7. Ownership
The question of ownership was covered from a number of angles in our 1999 report. Specifically that report looked at:
- The reasons behind changes in ownership
- The range of exit strategies used or available to owners/shareholders
- Issues associated with foreign ownership
Below we update the state of firm ownership and changes in ownership, but the primary focus of this chapter is to look specifically at how ownership impacts on firms' growth, both positively and negatively.
7.1 Ownership Stock-Take
An increasing proportion of companies in these studies is foreign owned. Since 1999 four companies that have been part of these studies since 1995, or earlier, have been sold to multinationals or foreign companies. Whereas in the 1993 study six companies were foreign owned, in the latest study double that number are foreign owned.
Table 7.1: Company Ownership
| Number of Companies |
|---|
| 1997 Study | 1999 Study | 2002 Study |
|---|
| Owner / operated private | 14 | 14 | 10 |
| Managed private | 4 | 4 | 7 |
| Publicly listed NZ | 6 | 6 | 1 |
| Foreign owned | 6 | 7 | 12 |
| Total | 30 | 31 | 30 |
The big drop in publicly listed New Zealand companies between 1999 and 2002 reflects two firms not being covered in the 2002 and three firms being taken from being publicly listed to unlisted or overseas ownership. In the current study 12 of the 30 firms experienced no change in ownership between 1999 and 2002. Of those 12 firms, ten are private New Zealand companies with all but one being still largely owner-operated businesses. Two are foreign owned subsidiaries and one is a publicly listed New Zealand company.
There are seven New Zealand companies where shareholdings have changed as new investors have been brought in, most commonly to provide additional capital to underpin growth. In some cases the new capital has allowed founder-owners to liquidate some of their equity in the business. A number of firms have taken on outside private investors shifting them from purely owner/operated private businesses to be managed private businesses.
Table 7.2: Change in Ownership
Between 1999 and 2002 of firms interviewed in 2002.
| No change | 12 |
| Change within NZ | 7 |
| NZ to foreign | 7 |
| Change in foreign | 4 |
| Total | 30 |
Changes in the ownership and direction of foreign parent companies can have a significant bearing on the growth prospects for New Zealand subsidiaries - discussed in more detail below. In this study four of the 12 foreign owned firms had experienced some change in the make-up of their foreign parent company, ranging from a complete change in parent owner to minor changes in shareholding and or direction.
7.1.1 Ownership and Capital for Growth
As we have already noted, changes in ownership often reflect a need for more capital to finance growth. Virtually all such companies have been able to attract the required capital, although some companies grumble that new investors are buying into business growth stories too cheaply.
As new capital comes into the business it can set up new dynamics in the firm. Investors require an exit route that implies either a change in investors at some future date, or a public listing for the company. Such events require both careful planning and often changes in financial management and reporting systems, as well as governance. These are all management responsibilities in addition to delivering the growth the capital was for in the first place.
Some private companies rely on retained earnings to finance growth. That can limit their rate of expansion but is in keeping with their conservative approach to business and the priority they put on sustainability rather than growth for its own sake.
7.2 Ownership, Vision and Culture
For many firms, even within this collection of successful and fast growing companies, there is a real tension between wanting to grow and remaining a New Zealand business.
There is a strong loyalty to remaining a New Zealand business, located here and controlled by New Zealanders. This strategic imperative imposes some conditions on growth, the most obvious being:
- An unwillingness to contemplate foreign ownership even where that might bring considerable benefits to the company in opening up markets, access to technology, capital to grow, etc.
- A fixed location for the business in a small, remote economy is not particularly conducive to growth.
Few if any of the 18 New Zealand businesses in this study were openly contemplating moving offshore or seeking foreign ownership to extend or accelerate their growth. Indeed some were vehemently opposed to such ideas.
Does this mean that the growth of New Zealand owned companies is constrained by their conservatism or nationalism? That is certainly true for some firms - one admitted as much. But it is definitely not so for other New Zealand owned companies in this study. The rest, (the majority) lie somewhere between these two extremes. Few privately owned and operated firms consciously decide not to grow. But in many cases their pursuit of growth is cautious, reflecting their inherent conservatism and the impact on their relatively small-scale businesses of fluctuations in world market demand.
7.2.1 Foreign Ownership
Foreign-owned companies cover the spectrum from no growth to rapid growth. Some foreign-owned manufacturing export businesses are in New Zealand for historical reasons (tariffs mainly) and simply follow instructions from the parent company. These may be to use the capacity as efficiently as possible, deliver specific (often niche or short run) products for the group, or simply stand by for further instructions.
These firms have little scope to develop and pursue their own vision. There are a growing number of foreign owned businesses that are run by local management teams who individually report to other managers offshore. This approach works against leadership and vision and is likely to constrain growth at some point.
In other cases, foreign ownership provides an expansion path for New Zealand operations, either by way of capital to expand production; a marketing and distribution network to sell product through; or a specific area of activity it wants the New Zealand business to concentrate on for the group (Invensys' Christchurch plant is the DC power centre of excellence for the multinational).
The purchase by foreigners of New Zealand operations would generally be underpinned by a clear business case, which might be expected to include growth. Interestingly, the most recent buy-ins by foreigners have tended to target particular attributes (patents, R&D, highly customised production expertise) of the New Zealand firm. In at least two cases the purchases will result in a decline in manufacturing export sales from these businesses, but an increase in their invisible foreign exchange earnings - R&D and product development services.
7.2.2 Culture
A number of privately owned companies have developed a strong culture that has a significant bearing on the decisions the company makes with respect to growth and how they go about achieving it. The embedded culture becomes a real asset when dealing with customers, distributors and suppliers - it helps develop the reputation and credibility that enables the firm to differentiate its products (whole business) from its competitors.
There is a wide range of culture/reputation attributes that we have observed from the 30 firms interviewed:
- Fix any problems that arise
- Work closely with the customer to ensure the product meets requirements selling a solution rather than a product.
- The product must look good, conveying pride in what we produce and a product people associate with us
- Everyone contributes to solutions, everyone has a stake in the business, a strong team culture
- People are paramount - whatever the business does it gives priority to the impact it might have on its staff
- The product must last
In most cases these cultural attributes are not written down, but are strongly expressed by the managers and therefore presumably clearly communicated to staff.
How important is culture to growth? It is crucial. It highlights the firm's strengths and therefore helps staff translate growth objectives into day to day priorities.
Two companies were so committed to nurturing their culture that they were concerned not to add too many people too fast to their business so as not to dilute the culture. In another instance the firm had noticed a difference in performance and attitude of staff when two uncommitted managers left. Another staunchly New Zealand owned and operated firm indicated that if, or when, the business is sold the culture of the buyer will be more important than their nationality.
One of the dangers of being heavily committed to maintaining the culture or character of a business, especially where people or the team approach dominates, is that it can lead to management inertia. Managers fail to change with the company and end up frustrating growth. This issue relates to a range of management roles but is typically concentrated in the manufacturing, sales and marketing areas. The difficulty with upgrading management may reflect not just concerns for maintaining culture, but also the relatively small pool of management talent in such a small economy. Firms outgrowing managers/owners is the theme of the next section.
7.3 Outgrowing Owners
Fast growing firms are likely to eventually outgrow owners. To what extent do owners hold back their firm's growth because they are reluctant to hand over control (management and or ownership) of the business?
It is difficult to be emphatic about any conclusions in this area but there are some important issues that surround ownership of companies especially as they pass through various stages of growth.
As the business grows it becomes more complex, and in some cases less flexible. The bigger the deals, the more valuable the brand, the greater the commitment to R&D and development of new products and the more investors there are in the company, the less scope there is to run the business the way it was run in its early years. Often the founder manager is skilled at running a small but fast growing business. They know how to take risks and make their business respond to near impossible demands to secure and fulfil orders. These skills become a liability as the company gets bigger.
In some cases the owner manager's expertise changes or grows with the company, at least over a significant period of growth. In other cases the buccaneering style of management, so effective in the early years of development, does not change and the company's growth is compromised.
Sometimes the owner manager will recognise the problem and respond by appointing an outside manager to take the company forward - there are examples of this occurring in this study. There is no obvious growth point at which the change in management style is required, but it would be surprising for a company moving from around $30m of export sales to over $100m of sales not to require some significant changes in the way the company is managed.
Although changes in management might be expected to be linked more often than not with changes in ownership, the evidence from this study is not convincing. Of the fourteen cases where new managers have appeared in the last four years half have been in companies where ownership has also changed and half have occurred in companies with stable ownership.
7.4 Conclusion
Nearly two thirds (18) of the firms interviewed had experienced some change in their ownership since 1999, with seven of the changes being from local to foreign ownership. Of the 12 firms where ownership has remained stable over the past three years, 10 are privately, New Zealand-owned companies.
Eighteen of the companies interviewed are New Zealand owned. The vast majority of these companies indicated they were not contemplating moving offshore or seeking foreign ownership to extend or accelerate their growth. Some firms were strongly opposed to such ideas, which could ultimately compromise their potential growth.
The steady increase in foreign ownership is consistent with growing internationalisation and the Government's desire to encourage foreign investment in the New Zealand economy. From this study it appears that foreign buyers are tending to target specific activities - patents, R&D, highly customised production expertise - rather than the complete business. In some cases the change to foreign ownership will result in a decline in manufacturing export sales from the business. Monitoring the export performance of the manufacturing sector may become increasingly difficult as firms concentrate on less visible activities and foreign controlled companies set export prices to suit their international business rather than their New Zealand business.
The growth of owner/operated firms is potentially constrained by the very attributes that were crucial to their early success. Owner/managers are not always able to change their skill sets and approach to business sufficiently to enable them to run a $100m business as successfully as they could a $15m one.
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