Aligning shareholders and customers - is it possible?

With the recent BP Gulf of Mexico oil leak there has been a lot of focus on the interests of shareholders over other stakeholders - with the US successfully putting pressure on the company to forgo paying dividends to shareholders until the current situation is resolved.

Whilst this was probably a wise decision, it does demonstrate how removed shareholders can be from the day to day running of a business and it's main stakeholder - the customer - creating potential issues from a misalignment with these two groups.

Typically a customer is looking for good customer service, competitive pricing and a great range of products. (plus wild life not covered in oil)

The shareholder is looking for a return on their investment - increasingly short-term - creating pressure to lower wages, increase margins and reduce product production costs.

However not all companies have this misalignment issue.

John Lewis for example is a very successful brand with a unique way of working.  It has brought the interests of the shareholders closer to those of the customers by making it's employees partners in the business.  Each employee has a share and a say in its success (with bonuses this year equivalent to almost 2 months salary).

Started by John Stedan Lewis, he believed:-

That it is "all wrong to have millionaires before you have ceased to have slums"; that "the dividends paid to some shareholders" for doing essentially nothing were obscene when "workers earn hardly more than a bare living"

I think John Lewis was inspired in this respect.  He wasn't saying equality for all - you could be a millionaire - but you don't do it at the expense of others, in this case the employees.

This alignment of stakeholders seems to work as well.

Not only is John Lewis able to boast double the average industry rate of employee retention, but in an article in the Guardian it discusses research by the Cass Business School showing that employee-owned businesses create jobs faster; are significantly more resilient in an economic downturn; deliver far better customer satisfaction; boast substantially higher value added per employee; and, depending on the sector and size of the business, can deliver markedly higher profits.

Not all companies can follow the John Lewis model however and so for more traditional companies there is still a misalignment issue whereby the focus on the needs of shareholders - often short-term - causes a company to make decisions which affect the product and service delivered to customers.

Wouldn't it be great though if these two groups could see eye to eye more.

Where for example the desire of a customer for good service is matched by a companies desire to deliver it by investing in their staff - providing great benefits which retain them (and their knowledge).

Where the customer is prepared to pay a fair price for a fair product - even if this means paying a little more.

Where the products sold are in the long term interests of the customer not the short term interest of a quick sale.

Achieving this though can be hard if dividends paid to some shareholders for doing essentially nothing are more important than the needs of customers who are the lifeblood of the company.  As Don Peppers and Martha Rogers said in an open letter to Wall Street.

The only thing in short supply these days? Customers. Customers are difficult to find and hard to keep. Without customers, you don't have a business. You have a hobby.

So here's a radical thought - why not combine these potentially opposing groups by making customers shareholders - rewarding them for their loyalty with an increased stake in the company.  Not only would this give customers more of a voice but is also more likely to make them loyal.

Okay, so in reality this is not such a radical thought - co-opertatives have been doing this since 1844 when the Rochdale Partners first started paying a patronage dividend to customers.  This has continued into the modern day with the Co-operative Group paying its members a share of profits worth £50.4m this year - up from £38.8m in 2009 and £19.6m in 2008 - and in the middle of one of the worst recession in decades.

As Patrick Allen, Director of Marketing at The Co-operative Group says:-

It is only right that our members, who ultimately own and control the business, share in our success

It's interesting though that it's not just these long established companies like John Lewis or the Co-Op that are thinking in this way - looking to engage their stakeholders directly within the business.

Recently there have been other examples.

Hotel Chocolat is reported to be seeking to raise £5m to fund capital projects by issuing "chocolate" bonds.  Investors will be able to purchase either £2,000 or £4,000 bonds with the investment returned after 3 years.  However instead of interest payments, the investors will receive value in kind in the form of chocolate boxes - the value of which is reckoned to provide a net dividend return of 5.38%.  This will obviously create a closer engagement between the investor and the product and in all likelihood will recruit investment and hence shareholders from an existing loyal customer base.

Internet food delivery retail Ocado announced recently that it was looking to float the company next month and was offering existing customers the chance to purchase share in the company at the same rate as institutional investors.  Aiming it at existing, loyal customers, to be eligible you must have spent over £300 since 1st January.

Has the public mood changed since the collapse in the financial markets?  Do they want greater control and a closer relationship to the organisations they are loyal to?

It will be interesting to see if the public embrace these offerings - reversing what has been previously a decline in customer owned organisations such as building societies.

I do however think these are really innovative ways of engaging customers directly in the business and I also think there is a lot of scope for creating a long term loyalty programme along these lines which truly rewards customers for their patronage, by giving them an increasing share of the business and with it an increasing share of the profits they generate.

Not by doing essentially nothing - but by doing what every business needs - just being a good, loyal customer.

 

Photo credit kayak.wa

A distribution of surplus in proportion to trade

The Co-operative Group in the UK announced recently that its interim dividend payment for the first 6 months of 2008 was to be £8.9m, this is £2m more than the interim payment for 2007 and comes on top of a full year dividend payment of £38.1m in June.

For those that don't know the Co-operative Dividend programme was re-launched in 2006 and essentially awards points to members based on their spend within the group of companies – these points are then assigned a value every 6 months as an interim and full year dividend, based on the profits of the group. In this way the programme pays out a true dividend or share of profits based on the contribution the customers make to the group as a whole. Since its re-launch the Dividend programme has recruited over 500k new members, taking the Co-operative membership to 3.1m.

Although the programme has recently been re-launched and replaced a previous "standard style" retail loyalty programme it is essentially nothing new. The founding members of the current Co-Operative movement, the Rochdale Pioneers Society were established in 1844 and within their original eight 'Rochdale rules' was the inclusion of a requirement for the "distribution of surplus in proportion to trade" which became known as 'the divi' - this was probably one of the first "loyalty" programmes in the UK.

The Co-Op aren't the only organisation to support loyalty through a share of profits. The Britannia Building society in the UK has been running a whole of bank style loyalty solution called Britannia Membership Rewards (BMR) for over 10 years. This scheme rewards customers with points based on their financial product holding and value within those products. On an annual basis the points are converted to a cash value based on a proportion of the society's profits and are then paid out to its members.

Although these businesses as co-operatives and mutual societies are built around ownership by their members and the return of excess profits as either a dividend or competitive pricing, there is probably a lesson here for all businesses.

The recent financial crisis highlighted the unhealthy focus some companies have on either their employees (and associated bonuses) or on shareholders and their requirement for ever increasing profits – sometimes at the expense of long term growth and stability. Badly sold mortgage products to customers who clearly had no ability to pay or would struggle to pay in the future were sold by financial institutions who were thinking more about short term gain than a long term relationship. The other banks and investors buying these badly sold mortgages up as packaged portfolios or Collateralised Debt Obligations (CDOs) weren't thinking of the customers either – they were all just looking at the profits to be made. You could argue that for these businesses the customers were almost an inconvenience, with the focus simply on making money for stakeholders rather than thinking about delivering benefits to their customers.

A sustainable business however is based on both acquiring and retaining profitable customers - this doesn't mean a business has to be owned by its customers but it does need to recognise that customers are the lifeblood of the business and it needs to acquire them with a view to retention - providing great products, customer service and recognition of their loyalty from day one. In their book "Return on Customer" Don and Martha suggest that "the only value your company will ever create is the value that comes from customers -- the ones you have now and the ones you will have in the future. Businesses succeed by getting, keeping, and growing customers."

They go on to put it succinctly saying "Without customers, you don't have a business. You have a hobby". You could probably spin this around a little and say "Without focusing on customers, you don't have a business. Period."

Whether the Co-Operative Groups recent renewed success is a result of the re-launched dividend programme, their group wide rebranding or their increased focus on ethical investments and fair-trade products is difficult to tell – what isn't hard to tell is that a business which is still growing after 160 years must be doing something right.