This article was first published in Edition 8 (January 2014) of Accountancy Futures, ACCA's research and insight journal.
Running a successful business, whatever its size, has always required a number of key proprietorial talents – a vision of the ultimate goal, an ability to design and deliver attractive and good-quality products or services, and the knack of keeping existing customers happy and attracting new ones as you go along.
But according to a new report by UK think-tank Tomorrow’s Company, co-sponsored and supported by ACCA, a new factor has emerged that requires more attention, and that is the need for the business’s form and structure to be consistent with its activities. Businesses require a clear and inspiring purpose that employees and stakeholders can identify with. To make sure this vision is evident in all that the company does, selecting the most appropriate business form from a growing range of options is a critical decision.
For the purposes of the Tomorrow’s Business Forms report, business form goes a lot wider than simply deciding whether to set up as a partnership, sole trader, limited company or something else. It is a combination of several elements: legal status, ownership structure, governance arrangements and accountability.
Mark Preston, group CEO of property development and fund management group Grosvenor, says: ‘All too often business form is taken for granted. It’s not something companies think about or realise they need to make a decision on rather than taking it as a given.’
Problems can arise when purpose and form are not closely aligned. When UK care home operator Southern Cross collapsed following an aggressive push for growth financed by the sale of leases on its homes, many questioned whether a heavily geared private company structure was the most appropriate form for an organisation set up to provide long-term care for vulnerable people.
Then there is the growing public distaste for what are seen as the excesses of corporate life. A 2013 Ipsos Mori poll for the Institute of Business Ethics found that just 5% of British adults believe British businesses behave ‘very ethically’; 37% think they act ‘not very’ or ‘not at all’ ethically. Consumers increasingly want to feel that the companies they spend money with behave in a way that matches their professed values.
There is a growing diversity of business forms in the UK. The John Lewis partnership model, where all staff of the retail chain have a financial stake in the business, is a well-known alternative business form, but there are plenty of others. They include employee or family ownership, mutuals and co-operatives, private equity ownership, limited liability partnerships, social enterprises, trusts and listed companies.
Sir Charlie Mayfield, chairman of John Lewis, says: ‘While no single form of ownership is right for every business, encouraging a greater plurality of ownership is a positive step in promoting staff engagement and long-term decision-making.’
a change of format
Grosvenor had been privately owned for over three centuries until it switched in 2000 to a devolved structure of wholly owned subsidiaries. The aim of the change was to motivate staff to make a lasting contribution in the countries Grosvenor invests in, in
line with its commitment to a long-term approach. Belu Water was set up as a social enterprise in 2004 to use its profits from selling bottled water in the UK to fund clean water projects in developing countries. Similarly, Scotland’s Isle of Skye ferry is run by a limited company for the community rather than shareholders.
Utility Anglian Water is owned by a consortium of four investors. It emphasises collaboration to operate as efficiently as possible. ‘We have lots of stakeholders who all have different agendas and it’s all about how we respond and work with these entities,’ says Richard Boucher, business change and strategy director.
Business forms can be chosen to motivate particular behaviours at work. TTP Group was set up by engineers and scientists to tackle client projects and speculative developments. All staff are shareholders, and TTP offers a range of schemes and loans for staff to buy shares. Group chairman Gerald Avison says: ‘This is not about incentivism. Rather it’s to do with sharing our strategy – it mirrors what we want people to do, which is to work as a team with a common goal.’
The B Corp concept, which originated in the US, offers independent certification for companies that meet rigorous standards of social and environmental performance, accountability and transparency. So far 850 companies worldwide have been verified by the scheme, including the UK’s global sustainability advisory firm One Stone. The
B Corp is a public declaration that a business is meeting its wider responsibilities to society.
Government is also encouraging different business forms for delivering public services, including public sector mutuals run by National Health Service (NHS) staff, and hospitals funded and operated by a mix of public and private partners. Care minister Norman Lamb says: ‘Government is making a real contribution to the debate as a regulator, as a provider of services and as a purchaser. What we need to see now is raised awareness of the diversity of business forms out there.’
No good versus bad
David Hawley, Deloitte’s UK director of public policy, says: ‘There is no good versus bad model. It is what fits best with the business purpose.’ A lot depends on circumstances, and form needs to be kept under review. As a business changes, management needs to consider new structures to reflect how it operates and interacts with its stakeholders. Preston adds: ‘The aim is to put the question of business form high on the agenda for boards and government. It should be part of the language of good corporate governance and stewardship. Advisers, including accountants, should make sure they are showing clients all the options.’
John Davies HEAD OF TECHNICAL, ACCA
‘The choice of business form is becoming an issue for a number of reasons. One is the process of globalisation, which is leading to demands for structures that facilitate cross-border activity. Another is the economic crisis, which is leading many national governments to look for ways to contract out the delivery of public services. Another still is the increasing level of interest shown by many consumers and stakeholders in how businesses organise and conduct themselves. This increasingly dynamic landscape is creating new interest in how form and structure help or hinder a business in achieving its objectives.’
Pat Sweet, journalist