Ludo Van der Heyden, INSEAD professor, talks about an owner’s role in corporate governance, the necessary qualities, and the primary mistakes that business owners make.
In this article, I would like to discuss the role of an owner in corporate governance, what qualities an effective owner should have, and what the dividing lines are between the owner strategy, investment strategy, and business strategy, as well as about the primary mistakes that company leaders make.
Owners often find it difficult to define their role in the business: they mistakenly behave like executives, investors, and even managers. One of my clients regularly reminds his CEO that he’s not interested in anything other than a 25% return on his investment. And yet, he eagerly starts new projects, pushes, prods, and dismisses employees for his CEO, even gives him direct instructions concerning to whom and at what price he should sell products. This businessman, just like many other business owners, is lost between trees – ownership, investment, and management.
The main goal of an investor is to preserve and increase their capital (see Fig. 1). They specifically solve issues of fund allocation by determining timeline, risk appetite, and industry preferences based on the first two parameters. The goal of management is to ensure the stable and profitable growth of the company that they manage. Their efforts are aimed at a concrete organization or institution, while an investor is neutral to the institution.
So what is the role of the owner? Of course, all owners act as investors, and even managers. But I would argue that beyond that there is a distinct role for the owner of a business. If you ask appointed CEOs what they’d like from the owners in charge of their businesses, 95% of them will say “vision.” Specifically, answers to the following questions – What do we want to receive from our asset? Why did we invest in it? What are the terms and conditions? (The remaining 5% of CEOs will say “I want more money”). The role of an owner is to provide an effective framework for developing the business and managing it on behalf of those people. This can vary, and include different sets of parameters, including vision, long-term goals, limitations. I like the GVR format – Goals, Values, Rules.
With this in mind, an owner should concentrate only on his affairs. For example, one of the world’s best business owners, Warren Buffet, founder of Berkshire Hathaway, doesn’t sit on the board of directors at any of his portfolio companies. He only once agreed to chair the Board of Directors at Morgan Stanley, when the company was on the brink of bankruptcy. Warren interviewed three candidates, appointed a new CEO, and went back to Nebraska, with parting words of “if you have questions, call – but remember, you manage the company, I don’t”.
Another example of effective ownership is InBev’s company history. When a new generation of owners joined the company’s management, it was ranked 53rd in the world. The new owners asked themselves “should we sell the company, or try to make it a global leader?” The shareholders decided that they wanted to grow the business, which is why they broke up their monopoly on owning and attracting financial investment, which allowed them to purchase Anheuser-Busch and become one of the leading global beer producers. As a result, both the family owners and their shareholders won when the value of their reduced shares dramatically increased.
Let’s look at another example, that of the company Peugeot-Citroen. Over the course of several decades, the conglomerate produced vehicles that were repeatedly recognized as “car of the year”; however, in recent years, they’ve been unable to escape the vicious cycle of market and financial strains. The root of their problems didn’t have to do with their automobiles, but with their owners. First of all, the owners were completely unprepared to invest outside the borders of France: all of Peugeot-Citroen’s foreign deals were unsuccessful. But you won’t be successful in the automobile industry as just a national player. It’s important to anticipate what’s known as “country risk”, which is a macro task that the owner, in particular, should work out. Secondly, the owners, brothers Robert and Thierry, did not get along. One was the chairman of the company’s Board of Directors, and the other headed the holding’s Board of Directors. As such, one managed the investment company, and the other, its largest asset, and the two couldn’t agree on anything. The last two CEOs for the company could be considered a compromise between the two sides – they were financiers, without any experience in the industry, which speaks to how the owners cared more about money than their business.
All successful owners – Bill Gates (Microsoft), Bernard Arnault (LVMH), the Mulliez family (Auchan), and others – are examples of how long-term vision and innovation came from the owners, because they weren’t focused on managing the business, but dealing with larger issues – country risks, choosing partners, etc. As an owner, you shouldn’t be focusing on solving every problem, only the big ones!
American academic literature doesn’t pay much attention to questions about owners’ strategy or behavior – these issues simply remain outside the researchers’ field of vision, but that does not mean that they do not exist. Why does this happen? The reason for the myth about the “normal” company, predominating Anglo-Saxon capitalism. The myth about the “normal” company, which is, of course, public. But it’s completely not like that. In the US there are over 15 million companies, only 50,000 of which are public. Of course, those are the larger, leading businesses, but most companies are private and account for 50% of GDP, and provide 60% of employment. Business schools specifically talk about public companies more often because they have collected more information about them, and they tell these beautiful stories, but a huge number of successful companies are not public (for example Cargill, Mars, Dell).
So what is the problem with public companies? In this system shareholders don’t speak – they only buy and sell shares. They don’t talk about what they don’t like, they “vote with their legs”. Consequently, Anglo-Saxon capitalism, despite its alleged focus on defending the interests of business owners, actually reflects the interests of investors and traders. The ambiguous understanding of ownership in Anglo-Saxon capitalism has led to the increased role of management and the Board of Directors. In the US, legally, your responsibility as a Board member is to defend the interests of the company, not the owner. But the primary responsibility of the Board of Directors is to gather information about what the shareholder wants, and that he understands the value. Value is determined not by the market, but by the owner. In Japan, for example, the primary value is in maintaining employment. This is why Nissan practically went bankrupt in 2000: the company was putting off the inevitable reduction of half of its workforce, because they didn’t want to betray the Japanese business ideology of working behalf of employees.
In summarizing everything above, I’ll answer the questions posed at the beginning of the article.
What does an owner need to compete in the modern world?
- Long-term vision
- Patience and dedication to the business
- Reliable partners who share a common vision
- Focus on hired managers who act effectively
What are the primary actions and decisions of an effective owner?
- To determine the business’s vision, and your ambitions as its owner.
- To appoint managers and give them enough autonomy. Don’t tell them exactly how to implement a concept, just give them the ability to exercise their creativity and feel responsible for the result.
- To select Board members who can monitor progress and evaluate results.
- To be prepared to re-evaluate your framework and vision, because you could be wrong. You don’t have to know everything. Be open to changing people and partners.
What are the most common mistakes made by business owners?
- A lack of vision: Some owners say “I have no vision, I just want to make a profit each year”. That’s not a vision. And a lack of vision, sooner or later, will lead to losing the business, or losing control over it.
- A lack of your own story: Your company is your story that you’re telling the world. It embodies your values, beliefs, perception, but there is a class of owners (I call them “rock-n-rollers”) that don’t have a distinct understanding of their own history, which is why they’re constantly running around, wasting strength and resources.
- Incorrectly choosing partners: This is largely a problem of money – they bring in people who are often useless or even harmful. But lacking partners is in and of itself a mistake, because you’re depriving yourself of the opportunity to hear the opinions of others. Owners are often too focused on their own projects, therefore they are often biased and need an outsider’s opinion.
To be an owner is a talent; it’s an ability to create a vision and inspire others people to realize it. The ability to believe in other people is also its own sort of talent. Talent is the ability to recognize people who are trustworthy and dependable.
This article was published as part of the eighth issue of Talent Equity Newsletter "Effective Corporate Government".
To read all other journal issues, please follow the link to TE Newsletters page.
