Is For-Profit Ownership Changing or Not?

By Caroline OliverDecember 19, 2012 | Print

Distinguishing ownership is the first step in laying the foundations for excellent governance and so say all Policy Governance aficionados. In my early days with Policy Governance, what this means in practice seemed very clear—now, not so much.

I still absolutely see the importance of distinguishing ownership, for I still see the board as governing “on behalf of” others. Having accepted that, it then seems obvious that a board cannot legitimately decide on Ends or any other significant values until it has decided who its owners are.

The impetus for writing this article has come from the increasing number of voices suggesting that ownership in the for-profit sector should no longer be seen as synonymous with share ownership and my desire to look at this issue through a Policy Governance lens.

Legal ownership is a matter of fact. Whomever your bylaws say have a vote at your annual meeting are your owners. No murkiness there. Where things start getting tricky is in the whole Policy Governance concept of moral ownership. And the purpose of this article is to suggest that when it comes to moral ownership, things are getting trickier and trickier, particularly in the case of for-profit entities. But first a few words on the wrinkles that can occur in nonprofit ownership.

In charitable nonprofit entities, the legal owners are often current board members themselves and no one else, which makes the question of moral ownership loom particularly large. Unless such boards do distinguish and connect with a moral ownership, their organizations are literally accountable to no one other than themselves and the law. How sustainable can such organizations be without a body of people beyond themselves who care about their organization’s future? How can they survive and thrive without, to name just one aspect of the problem, a breeding ground for the next generations of board members?

Nonprofit entities that do have a wider legal ownership provide another example of the kind of moral ownership dilemmas that can face nonprofits. I have noted that those who have a vote at the annual meeting are the legal owners. Thus, it would seem that nonprofit entities with a legal ownership (usually called a membership) that extends beyond their board need not consider moral ownership because they already have built-in accountability to a body of people beyond themselves who care about their organization’s future.

However, what about the fact that many members may wish to relate to the organization only as customers? And what about potential members, past members, and others who may be far more interested in the organization’s overall health than some current members?

My guiding principle for negotiating these tricky waters is that in considering whether to recognize a moral ownership, and who that moral ownership should be, the board should put sustainability at the forefront of its thinking. In other words, unless your current legal owners directly prohibit your board from holding itself accountable to anyone other than themselves, the board should seek to create and connect with whatever moral ownership is likely to provide the support that will help keep the organization functioning over the long term. By definition, this excludes from the moral ownership category anyone who is interested in connecting with the organization only for the purpose of fulfilling their own immediate self-interest. From this perspective, a long-term donor to your core expenses might be a moral owner; someone who makes an occasional purchase from your charity shop probably is not.

Also looked at from this perspective, the board has a responsibility to ensure that all its legal owners have the maximum opportunity to understand and operate as responsible owners. Otherwise those owners could unwittingly represent a threat to the sustainability of their own asset.

Turning now to the for-profit sector, it seems that the ownership sands are shifting in several ways. First, with so much dissatisfaction around executive pay and short-term outlooks, the need to wrest more power away from executives and toward those to whom the organization is accountable has been getting starker. So the need for for-profits to clearly identify and connect with owners is getting stronger and stronger.

Second, the term corporate social responsibility, which used to be only a small concern in the corporate world, is beginning to be seen in some quarters as a central concern, even the central concern, of business.

Third, the very forms of incorporation are being changed, and the distinctions between for-profit and nonprofit entities are being blurred in the process.

For evidence of the first of these shifts we need look no further than daily news sources to see calls for shareholders to have more “say on pay” and be more active in using their powers.

As evidence for the increasing centrality of corporate social responsibility let me offer the following.

In a recent interview, Mervyn King, chair of the group that wrote the third iteration of the King Code of Corporate Governance and author of several books, including Transient Caretakers, argues that corporate boards have long grown beyond their original purpose to take account of solely the interests of shareholders.1 He says:

The primacy of the shareholder to the exclusion of other stakeholders and a single bottom line was based on false assumptions … of limitless resources and the earth having an infinite capacity to absorb waste.

Thoughts in a similar vein come from the Corporate Knights organization.2 In introducing its tenth anniversary report on the state of responsible business in Canada, its president, Toby Heaps, asserted, “[We are moving] along a continuum that started with corporate social responsibility, evolving to responsible business, and then to the cusp of clean capitalism—a daunting but more exciting age of opportunity that will reward companies that pursue profit concurrently with social and ecological prosperity.”3

In the United Kingdom, Tomorrow’s Company is a nonprofit organization committed to creating “a future for business which makes equal sense to staff, shareholders and society.”4 Also in the United Kingdom, Corporate Citizenship, a specialist consultancy that works corporations around the world, states:

Corporate Citizenship is more than just our company name. It’s a statement about the role companies should play in the world of today. Citizens are fully part of society. They have rights, but also responsibilities. And good citizens don’t take a short-term “I’m alright” attitude. They work to build up the common good.5

A complementary viewpoint comes from Lynn Stout, Distinguished Professor of Corporate and Business Law at Cornell University, in her book The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public and an article on corporate purpose written for Brookings Institution.6 In the article, she states:

Most people today would say corporations have but one proper purpose: maximizing their shareholders’ wealth as measured by stock price… . Shareholder value ideology in fact is a relatively new development in the business culture. It is not supported by the traditional rules of American corporate law; is not consistent with the real economic structure of business corporations; and is not supported by the bulk of the empirical evidence on what makes corporations and economies work.

From a Policy Governance perspective, this all sounds rather shocking, for we hold Ends to be the reason for any organization’s existence. In addition, because we see boards as acting on behalf of owners, we see Ends in the for-profit sector as being synonymous with “shareholder value.” Is Policy Governance thinking therefore at odds with the increasing desire to have the for-profit entities in our midst take longer-term and broader perspectives on their ownership and purpose?

My answer is no; in fact, Policy Governance thinking can help boards clarify the relevant issues. Taking Stout’s views as the reference point, let me illustrate what I mean. Stout says that focusing on “shareholder value” could be a mistake for most businesses because there is “no single shareholder value— different shareholders have different needs and interests.”7 This same thought is also reflected in the Tomorrow’s Company conception of a founder to speculator “stewardship spectrum.”8

In Stout’s view,

Shareholder value ideology focuses on the interests of only a narrow subgroup of shareholders, those who are most short-sighted, opportunistic, willing to impose external costs, and indifferent to ethics and others’ welfare… . This ultimately harms most shareholders themselves—along with employees, customers, and communities.

From a Policy Governance perspective, we would surely say that the board is obliged to operate on behalf of all shareholders and therefore cannot focus on the interests of only “a narrow subgroup of shareholders” or do anything that “ultimately harms most shareholders themselves.” Thus, the only disparity between our thinking and Stout’s lies in her definition of “shareholder value ideology.”

When Stout speaks of shareholder value ideology, she seems to mean an ideology in which short-term gains in wealth as measured by stock price are valued above all else. Yet she also points out that “individual investors do best by pursuing short-term, opportunistic, external-cost-generating corporate strategies, but investors as a group suffer over time when all pursue this strategy.” Going further, she suggests that it is “unwise to reduce shareholders’ interests to the single metric of today’s share price” and even says,

Some shareholders may care only about their own material wealth. But many and possibly most are “prosocial,” and prefer their companies not earn profits by harming third parties or breaking the law.

And so when Stout suggests that directors need to accept their “obligation and authority to mediate between different shareholder interests” and abandon the “ultimately self-defeating idea that corporate success can and should be measured by a single objective metric,” we can all agree. Where we differ is that for Stout, “shareholder value ideology” is based on the premise “that the only shareholder whose values should count is the shareholder who is myopic, untrustworthy, self-destructive, and without a social conscience.” For students of Policy Governance, “shareholder value ideology” is based on the premise that the values of all legal and moral owners should count.

So who are the moral owners of a for-profit organization? Again, my guiding principle is that the for-profit board should put sustainability at the forefront of its thinking. This excludes those who see the organization from a purely short-term customer or employee perspective but could include some, or all, customers and employees depending on how the organization is operated. Employee ownership plans are common. Full-scale employee and customer cooperatives abound. For-profit organizations whose owners see themselves as morally owned by a group much wider than themselves are springing up every day. And as with nonprofits, I suggest that the for-profit board has a responsibility to ensure that all its shareholders have the maximum opportunity to understand and operate as responsible owners; otherwise they can unwittingly represent a threat to the sustainability of their own asset.

As more for-profit owners become more interested in the economic, environmental, and social impacts of their investments, the Policy Governance board has to reflect these values in its Executive Limitations. Fulfilling an organization’s legal, ethical, and wider social obligations may still not be part of most organizations’ business purpose, but in today’s world, it is becoming ever more essential to business success. And as more for-profit owners become interested in pursuing purposes that encompass triple bottom lines or set themselves up as social entrepreneurs investing in new corporate vehicles, such as the community interest companies in the United Kingdom, and various forms of mutual organization with social purposes in mind, so the Policy Governance board has to reflect these values in its Ends.

So maybe it is quite simple after all. Maybe it is not so much the meaning of corporate ownership that is changing; the concepts of legal and moral ownership still hold. Instead, maybe what is changing is what today’s legal and moral owners intend and therefore what Policy Governance boards must do.


1. For the interview, see Ann-Maree Moodie, “Boards and Governance,” May 21, 2012, http://boardsandgovernance.
. King Report on Corporate Governance III, South Africa, (Johannesburg: Institute of Directors in Southern Africa, 2009). Mervyn King with Teodorina Lessidrenska, Transient Caretakers: Making Life on Earth Sustainable (Johannesburg: Pan Macmillan, 2009).

2. http://www.corporateknights.

3. “The 2011 Best 50 Corporate Citizens in Canada,” Corporate Knights, June 2, 2011.

4. http://www.tomorrowscompany.

5. http://www.corporate-citizenship.

6. Stout, L. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San Francisco: Berrett-Koehler, 2012, and “The Problem of Corporate Purpose,” Issues in Governance Studies, no. 48 (Washington, DC: Brookings Institution, June 2012).

7. Stout, L. “The Problem of Corporate Purpose.” Issues in Governance Studies, no. 48 (Washington, DC: Brookings Institution, June 2012).

8. Tomorrow’s Owners: Stewardship of Tomorrow’s Company. London: Centre for Tomorrow’s Company, October 2008.

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