Grünfeld and Jakobsen (2006) explain four value adding roles that owners can and should make use of. The roles are selection, fuel, complementary resources and guidance.
Figure 5: The owners’ value-adding roles (Grünfeld and Jakobsen 2006)
The first step in ownership is to start the ownership, i.e. make a decision whether to invest or not in the company under evaluation. Owners can govern the fuel in the company through issues and dividends. In addition owners guide and control the management to make sure the company is maximizing the owners’ value. An owner should also either possess or be able to bring in other resources besides financial resources, which are not already in the company.
When talking about competence in ownership it is important to execute the different roles so that they enforce each other, this is referred to as second degree owner competence (Grünfeld and Jakobsen 2006).
Figure 6: Second Degree owner competence (Grünfeld and Jakobsen 2006)
The description of the four different ownership roles is presented by Grünfeld and Jakobsen (2006) in their Norwegian book. I do not quote them directly as a direct translation into English does not necessarily give the best presentation. I present the main features and importance of each role based on their writings.
2.1 Selection
An investor has to select where to invest her capital. The companies and projects invested in should add value, meaning that the sum of discounted expected cash flows needs to be larger than the alternative cost of the capital that is invested. The capital should be distributed to the projects where the risk adjusted return is highest. In order to have a high level of selection competence, the owner has to be good at evaluating and forecasting how the project or company will perform. Owners should take active part in deciding which investments a company should undertake and which it should not. Thereby selecting the course of the company, and hopefully the course that has the best return is selected. Selection is also a matter of timing, of when to enter and exit. Another part of selection is to be able to take into account if there are differences in expected value of a company depending of which owners it has. This can make a difference when it comes to what one is willing to pay for a company.
2.2 Guidance/control/monitoring
Being an owner makes one entitled to decide what the company should do; all that is not delegated to others are up to the owners to decide. The company has a vision that justifies its existence, to achieve this vision, the company forms a strategy. Finally the strategy is implemented and put into operation by the managers. Owners should take active part in defining the vision and the strategy as it is their return that is influenced by the success or failure of the strategy. Even though most of the strategy work and the implementation are done by the managers in the company, the owners can influence the decisions. Through the board of directors, owners can provide guidance as well as control and evaluate the strategy and operations. This way the owners take an active part in the management of the business, which is logical because it in the end is their money that is at risk. It is also important to make sure that the managers do not pursue other goals than those that benefit the owners; this is up to the owners to decide as they pay the salaries of the managers.
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2.3 Fuel
Grünfeld and Jakobsen (2006) present capital as the accelerator and the brake of the business.
Capital can be injected through share issues and drained through dividends. Capital can also be supplied through borrowing capital. Because the loan and interests has to be repaid before the shareholders can get their money, the risk of the shareholders increase with the level of debt. However, if the company is believed to deliver a return above the interest on the loan, bringing in debt capital will increase the return for the shareholders and could be welcomed by owners even if it increases risk.
Especially when expanding and growing, capital injection is important. The company needs to make investments, but often it does not have the capital to finance it internally. Expanding companies are often young companies that are not making profit that can be reinvested in new capacity. It is expensive to expand capacity, and in addition growth often take place in new markets where the fight for market share with the incumbent firms can make expansion even more costly.
2.4 Complementary resources
The success of a company has a clear link to the resources it possesses. The resources need to match the critical success factors of the industry that the company operates within. An owner can increase the value of his company by supplying it with important resources that are missing. Young companies often do not reach their potential due to lack of right resources.
Entrepreneurs are often very good at the product level, but in order to succeed commercially other skills are needed. Entrepreneurs do not always possess these skills. Owners should bring in new employees with the right competences for the company. These competences should help the company to be better at knowing how to market the product, where to sell, which suppliers to use and how to establish the good relationship with suppliers and clients etc. In a production perspective, to bring in competence can lower costs through increased efficiency in operations. The success factors and the needed resources vary across age, industry and other characteristics of the company.