related issue is the temptation for the boards of such organisations—and their executive teams, for that matter—to bias their decisions and actions towards board members’ organisations. A friend of mine is a senior manager in a federation of professional firms which provides services to its members. The federation’s board comprises individuals drawn from member firms, who also sit on the boards of those firms. My friend is constantly dismayed by the tendency of the federation’s executive team to bias either the quality or the quantity of services provided by the federation towards the board members’ firms. It’s a natural tendency (sometimes called ‘knowing which side your bread is buttered on’) but it can end up having an undesirable effect on the integrity and reputation of the federation and an adverse impact on its other members.