E060: Responsibility, Influence, Legal Structures and Finance

This is the world of work podcast with James and James, hi. This is James. Just before we start,

I wanted to remind you that you can read our articles, explore more podcasts, and learn about our online personal and management development programs and workshops by visiting our website, www, dot, World of work.io. All right, onto the podcast. Hello. This is James, and this is Jane, and

here we are again with another episode of a world of work podcast. What are we speaking about today? Jane, oh,

we're talking about some of my favorite topics. So this is directly linked to the episode we recorded previously around responsible business, and this time we're talking about very specifically the role of ownership and finance and how it influences business and their efforts to be responsible. Cool.

Before we get into the core of a episode, though, just want to say to everyone, don't forget. You can get in touch with us on twitter for our podcast. You can email us at Hello at World of work.io or check out the website, www dot World of work.io

Yeah. We really love hearing from people and engaging with people on social media who are also interested in the same things that we are. And as always, a little bit of a nudge. If you're enjoying what we do, we would love you to go on to Apple and podcasts and leave us a review. Yeah, that's

right, guys, they're always really helpful. So we're going to do this episode with the usual structure when it's just for two of us. So we'll have some definition, some research Roundup. We'll have a list of a week where we explore some stuff, tell some stories from our sort of work experience, and have a few final thoughts. We're going to aim to hit that sort of 30 to 35 minute mark, which we're working towards now. So let's see if we can do it. So I guess to kick us off, Jane, would you like to run through some definitions for today's episode? Absolutely.

Okay. So we've got four to crack through quickly. The first is stakeholder and is covered in Investopedia. A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. Primary stakeholders in a typical Corporation are its investors, its employees, its customers, its suppliers, etc. However, the modern theory of the idea goes beyond this original notion to include additional stakeholders, such as the community within which a business is based, government or a trade association. The second definition is ownership, which we're going to talk a little bit more about. And this is from Wikipedia, because actually, Wikipedia sometimes has the most straightforward definitions. And it says ownership is the state or fact of exclusive rights and control over property, which may be an object, land or real estate or intellectual property, ownership involves multiple rights, collectively referred to as title, which may be separated and are held by different parties. In other words, more people, lots of people can have shared ownership of stuff. Third one is legal structure. And this is off of PwC, UK website, a legal structure defines the way a business is organized. It will determine the legal obligations for the business, you and your business. And finally, and this is, uh, this is gone back to Investopedia finance. Is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, money and investments. Basically, finance represents money management and the process of acquiring needed funds. Now the reason we've shared that finance definition for you is because it's really important to be clear that finance isn't just about money management, it's also about the process of acquiring the needed funds for an organization. Cool. Thanks. Jen, no worries. Those are the four definitions. What you think?

Yeah, I think they're good. I think they're interesting, and I think hopefully they'll be helpful for listeners as we get into the episode. So

that's our four definitions for you for this episode. James, do you want to take it away with the research, round up?

Yeah, I'd love to. So we're going to do something maybe slightly different in terms of what we did this week. We're going to start off by asking a question, why do we care, right? So why do we care about legal structures? Why do we care about finance and stakeholders within organizations? And fundamentally, we care from a responsible business perspective, because while we think that responsible businesses work to the benefits of all their stakeholders, their communities and their environments, their ability to behave in responsible ways is to some extent, shaped by the influence and the desires of the various stakeholders that exist within those organizations. And this comes down to influence, and it comes down to power. And when we think about influence and power within organizations, we think that there probably are two really big sources of this. One is the finance that exists within organizations. So that mixture of some extent, the ownership of organizations and the actual funding that's provided to them, and also the sort of legal frameworks that they operate within their governance structures and that. Sort of legality that shapes what they can and cannot do. And there are, of course, many other routes towards influence as well, and types of influence. So individuals will have positional power within the management of organizations. You'll have personal power through perhaps charismatic leaders or individuals. There are lobbying groups that will, you know, petition organizations. There's consumer power. There are lots of other sources of influence. But fundamentally, we think that the legal side of things, for legal structuring and the finance of organizations, are two of the biggest and under different, I guess, legal structures and under different sources of finance, under the different permutations you can get in your legal and finance structuring, you'll get different models of doing things, different ways of doing things and different ways of working, that will result in different stakeholders having different levels of influence, and organizations fundamentally behaving in different ways, and that can lead to them being more or less responsible. So generally, we think that the more concentrated ownership is for more than an organization will act in the interest of those specific owners. And likewise, for more power than any one group of stakeholders has, for more they'll be able to use that power and influence towards their own objectives, be those responsible or otherwise. And if we think of a stakeholders that exists within organizations, I'll just rattle through some of the main stakeholders that are there just so we're in mind of who they are. So organizations can have suppliers, they can have customers. They can have communities that they work within. They can have the employees that work for them. They can have the investors who own them. They can have government and other regulatory bodies that set the, I guess, legal ecosystems that they work within. You've got the finances who provide them with the cash, or, I guess, the working capital, to do what they need to do, and then you get the leaders of the organizations as well. And generally speaking, you know, stakeholders will kind of pursue their own interests subject to the power and influence of the other stakeholders within the organization. So today's focus is going to be on learning a little bit more about those legal structures and finances and how those can affect stakeholder power within organizations, and consequently how that can affect what organizations actually do and whether they are responsible or not. So Jen, have you got any initial thoughts on stakeholders or why we care? Yeah,

I think for me, there's a couple of really important things here. One is about when you work for an organization, really thinking about understanding who is setting the direction of that organization. And so I think understanding where the finance comes from, it matters. And I think the legality, the legal structure. And I think the other thing is we it's just, it's information. I think we should have as citizens to understand the organizations that populate our environment. Yeah,

I think that's right. I mean, I think to be an informed citizen or an informed employee, you need this stuff I'm going to run on now and speak a little bit to some thoughts on legal structures and the legality of organizations. And just as a disclaimer, neither of us are experts in this, so we're just going to do a bit of a chat and hopefully provide a starter for people who want to maybe learn a little bit more about the legal structures and then what they mean. And then what they mean for organizations. And what I'm going to run through is I'm going to run through basically three types of organizations, three ways that organizations can be brought together from a legal perspective, and what those mean, and they've all got slightly different meanings. And I guess there's one overarching thing that's worth pointing out at the start of this, before we get into different types. Different types, and that is that it's possible for individuals to behave on their own terms and to be accountable for their own actions, and to essentially be a business in themselves. So there's no distinction from the business and an individual. But it's also possible to have what's known as incorporation, which really just means the creating of a body and and that incorporation then creates a separate legal entity which is different from any individual, right? So you get organizations that are individuals or collections of individuals, or you get organizations that are separate legal entities. And then that's an important concept that you might want to reflect on a little bit more, and we'll not go into it too much at all today. So if we run through the different types, I guess, of legal structures that you can have, we'll explore a little bit more what comes with those and what way those look. So I guess we start. You can have individuals, and this, as I said, as an individual doing business kind of on their own. So in the UK, these are known as sole traders. Generally. In the US, they might be something like a sole proprietorship, and this just means that the individual controls their businesses. They'll have stakeholders like suppliers and customers. They'll have stakeholders, maybe like banks lending them money. But fundamentally, they can do what they want. So if they want to be responsible, everyone's with the most power and influence generally in those businesses. So they can do so next you have the coming together of individuals into groups of individuals. And from a legal perspective, this is normally known as a partnership. It's going to be like a general partnership or a limited partnership. And what happens with partnerships is that you get groups of individuals coming together, creating a partnership agreement that says we're all still private individuals. Rules, but we would like to work together and reach an agreement amongst ourselves for our responsibilities and our accountabilities and what this collection of individuals is going to do. So partnerships are fairly common in lots of industries like the legal and accounting professions, and they benefit from being less, to some extent, controlled and regulated than private companies. And that's part of the reason they've come about. It's worth noting. But you can also have limited liability partnerships, or in the US, you can also have LLCs, which are limited liability companies, I believe, although I could be wrong on that fit loosely into this arena as well. And limited liability partnerships are slightly different in that they as the name says, limit the liability of any one partner within an organization. But fundamentally, the point is that within a partnership, it's a collection of individuals. They set their own rules, and from a responsibility perspective, they're the ones who tend to have a lot of influence. And if they want to be responsible, great next. If we move on, we move on to this set of separate legal entities, actual companies. So here you can get things like a limited company in the UK, which is maybe known as a corporation in the US. And what happens here is that this is the incorporation of a separate legal entity that's designed to run, I guess, a venture. And here you separate out the ownership from the management, and you create this legal entity that people can own parts of. So here you can own part of a corporation by buying shares in it, and that gives you that part ownership over a corporation. Companies that are set up like this are generally accountable to their shareholders, so they employ managers like a chief executive, who's basically the manager of a company, and those managers are beholden to those shareholders to do basically what the shareholders want in terms of their ability to drive a business forward. Now in this situation, the shareholders may want responsible business, or they may want something else, but fundamentally the the obligation of the executive and the management team leading a company is to serve the needs of those shareholders. And within this separate legal entity category of organizations, you get a whole range of them, and they're defined or shaped by their things like memorandum or articles of incorporation that define what they are and how they work. So you can get some of them that legally within their legal structures are obliged to be maybe more responsible than others. So you can get things like social enterprises, Community Interest companies, things like B Corporations, and these are separate legal entities who are incorporated in such a way that they take on some sort of social obligation towards responsibility. You can also get charities, charitable incorporated organizations, non profit corporations, in the US and again, these are legal entities that have a specific set of rules around regulation and funding and are designed to act in certain ways. And you also get some other different types of entities, like cooperatives, which are coming together as of groups of members to provide perhaps a service more than a set of financial returns. And you also get things that are maybe a bit newer, things like community benefit societies in the UK, which is kind of like a community organization with a slightly different set of rules around ownership and restrictions on what it can do and how it can raise funds. But the key message here is that there are different legal ways in which you can set up a business, and depending on how you set up these businesses, there are different levels of influence and control within the different stakeholders there, and these different levels of influence affect the ability of an organization to be responsible, should it wish to do so. So hopefully that's just a little introduction. Jane, what are your thoughts on this? I know you're closer to a charitable space, maybe even some others, but

what do you think? I think it's a really great summary of the different types of organizations from in terms of who organizes like who's involved in the organization at the top level. And I think we probably similar to what we talk about, about why we should care. I think we should probably spend a little bit more time reflecting on particularly within the charitable and nonprofit sector, which are not the same thing. So you've mentioned brilliantly, social enterprises, things like CICS, COVID hits, all of that, whose interest is that organization trying to serve, and who ultimately is responsible for that organization, and in what way, and what does the law say about how responsible they are? Because that will tell you a lot about the actions of an organization. To me anyway, yeah, I

think that's right. You know, going back to that point of being informed about who sits behind the organizations that we work for and work with is a really important piece. What I'd like to do now is just run on quickly and talk a little bit about how organizations are financed or funded, or how they get their money. I mean, that's really what it comes down to. How do they get money to let them do what they. Want to do. And for our purposes here, there are basically three big ways in which organizations can get money, and we talk about them as transfers, as debt and as equity, right? So let's, let's just run through them and explore a few little bits within them and some of the implications within them. So transfers basically means somebody gives you something so you can receive a grant, maybe from a state, or, you know, a different funder that's could have obligations with it, but basically it's a gift of money, sometimes conditionally. Again, you can get donations, which are basically the same thing, a gift, sometimes conditionally. And so those are transfers. Then you get into debt. And when you think about an organization receiving debt, what it's doing is it's saying I will borrow money from you with an obligation to repay it. And there are lots of different ways that this can happen. So you can have unsecured debt, which means I'll borrow money from you and you don't have a claim on any of my assets. If I can't pay you back, you can get secured debt, or secured loans, which are like a mortgage. You'll give me money, and if I don't pay you back. You can take my house. You can get bonds, which are basically borrowing at a large scale for large organizations, and you get slightly different things, like community bonds or community status. But fundamentally, what happens with debt is you are borrowing from somebody, and they will be repaid a rate of interest based on a range of factors, and they'll have maybe some conditionality over what you can do, but it's a borrowing so they don't own you as a company at all, so they'll have influence, but they won't have ownership of your organization. Then you get into equity, and equity is really a way to raise money by selling part of your business, right? So remember, under debt, you're just borrowing, so nobody is taking any ownership in your business, you're just promising to pay for money, and you keep all the business, and you need to make enough money to pay them back to service for debt, as I say, whereas under equity, what you're doing is you're saying, Well, I don't want to borrow money. What I want to do is I want to sell you a little bit of my business, basically, and then I'll give you some some share of a profit in the future. And there are different ways that you can do this, right? So some organizations now do it through crowdfunding. So you can go to platforms like Kickstarter or seeders or other ones and raise little bits of funding from lots of people. Or you can go out to what are known as angel investors, and these tend to be wealthy individuals who will invest in really small early companies, maybe for high percentage ownership stakes, looking for a larger return and taking on a fair bit of risk. Or you'll get venture capital. And venture capital, what venture capital will do is, again, they're buying into smaller organizations that are growing, or growing organizations that are privately held, and they'll often chuck a lot of money into them and say, right, we're going to help you grow and become a serious big business. And then you get things like private equity. So private equity is when you get a group of individuals set up as an organization who will buy up ownership stakes, sometimes 100% ownership stakes in companies with a view to turning them around and changing them and driving them for financial return. And then, I guess, almost Lastly, you can get public listing. So with a public listing, what you do is you basically say, I'm going to sell part of my company to the general public. I'm going to go under a stock exchange and make 2050, 30% of our whole organization available to the public. And they'll be able to buy these little chunks of it, these little bits known as stocks or shares, and buy and sell them amongst each other, amongst them, amongst a group of market makers that help provide that ability to sell those shares to each other. And so within that sort of equity ownership, again, you get different types of tendency towards responsibility. So for example, maybe private equity is driven towards a certain type of financial return, because that's exactly why they've bought a company, whereas with a public listing, maybe the public might own a company and want it to behave in an ethical way. So you might buy a local investment in a utility company in your area, and as well as wanting that utility company to provide maybe your water, you'd also like them to maintain the integrity of your local waterways and the environmental surroundings that you live within. So I just want to call out that the different people who own organizations through their approaches to equity, the different people that provide funding through debt, lead to different incentives and different predispositions to responsibility within businesses. So there we go. A little introduction to, I guess, finance to some extent. Jane, what are your thoughts on that?

So I think, I think the key takeaway from that is really getting to grips with the difference between transfers debt and equity, and trying to reflect on what does that mean for the decisions that are made in the organization and by whom? Because ultimately, finance is like an invisible owner. In some senses, you might not be listed in the on company's house if you're in the UK, for example, but there's still an interest in the organization, and there is someone who will have to make decisions based on acknowledging that interest in the organization. Yeah,

that's absolutely right. And a lot of things like debt will attract you know what? Known as covenants from banks that mean you need to act in certain ways. So even though they don't own it, there can be a huge amount of influence in relation to them. So that's really kind of the end of our research. Round up again. Just to recap, we just wanted to show that there are different levers that lead to influence in organizations, and that some of the most powerful ones there are the legal structures for organizations adopt and how they're legally created, as well as the way that they get the money to do what they do. And to some extent, by changing the legal structures or changing the ways that organizations access or finance they need to run their businesses, you can change their levels of influence by different stakeholders. And through that, you have an effect on the ability of organizations to behave in a responsible way under some of these finance and legal models, it's harder for leaders of organizations to behave responsibly than it is under other ways. So that was our research roundup for this episode. Jen, would you like to take us into the list

of a week? Yeah, happy to so this week, we thought it'd be really useful to pull together some interesting organizations that help us think about things like organizational structure. And so James has kindly squirreled away on the internet and also had a think about some of the organizations we think are really interesting. So we have John Lewis based in the UK. They are an employee owned organization. They refer to themselves as a partnership, but they also are part of the John Lewis partnership would include Waitrose, which is a major supermarket over here. And they have a very interesting history in this country Ocean Spray, which is a US based organization. I believe they make juices and the like. And I remember briefly living in America and drinking an awful lot of Ocean Spray. And they are a cooperative organization. The third on the list is the infamous we work. If you have been following business news recently, you will have seen them crop up a lot, and if you live in a major city, you might have seen that offices open a lot, and they are a USA based organization. And they're a really interesting one, because the story goes that in August 19, they were valued at $47 billion by the end of September, they were valued about 10 billion, which is less than it even raised in capital. And there's huge interest in the way that we work. Were raised its money, what it was doing, how it was owned, and who had influence over the people running the organization from that financial ownership. And then we have Mars, good old Mars, chocolate and confectionery. And they are a family owned company, which, until I saw this list, I did not know, and I had to check with James, which I think is brilliant. And brilliant. And the final one on the list is an organization called cook. They are a B Corp as well as being a limited company. And a B Corp means that they are have other interests, rather than just financial. And we're going to cover that more in an episode where we actually interview one of the chairman so that's one to look out for. James thoughts on the those five very different organizations.

Well, I think it's great to see such a variety of organizations from both the I guess, legal frameworks that they use, but also the financing that sits behind them, right? So, you know, Mars, they own all their equity. We work. We're raising lots of venture capital and driving a big valuation there. Ocean Spray with cooperatives. John Lewis is employee owned. I mean, variety in that is great, and it's also great to see some of the difference in outcome. So I just think the variety within organizational structures, particularly in the semi corporate world, is fantastic, but we work story. I mean, I could do a whole episode on that easily. We thought about speaking about some of these other organizations, like Theranos and some other VC backed organizations, but I've had rocky right. And I guess lastly, I'm really looking forward to the episode on cook. I think a lot of work that B Corps are doing around trying to broaden out the responsibilities of organizations is cool. So looking forward to that one. Yeah, I

think Theranos is, if you're interested in this stuff, then just Google Theranos and you'll be able to unpick an incredible story. And, you know, the thing about B Corps was really interesting, because I have to say that I wasn't sure about that episode and the concept of B calls, but I've come out a bit of a believer, and what I think has formulated that is the fact that it's about embedding. The responsibilities of the organization within the structure, so within the governing structure, or structural documents of the organization. And I think it that goes to demonstrate how important it is to understand ownership, where the money is coming from, and therefore how that plays into the operations of an organization. That's

right? And so B Corporations can do some of that actual structuring to create a legal and governance structure. That's helpful, but it's still hard to raise funds, right? So that raising funds for purpose driven, sustainable or responsible businesses is hard. So really interesting, yeah,

and actually, that's a really good point. We haven't even discussed the flip side that you've just mentioned, which is not just where do you get your money from, but who's prepared to give you money depending on your attitude to responsible business.

Yeah, it's interesting. Cool. So, Jane, have you got any thoughts from, I guess, your work, or, you know, tell us from a keyboard in relation to this that you think would be worth sharing?

Yeah, probably the thing I'd share is my first experience of the role funders play in charitable organizations and nonprofit organizations. So I really went into sport at an operational level, right? Very much embedded in how competitions worked, how sports was organized, stuff like that. And I remember we did a project, and it was about use of it, and managing competitions. And it was kind of, we were getting some investment. And it was I was asked to justify. Was asked to, like, write a business case effectively, like a one pager, saying, like, why do we want to do this, and what's the benefit, and why should the money spent it? And when I was chatting it through with my first stroke, second manager, I remember chatting it through, and I was like, What do I put in this? And he was like, well, you need to think about the different stakeholders, right? And I was like, I didn't understand. I was like, what tennis players? Because it was when I went to tennis. And he was like, No, all the people are going to care about how this money is spent and whether it's a good spend of money. So that's the people who give us money our members, which are the tennis players, but it's also the clubs who pay affiliation. It's also the board members who are responsible for making sure the business is run properly. It's the senior executive staff who are responsible for making sure it's operationally running and the board's strategy. And then it's the public sector organizations and indeed, the other investors, like major championships who pay sanction fees and affiliate and I was like, Whoa, I got to convince all those people. And he was like, well, to differing degrees, and it's not all the same, but yeah, you need to have a reason, and you need to be able to articulate that really well, and you should be able to articulate it proportionate to the percentage of, like, money that it's theirs. So if it's a small amount of money relative to the organization, you need to be able to explain it in one sentence. If the CEO ever asks you why you want the money. And I just blew my mind, right? Like my first job, it just totally blew my mind. The idea that I had to think about all these things was frightening. So that's my story. Yeah,

that's cool. That's a nice story, and it brings to life stakeholders and the level of influence they have, and in your responsibility as an organization to serve the needs of your stakeholders and to be responsible if they wish, and I guess not if they wish, otherwise, my reflection is actually really quite similar, and it's On the role of chief executives and in my job, I worked, obviously, in a large international bank. And you know, you're there, and at least when you start, you always think of a chief executive as being really the leader and the one driving and controlling the organization and making the decisions and steering it. And then after a little while, you start to realize that, yes, he does that stuff internally, but a huge amount of a time spent by a chief or Exec of a large organization is speaking to investors, speaking to your institutional investors, speaking to the people that are lending you money, speaking to the people that are buying your organization, and trying to understand what they Want and trying to make them happy and trying to work on doing what you can to help them achieve their goals. And so it kind of comes to me that while chief executives are masters of their own organizations internally, they're really very much middlemen, or middle women in their interactions with the wider world and their stakeholders. And I think that, you know, seeing that just paints a really interesting picture of what their roles are, and the roles that finance and legal structure play, and the influence of organizations and their ability to be responsible or not. I mean, fundamentally, you have to do what your stakeholders want. And I guess that's what it comes down to, is where the power sits. But. Is wherever decision making sits in relation to organizations.

But how important is that? Right? So what you just said, I know, I know. You know this whole episode is about understanding who influences what, but how important and how sort of revealing is that when you first learn, when you're an organization, you first realize the CEO is ultimately not alone in driving it, and in a good organization is supported and challenged by the board, but also that there's this just raft of people they have to keep happy. That's always the term, right? We need to keep them happy. Keep them happy enough,

intermediary, right? I mean, they're a conduit between the wishes of somebody else. They're professional managers, managing on behalf of a people that appoint

them. Imagine, what can you imagine? What that must be like? It must be a real challenge. Because effectively, I don't know it. People have that perception, a different, very different perception, I think, and I think it make that makes it harder in some ways, because, you know you can't, if you're a CEO, you can't really complain about it, right? Oh, yeah. You're not expected to say, Hey, I just feel like the middleman right now, yeah,

Woe is me. That all goes back to the legal structures. And if your legal framework is incorporating someone like a B Corporation, then then it'll make it easier for you as a chief executive to behave responsibility, responsibility, should you wish to and likewise, if you're a chief executive also happens to own the business, then you can do what you want. So again, you know, the legal frameworks that you within and the finance that builds your organization's ability to work are huge factors in this, yeah, so we

usually try and squeeze out a little top tip. Oh yeah, I've definitely got one I'd like to share, which is probably what I said at the beginning. Okay, cool. So my plea is, if you are taking a job or a board position or something similar, please, please, please, can you spend some time researching the organization, their funding, their structure, before you decide whether you want to join them, and when you do join them, join them knowing what that funding and that structure is, because it will materially influence your experience of work. Yeah,

that makes, makes sense. That's a good call out. Um, I guess I do have one, and it's, I think it's applicable for this episode, but it's also applicable for,

I guess, a lot of life. And you know, we spoke a lot in this episode about influence and power and things like that, and about the fact that different stakeholders are trying to achieve their own objectives to some extent. And I guess, my final thought, I guess, is that really it's important when you are thinking about things that people say and the opinions that people share, whoever they are, but you step back and think about what their underlying incentives are, you know, what do their position, which camp of influence of a in which stakeholders have a aligned to, what are the outcomes that they want? Because probably an understanding of their outcomes will give you an insight into why they say what they say. So, yeah, I guess that's my final thought for us today. Great stuff. All right. Well, thanks

everyone. Until next time, it's bye for me and it's bye for me.