He was meaning the guilds which, in proportion, is about right. As for the effects oblivion doesn't change much(haven't played Skyrim yet) a dragon statue in the middle of temple district and every npc having a new line of text praising you.
either way, he's still incorrect.
becoming the leader of any faction in Morrowind is not a "small, but important part.", as there is
no importance in becoming Arch-Mage or even Guildmaster as the effects of accomplishing such tasks are non-existent.
if you're Arch-Mage of the Mage's Guild they still say "Outlander, MOVE ALONG."
if you're Hortator of every great house they still say "Outlander, MOVE ALONG."
if you're the Nerevarine, prophesized hero and reincarnation of the savior of the Chimer, Nerevar, they still say "Outlander, MOVE ALONG."
and Oblivion succeeds in this
far better than Morrowind. that one "new line of text" is the differentiating factor between the player feeling satisfaction after doing something important and feeling complete and utter apathy towards any future endeavors.
after beating a long (and sometimes tedious) game like Morrowind, and having literally saved all of Vvardenfell, only to be greeted back in Balmora with "Can you EVEN.BE.TRUSTED?" or "Can you hurry this along? I really must be going." needless to say, leaves a lot to be desired.