posted August 19, 2000 06:41 PM         

The Ends concept is as incisive a way as possible to state the rock-bottom, core purpose of any enterprise. The "which people" component of the Ends formula designates those persons for whose benefit the organization is created. In other words, their benefit is at the core of purpose (what kind and how much benefit are, of course, other components). Those thoughts apply to business and nonbusiness organizations. It seems clear that businesses exist (there are some very rare exceptions) for the wealth of the owner(s) of that business. That is why people invest. In other words, the investment we have in a business is a self-interest in investment return.

You said you assume "that Ends were to do with customers and clients, not with owners," but that is true only when an organization is not organized for shareholder benefit. I regret if I’ve published anything that confuses that point. If we set up an organization for the benefit of others rather than for our own financial profit, then the primary beneficiaries are not ourselves but someone else. This is the essence of most nonprofits and the reason government chooses not to tax nonprofits even though they might build surpluses. There are even nonprofits (and most governments) that are established primarily for the owners’ benefit, such as trade associations, professional societies, and municipalities. But the owners’ benefit in those cases is not financial return from an investment, but benefit from the productive process itself (i.e., the organization does something for or to the owners as customers).

Consequently, in nonprofit Policy Governance, Ends in reflecting basic purpose do not align with owners as owners. They align with the populations the owners wish to benefit (sometimes themselves, but in the way a trade association or city government does). In profit Policy Governance, however, Ends in reflecting basic purpose do align with owners, for the owners became owners due only to their desire for financial return. Despite what Peters and Drucker say, the originating reason for any business (as opposed to nonprofits) is to produce a financial benefit for its owners. Notice that Drucker and Peters are exhorting management, when they say, as you point out, "that management should primarily focus on looking after customers and staff, and that if they do this well, good financial performance will result as a by-product." I agree. Management should, indeed, focus on customers and staff, but that is because financial performance for owners is so important and fulfilling that basic purpose is why one has staff and customers to begin with. My point is that the board, out of its allegiance to and focus on shareholders, renders decisions that cause management to have to focus on customers and staff.

Consequently, the business board, speaking on behalf of owners, decrees that shareholder value will increase (in a number of possible ways and amounts), leaving means largely up to management. The nonbusiness board, speaking on behalf of owners, decrees that certain beneficiary populations will enjoy certain benefits for certain costs or with certain priorities, leaving means largely up to management. For the business the intended beneficiary is best described by the word "shareholder." For the nonbusiness, the intended beneficiary is best described by the words consumer, client, student, recipient; with some strain, the word ‘customer’ can used as well, as I frequently do.

You have said, "In a nutshell, a not-for-profit addresses consumers in its Ends policies and financial parameters in its Executive Limitation policies; and a business corporation does exactly the opposite." Yet this isn’t strictly true. A nonprofit addresses financial parameters in both Ends and Executive Limitations policies, depending on the type of parameter. For example, the cost of a consumer result is an Ends issue. The cost of bonus packages is a means issue. I think the biggest source of difficulty here is semantic; different language is typically used in the business and nonprofit worlds. The attempt to cross-fertilize the concepts (stakeholder, customer) can be as misleading as helpful, especially when the words cross over without the concept necessarily following.

I would be a bit afraid of the verbal gymnastics of saying that in business the owners comprise the ‘consumers or consumer-like population’ and don’t think it is necessary. You are right on target in suspecting that I "don’t agree that (a) conceptual difference exists." When I consult with a business board, I make a very simple transition, true to my contention that the model applies in all settings. I say to the board, "you represent owners, who are obviously shareholders. Shareholders have one primary intention for owning a company: that it produce a favorable return on their investment. Therefore, when you answer the question, ‘what benefit for which people does this company exist?’ you must address your choice of types of shareholder value tailored for certain kinds of shareholders." When directors’ answers are carefully organized using Policy Governance principles, they are doing Ends work.

Continuing with my message to a corporate board, I ask if the company were to achieve even a magnificent return for shareholders, what possible complaints could the board have about the corporate practices markets, customers targeted, or products/services used to produce that return (all means)? There are various prudence and ethics reasons to have such complaints, but exactly what are they? The board might reply that breaking the law, mistreating the staff, failing to plan for strong executive succession, exceeding certain risk parameters, entering certain risky markets, or any number of other practices are unacceptable. When directors’ answers are carefully organized using Policy Governance principles, they are then doing Executive Limitations work.

posted August 16, 2000 07:21 PM         

Thank you for replying to my email. I confess that your statement that a business corporation’s Ends policies should be concerned with financial performance matters has come as a revelation to me!

The definition of "Ends" in your books focuses on "consumers or consumer-like populations." That led me to assume that the Ends of a business corporation would be defined with reference to the business’s customers or clients. I saw that as being consistent with the notion espoused by, eg, Peter Drucker and Tom Peters that management should primarily focus on looking after customers and staff, and that if they do this well, good financial performance will result as a by-product.

On my assumption that Ends were to do with customers and clients, not with owners, I was unsure as to the context in which a commercial Board should set policies as to financial performance. I decided that, if such policies weren’t to be found in Ends, they must belong in Executive Limitations, in the form of policies proscribing financial outcomes more adverse than those specified. I didn’t feel very comfortable about dealing with them in this way, but couldn’t see where else they fitted.

What I now understand you to be saying is that the definition of "Ends" differs depending on whether one is concerned with a not-for profit organization or a business - in the case of the former, Ends relate to consumers; in the case of the latter, Ends relate to owners.

What’s more, if I understand you correctly, consumers are relevant to ends in the case of a not-for-profit organization but to means in the case of a business. This seems to follow from your comment that "the specific product or service sold by the company is a means issue."

Given the above, there appears to be a fundamental conceptual difference between the way Policy Governance applies to not-for-profits and the way it applies to businesses. In a nutshell, a not-for-profit addresses consumers in its Ends policies and financial parameters in its Executive Limitation policies; and a business corporation does exactly the opposite.

Yet I suspect that you don’t agree that this conceptual difference exists. Indeed, you say in "Boards that Make a Difference" that the Policy Governance model applies with minimal adaptation to business corporations. What I am wondering is this: How do you reconcile the apparent difference that I have outlined?

One possible way is to say that, for the purposes of a business, the "consumers or consumer-like population" comprise the owners, who are looking to the business to confer a benefit on them in the form of a return on their investment. Is this how you see it? If so, how would you answer the argument that the owners are equivalent not to the consumers of a not-for-profit but to its funders?

posted August 15, 2000 05:56 PM         

Hello, John Carver:
I have read and been impressed by "Boards that Make a Difference" and
"Reinvening your Board". The focus of these books is on not-for-profits,
but they note that the principles of Policy Governance apply to businesses
as well. I would be grateful if you would let me know if any published
materials are available that illustrate how to apply Policy Governance to
business corporations. I am interested, for example, in how a corporate
board would, presumably through its Executive Limitation policies, deal
with its requirements as to financial yardsticks like return on equity,
earnings growth, and so on, bearing in mind that at times the Board might
force major moves like a merger that impact on financial performance.

Thank you for your help.
(name withheld, since the inquirer didn't enter this here himself)

Here is my response:

I appreciate your trying to apply the nonprofit/governmental board writings to a business corporation. If you will let my office know where to send them, we will be happy to share two or three reprints that deal directly with corporate governance. Meanwhile, let me comment on your query about ROE and other financial performance measures.

With extremely rare exceptions, a business is established for the purpose of shareholder value. Of course, it values customer and employee satisfaction, but it does so in the interest of shareholders. Unlike nonprofits, businesses know this so well that they can claim to be customer-focused, because the shareholder starting point is a given. In other words, the business by its nature is first shareholder-focused and only then is customer-focused. Consequently, the broadest statement of corporate ends is something like "shareholder value at or exceeding market."

Using the mixing bowl analogy (smaller or more explanatory statements within larger, more comprehensive statements), the next level of ends would deal with broad ways the board wishes the broader statement to be interpreted. You mention return on equity, but, as you know, there are others. There are even rolling averages over specifiable time periods in each of several different and often conflicting ways of conceiving of shareholder value. Moreover, there is also an issue of which shareholders, for a board can aim its performance toward the longer term investor or the trader. It is important for the board to engage in this perplexing discussion and make the difficult choices about such things, for they will make a big difference in the aims toward which the CEO manages the company. Let me reiterate that this is the board’s decision to make; the CEO should not save the board from its job.

The upshot of all this is that financial performance is an ends issue. The specific product of service sold by the company is a means issue. The board might control that means by decreeing (in Executive Limitations) that expanding into new product areas or new customer areas is unacceptable, or that certain kinds of such expansion are unacceptable, or that failing to achieve such expansion is unacceptable. It might decree that while the CEO shall not fail to add new products for old customers and old products for new customers, it is equally unacceptable to extend new products to new customers. It might say not to expand to more than two major new markets in one year. In other words, there are many variations of what the board might say of the "stick to your knitting" or "don’t get stuck in your knitting" variety. Or, in fact, the board might say nothing and simply leave the choice of products and markets up to the CEO’s discretion.

Mergers, however, are a different matter. Mergers (though not necessarily acquisitions) are a shift in ownership itself and are, therefore, a Governance Process issue. In other words, the board "owns" the merger issue, not the CEO; so it is handled with neither Ends or Executive Limitations. If the board’s actions cause a change in what Ends should be or what Executive Limitations should be (as I suspect they will), then the board must adjust these policies accordingly.