A bit of a disclaimer: any mention of "government" seems to attract opinionated imbeciles from search engines: this is not a political blog, and I don't care to engage in political discussions. Comments will be moderated and correspondence ignored accordingly.
Back on point: I am led to the sense that businesses, nonprofit organizations, and government agencies have a similarity in their core purpose and differ only in ways that are largely incidental to the fulfillment of their purpose. Understanding this difference can help an entrepreneur evaluate whether his idea would best be accomplished by starting a business, founding a charity, or petitioning a government agency.
The similarity is this: all of these organizations function to organize capital and labor to deliver a benefit to certain members of society. From a functional perspective, they are interchangeable but for one thing - whether the people who receive the benefits they provide are willing and able to pay the expenses of providing those benefits.
- A business provides value to customers, who pay individually for the value they receive. The organization is willingly financed by the same people it serves.
- A nonprofit provides value to beneficiaries, who do not pay individually for the value they receive. Instead, the organization is willingly financed by donors who wish to gift the value to the beneficiaries.
- A government provides value to certain members of the public, who do not pay individually for the value they receive. Instead, the organization is unwillingly financed by taxpayers, pay taxes to avoid having violence done upon them.
Granted, that is speaking in ideal terms and in a general sense. For example, there are government agencies that collect fees that are willingly paid by those who receive the benefit or privilege of their service - the cost of obtaining a hunting license ostensibly pays the salaries of game wardens. But my sense is that these general statements hold true in most instances.
My consideration of nonprofit and government organizations will trail off from this point forward - as I currently work in the commercial sector, I am primarily interested in how the relationship to financiers and beneficiaries functions for a commercial organization, but the other types may pop up by way of drawing similarities or contrasts.
Investors and Customers
I have stated that commercial organizations are financed by the customers they serve, and I will stand by that statement - but there is another set of stakeholders who also consider themselves to be the financiers of a commercial organization: its investors.
In terms of operating expenses, it should be clear that investors pay no part of the operating expenses of a business - they intend to profit from their investment, not to be roped into having to provide a constant stream of financial support to the business. This sometimes happens when a business is poorly managed and cannot cover its expenses - it must borrow money or raise capital from investors (generally new investors, by issuing bonds or releasing treasury stock). But in a successful and sustainable operation, all ongoing expenses are paid out of the revenue collected from customers.
Investment capital, however, is less clear. Starting a business requires a lot of cash, and until a product is rendered there are no customers to provide revenue. This is where investors come in: they provide the investment capital to found a business (or in some instances to expand its operations) in exchange for the promise of a future return. It does seem possible for customers to found a business by paying in advance for products to be delivered in future, but I expect such situations are rare.
However, I stand by the assertion that customers finance the organization - the revenues of a business repay the investors for the investment capital they provided. This is most obvious when a business borrows money from a bank - the amount it required to establish the operation is repaid, over time, from the revenue contributed by customers. At some point, the loan is paid off by the customers.
When investment capital is generated by the sale of stock, the situation is less clear: the stockholders are not repaid (unless the firm repurchases all its stock and goes private, which is rare), but instead maintain an ongoing interest in the operation. The customers repay the investment capital through revenue, but it is a debt that is never entirely paid off: so long as shares are outstanding, the inventors are constantly owed some portion of the revenue.
As much as I'm attempting to avoid ethical issues, I am feeling a bit queasy at the notion of a loan that is never repaid - but I suppose all organizations are a bit questionable in this regard: the donors to a nonprofit gave funds without any expectation of being repaid, and the taxpayers who support a government have no expectation of repayment and did not freely choose to provide funds. And neither charitable of government beneficiaries have any right to expect to receive value. But this gets a bit off topic.
Ownership and Control
The notion of "ownership" becomes very hazy in all regards. In western culture, it follows the general principle that someone who pays for something owns it. But in organizations of all kinds, this becomes hazy.
The donors to a nonprofit clearly do not have ownership of the organization, though the organization must appease their demands for the sake of getting future contributions from them. The taxpayers of a government do not have ownership of the organization, but the organization must appease their demands to avoid being overthrown. And the customers of a business do not have ownership of the firm, but their demands must be appeased in order to generate revenue.
Business investors, however, are problematic. They are owed a return on their investment, as explicitly promised to creditors who loan capital or implicitly promised to shareholders. It seems to me that they have little "right" to control the business in any way except to ensure the repayment of the funds they are owed. And while investors show little interest in the day-to-day operations of a firm and relegate this task to employees (management), the strategic direction of a firm is another question.
It does not seem at all reasonable for an investor to demand that, in exchange for a loan of money, they have perpetual control over the strategic direction of an organization. This is particularly true when the amount of the original investment has been repaid, in full and with interest. A bank that loans money to a business has no rights other than to collect payments as agreed upon - but again, the perpetual debt to stockholders becomes problematic.
And again, the problem of ownership and control is not unique to commercial organizations. Nonprofit organizations can often "go rogue" and completely ignore the interests of their donors so long as they have working capital. Government organizations can completely ignore the interests of citizens until they have gone too far and incite a revolution. Businesses can ignore their investors and customers until they have gone bankrupt. This, too, merits consideration - but not here and not now.
Customer Relations
Of all the beneficiaries and financiers of organizations, my sense is that the relationship with the customer is most clear, direct, and ongoing. Except in rare instances where a company provides a rare, unusual, or once-in-a-lifetime service, the business must constantly take into account the interests of its customers and ensure that its operations provide ongoing value in order to receive ongoing revenue.
Its relationship with investors is of no consequence - or should not be of any consequence. Rationally, the investors should also be interested in providing ongoing value to the customer, because doing so is critical to the firm generating the revenue necessary to repay their investment. But there are instances in which investors run a company into bankruptcy because they are interested in something other than profiting from their investment, or because they do foolish things to generate short-term returns while damaging the company's potential to provide long-term returns.
In that sense, the rational investor should be content to leave the management of the firm in the hands of the employees it has paid to management, so long as the firm is profitable and stable enough to provide the required or expected return on their investment. Any encouragement should be for the sustainability of the firm.
Ultimately, that brings me to the conclusion that the customer is the most important stakeholder of the business, whose needs should be served above all others - it is neither a moral obligation nor an option, but a functional requirement that must be met in order for the firm to retain the customers who provide revenue to sustain its ongoing operations.
The Broader Scope
To summarize and make sense of all of this, the key point of this meditation has been that business, nonprofit, and government organizations all exists as means of coordinating capital and labor to deliver benefits to certain members of society, and that the difference between them is largely functional and financial: it is the difference in identity and interests of those who receive the benefits and those who pay for the benefits to be provided to the recipients.
In this regard, the function of a business is clear cut because the financier and beneficiary are essentially the same person - the operating expenses are paid, and the investment capital is repaid, both by the customers who receive the benefit - and because the customers contribute the revenue voluntarily and have the ability to stop their contributions at any time, their interests must be the primary concern of the organization.
Where the interests of financier and beneficiary cannot (or will not) be sustainably served, a nonprofit organization or government agency is the only effective alternative for establishing an organization to provide benefits. This becomes a bit of an ethical quagmire, because what is "effective" is not always "ethical" - but I'll save that meditation for another time and another venue.
