Companies have choices about their governance structure, and traditional isn’t always best

A few years ago I was talking to a highly experienced chairman of a public company. I asked him this question: “If you had a magic wand, would you choose for this company to be a listed company? Or would you choose some other form?”

He thought about it for a few seconds, and then replied that he would not choose to be a listed company. That is a discussion that he should have gone on to have with his board.

People wrongly imagine that there is nothing that they can do with their business form. In fact it is something that the best boards and owners will keep under constant review.

Choice of an appropriate business form can enhance business success, and may well help a business achieve more trust. Yet this combination of legal status, ownership, governance and accountability rarely receives the attention it deserves from boards or owners of companies.

Good form

Look at Handelsbanken. A listed company with over 700 branches in 24 countries. Under a scheme introduced in 1973, when Handelsbanken meets its goals of higher return on equity than the average of the other listed Swedish banks, a profit share is paid to a foundation named Oktogonen, which keeps its fund entirely in Handelsbanken shares. Oktogonen now owns around 10% of Handelsbanken’s shares.

Today Handelsbanken is one of the fastest-expanding retail banks in Britain, with around 150 branches. In 2012 it was also one of the most profitable – its UK operation helped the Swedish parent generate a 13.7% return on equity.

That’s a good news example of a business that has aligned its business form. There are plenty of bad news examples of businesses which have failed to match their business form – legal status, ownership, governance and accountability – with their purpose.

Take the Co-operative Bank. Its purpose – which had differentiated it from other banks and helped it build a highly successful brand in the UK – has turned out to be poorly served by its structure of accountability, which delivered it a chairman ill-qualified to understand business risk.

Or take Southern Cross. Speaking at the launch of the new Tomorrow’s Business Forms report, Mark Preston, group CEO, Grosvenor, said: “The best recent example of a failure to match form to purpose must be the Southern Cross care homes collapse. The vulnerability of its residents and the rather obvious purpose of caring for them ought to demand … a business form and ownership suitable to conservative financing.”

Structure choices

The truth is that owners and boards have much more choice than they realise. Like Handelsbanken, they can change their ownership over time. Like Richer Sounds, a founder can chose to pass the business on to employees rather than family. Like Serco, when bidding for a particular public sector contract, they can set up a purpose-built hybrid structure which enhances their partners’ confidence and trust.

Customers, and clients too have a choice. According to one recent UK survey on tax avoidance from Christian Aid up to a third of Britons are “currently boycotting products or services of a company because they do not pay their fair share of tax in the UK”.

Taxpayers – and their representatives – have a choice. And at a time when the UK taxpayer is spending well over £200bn on services from the private sector, the time is now ripe for government decision makers to instruct their purchasing managers to change their methods so that they avoid another Southern Cross.

Better procurement

That means looking carefully at the business form of the company that is bidding for business. The UK government has already encouraged the creation of more than 70 public sector mutuals.

In the light of recent difficulties with Serco (outsourced services) and G4S (security) it has had reason to question its dependence for public sector contracts on the traditional business model represented by the larger listed companies.

All these examples come from the UK. In the US, the emergence of the B Corp movement is another sign that there is business opportunity for many boards and owners in revisiting their corporate form.

Ten years from now I expect the words “review of business form” to be as regular an item on the board agenda as “review of business strategy”. It is the next big area of opportunity for the ambitious and outward-looking business.

Mark Goyder is founder director of Tomorrow’s Company.

Tomorrow’s Business Forms – making the right choices of ownership, structure and governance to deliver success for business and society – is published by Tomorrow’s Company. The report was developed in conjunction with a diverse group of business leaders, under the chairmanship of Mark Preston, group CEO, Grosvenor. Follow Tomorrow’s Company on twitter at: @Tomorrows_Co

corporate governance  corporate structure