Shareholder Director Selection as a Two-Step Process

Amy Schuman

Amy Schuman

In selecting a relatively small number (3 – 5) of family directors from among a relatively large (25 +) shareholder group, a two-step process can be very effective.

Step 1: Identify family members who are qualified to serve as directors.

Step 2: Select from among the qualified family members.

Although this process  appears straightforward, it’s far from simple.

It can be challenging to agree upon a list of qualifications for family directors. To what extent will those qualifications be different from the non-family directors? Who decides the qualifications? And, even more difficult, who makes the judgment as to which family members meet the qualifications, and which fall short?

Once the desired qualifications have been established and qualified family members identified, how is the selection made? Are there term limits to ensure that a variety of qualified family members have the opportunity to serve? Is any consideration made to other factors besides qualifications, i.e. family branch, generation, geography? Is there a regular and robust board evaluation process to keep the focus on performance of directors?

Although best practices call for qualifications to be the determining factor in director selection, be they family or non-family directors, most families find it difficult (if not impossible) to ignore branch and share percentages when selecting directors. An ideal approach can be to acknowledge the desire for branch/share percentage representation, while agreeing that any seated director must meet the established qualifications. Happily, with larger shareholder groups containing experienced and able members, this is often easy to achieve.

In the sibling stage, it is common that all (or nearly all) interested siblings are able to serve as directors. In the cousin stage, this dynamic changes radically. Not all interested family members will automatically have the opportunity to serve as directors, as their parents did. Resolving this issue is one of the most difficult tasks facing the cousin consortium.

Many successful families in the cousin stage have solved this sticky problem by following a variation on the two-step process described above. They find that it answers many of the tough questions quite well. Dear readers, do you have experience – or wisdom – or tough questions – to share in this regard?

For more information, our book Building a Successful Family Business Board by Jennifer Pendergast, Stephanie Brun de Pontet, and John L. Ward can be an invaluable resource.

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Incremental vs. Radical Innovation (“Everything in Moderation”)

Joe Schmieder

Joe Schmieder

Groundbreaking new products—like the iPhone or Viagra—rarely emerge from family businesses. Family-run enterprises tend to prefer smaller-scale, incremental innovation over radical changes, versus the publicly held Apples and Pfizers of the world, which have deep pockets for R&D funding. For most family enterprises, growing by incremental steps is preferable to advancing by giant leaps. This “incrementalist” approach dominates partly because family businesses are averse to taking large risks and taking on large debt. Not surprisingly, then, family businesses tend to be quick followers or quick improvers, rather than original innovators. But we can argue that incrementalism represents a form of innovation, as it focuses on steady improvement of offerings or ways of doing business through meaningful change.

Research suggests that successful, long-lasting family firms exercise moderation with regard to most key dimensions: planning, leverage, and innovation, among others. A 2013 research study conducted by Alfredo De Massis, Federico Frattini, Emanuele Pizzurno, and Lucio Cassia entitled “Product Innovation in Family versus Nonfamily Firms: An Exploratory Analysis,” highlighted how family businesses tend to take an incremental approach to new product development, as part of a broader objective of careful resource management. The moderation approach is related to the desire to maintain sufficient resources, financial and otherwise, for family shareholders. Thus, while venture capital firms talk about burn-rate, or the amount of cash a start-up venture plows through in early stages, and how quickly a given innovation can be brought to market and scaled, family businesses tend to talk about less exciting things, like self-funded developments or modifications to existing products. That prompts some to believe that observing family firms innovate is like watching paint dry. In reality, steady progress is the key to success and continuity for many family businesses and non-family firms. The paint may take time to dry, but it sets very well, with deeper, longer-lasting color.

The moderation approach to innovation has served most family businesses well: They evolve at a pace that fits them, based on collaborative thinking among family leaders and non-family executives who understand and adhere to the family’s guiding principles. At the same time, the incrementalist approach may not always be ideal, especially in fast-shifting markets. Family businesses that fail to adapt quickly enough to the changing landscape will struggle to perform. The print media industry, for example, has been a high-profile sector populated by many family-owned firms (such as newspapers). In the new millennium this market has undergone rapid transformation, mainly because of the rising popularity of non-traditional content-delivery channels, especially digital ones. Some family firms have adapted very well to the Digital Age, innovating digitally based strategies and offerings. Others have not adapted nearly as well, and are suffering greatly for it.

The highest-performing family businesses are those that have learned to be just innovative enough, like Goldilocks searching for the “just right” bowl of porridge in the bears’ house. They match their innovation speed to the requirements of their industry and the pace of their competition, moving more deliberately than many non-family peers, in part because they don’t face the same kind of pressure for short-term results.

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The World Cup as Metaphor

Amy Schuman

Amy Schuman

The brightest oranges, whitest whites, deepest navy blues, sun-ray yellows: each World Cup game brings a different color combination to the field but that is just the surface excitement. Are the players tall, long-legged, loping and passing the ball in graceful arcs from toe to toe, using the entire length and breadth of the field? Or are they short and compact, firing the ball in focused staccato bursts shaped like tight triangles that keep mostly to the field just in front of the goal? Does the team wait until the final 5 minutes to unleash the full power of their athleticism, or do they hit the goal, hard, in the first 60 seconds of play? Who flips and flops on the field after the appearance of a foul, and who springs up for more play after being flung to the ground or elbowed in the face? Who lingers to clasp their opponent’s hand, to speak with them face to face, trading jerseys, and who falls to the ground, on their knees, in tears, in private pain?

The World Cup may be one sport, with one objective, but week after week it has served up a rich feast of group dynamics and individual drama. Innumerable variations were played on the themes of strategy and opportunism, physical power and mental command, supremacy and surrender and ultimately, victory.

Many paths to success. A lesson to inspire us all.

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The Family Business Difference: Capitalizing on Family Innovation

Joe Schmieder

Joe Schmieder

Family businesses have unique strengths built on the overlap of family and business, in part because the family running the business has more at stake—including reputation, survival, and security—than the managers and employees of non-family firms do.

Innovation is one such strength at the family-business intersection. Innovation in a family business, like most other features, is different from that in non-family firms. A key dimension of difference is that innovation in family firms is driven and enhanced by several distinct factors that can ultimately yield greater business performance, and family harmony.  Family-business features that serve as innovation drivers include:

  • Personal attachments such as family bonds, customer relationships, and inter-family-business connections—all of which support innovation

  • An incremental approach built on exercising moderation with R&D spending and emphasizing small changes to offerings, rather than giant leaps

  • Longer time horizons that yield greater patience with the development time associated with innovation

  • Shared values including innovation itself, with several supporting elements such as innovation-focused objectives and cross-functional visibility

  • Low leverage, with an emphasis on reinvesting funds back into the business—and into innovation, specifically

  • Experimental tolerance, or a willingness to try new things, even when that means going against the conventional (in a calculated way)

  • Family leadership that supports innovation by generating high-value ideas and speeding the product development process

Family businesses are indeed different from non-family firms, and many of the differences cited above support their ability to innovate, which in turn supports their growth and profits and the family’s well-being.

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Family Retreats

Bernie Kliska

Bernie Kliska

A family retreat should be a time to align values and educate each other, while at the same time have some fun. It is usually held in an informal setting where family members can bond and exchange ideas and information.

To handle the flood of material, questions, complaints and accolades, it would be advisable to have a facilitator to help guide the family with their interaction.

What may seem like a good idea at the time, can fall flat or even become an occasion for family flare-ups. So what makes for a good family retreat?

  • Develop a Defined Outcome: It is valuable to have realistic and clearly defined goals and outcomes. The agenda should be distributed to everyone in advance and based on input from the entire family.
  • Be Thoroughly Prepared: There should be no surprises. The single largest cause for why family retreats do not succeed is because of not being prepared. If for example, one person is a “trouble maker,” that should be anticipated in advance. If a family has a hard time sitting for an extended period of time, that has to be factored into the design of the retreat.
  • Bring Solid Content: This is an opportunity to gain family cohesion around certain viewpoints and strategies. This is also a time for families to learn something about themselves as individuals, as well as collectively as a family.
  • Ensure Effective Process: Often family leaders focus on the end result and underestimate the importance of the process involved in the discussions. The process should be fair, open and engaging to ensure full participation from everyone. While content is critical, it is often the process that causes problems and derails communication.

If properly planned, the family retreat should be an opportunity to prevent confusion, dissension and conflict. Having sincere and candid communication will only benefit the family, as well as the business.

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Vision & Mission Statements: What’s the Difference?

Bernie Kliska

Bernie Kliska

Does it matter if you use a Vision Statement when you meant to use a Mission Statement? The answer is yes. As research has shown the importance of a family business having a strategic plan, it is equally important for the plan to include both a clear Vision and Mission Statement. Both statements serve valuable roles as the core element of the strategic plan.

A Vision Statement defines what the business hopes to be in the future. It provides guidance for a five to ten year period. It is written succinctly and in an inspirational manner that is easy for all family members, employees, and customers to understand.

A Mission Statement defines the present purpose of the family business. It usually answers three questions: What it does, who it does it for, and the company’s values and priorities.

The Vision and Mission Statements can be marketing tools as well because it announces your goals and purposes to your employees, suppliers, and customers.

It is never too late for a family business to define its Vision and Mission. In fact, some even reinvent themselves through the strategic planning process, which always should include well defined Vision and Mission proclamations.

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Strategic Planning

Bernie Kliska

Bernie Kliska

In order for a family business to survive beyond the current generation in today’s fast churning economy, a well-developed strategic plan would be greatly beneficial. Conceptually, a strategic plan is relatively long range, from three to five years on average.

The term Strategic Planning typically refers to the process of developing business goals and provides a detailed road map of how to achieve those goals. It facilitates communication among family owners, Board of Directors, management and employees.

Perhaps most importantly, strategic planning provides a framework to help guide decision making and how to make the business profitable and sustainable. It also challenges past business practices and opens the way for choosing new alternatives.

The result should be a well thought out written document that includes a business Vision and Mission Statement. It needs to include a time frame in which goals hope to be accomplished and designated individuals who will be responsible for meeting those goals.

Carlock and Ward (1) discuss the importance of having a parallel process. This means there should be a strategic plan for not only the business itself, but for the family members as well. This parallel planning will help unify the business and the family.

A strategic plan is not set in stone and should be revisited annually and revised according to current circumstances.

Strategic planning can be the key to unlocking the door to making a family business successful. Research has shown it to be one of the three most important factors of family business sustainability. The other two factors are holding regular family meetings and having a Board of Directors.

(1). Carlock and Ward (2001), Strategic Planning for the Family Business, Palgrave Macmillan.

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Capital Market Theory and the Family Business

John Ward

John Ward

The most recent HBR has the theme, “Are Investors Bad for Business?” (excerpt). Extraordinarily respected Clayton Christensen of HBS talks of how bad capital market theory is for innovation and job creation. Finance rations capital to a short term bias presuming capital is scarce. But it isn’t, Christensen asserts.

Family business capitalism sees the world differently. Families see capital as limited, but also embrace the long-term view. Families don’t decide as much by IRRs as by future scenarios. Limited capital sharpens the commitment, persistence, and agility necessary for sustainable success.

For years I’ve thought that shareholder capitalism couldn’t escape its fundamental assumptions and elegant, even if wrong, orthodoxy. With Professor Christensen leading a different thesis I’m heartened we maybe see things differently. While that’s good for society, it also lessens the competitive advantage of business families. Or, maybe, business families are so innately good at this thinking that they are protected by years of experience.

It’s ironic. Just as the share value capitalism theory is facing critique by advocates, business families are losing confidence in their inherent advantages. They are increasingly being told by family business researchers that they compromise shareholder value too much for family continuity and comfort.

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Conciliatory Gestures – Helping Make It Safe to Reach Agreement

Mike Fassler

Mike Fassler

Families that work together successfully while maintaining positive family relationships have figured out how to have difficult conversations and reach agreement on challenging matters.  Conciliatory gestures, doing something or saying something that expresses a concession or a willingness to make a concession, can play an important role in this success.  Conciliatory gestures help create a safe environment for multiple parties to make concessions as they work toward agreement.

Examples of conciliatory gestures include apologizing for what was said or for how you behaved; acknowledging your contribution to the challenging situation which demonstrates a willingness to be accountable, and positive expressions about the other’s contribution.  These gestures demonstrate vulnerability and a desire to find common ground.  This in turn can elicit a conciliatory gesture on the part of others as the expressions send a message that fairness will be represented in the ultimate decision.

In order for this to be effective, all parties must share a fundamental belief that they all have the greater good of the family and the business in mind balanced with respect and consideration for individual interests.  Absent this mindset, conciliatory gestures may be viewed as less than authentic and therefore manipulative.

Give it a try.  The next time you are engaged in a discussion that is emotionally charged and where opinions vary, try out the use of a few conciliatory gestures.  Set the example for the group engaged in the discussion as it may be contagious and could lead to a break through to agreement.

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Accountability in Your Family Business – Achievable Reality or Elusive Dream?

Mike Fassler

Mike Fassler

I have often had the opportunity to serve family businesses where accountability is alive and well and the resulting culture of accountability provides a competitive advantage.  Likewise I have seen plenty of family businesses where the lack of accountability is a perpetual topic of discussion, there are little or inconsistent consequences when people fail to deliver, and accountability seems like an elusive dream.  Often family businesses that lack a culture of accountability also have contentious relationships which are a drain on both family and business energy and resources.

So what are some of the distinguishing factors for those family businesses where a culture of accountability is a reality?

Shared Values – Shared values are the foundational building block to accountability as they inform what attitudes and behaviors are expected and provide broad guidelines for family member interaction with one another and with the business.

Shared Vision – A shared vision provides a clear understanding of where both the family and the business are going and how one supports the other.  A shared vision provides the context within which results can be gauged and is the connection to a purpose larger than any one individual.  It is this connection that creates the incentive to contribute to the overall good.

Freedom of Choice – Accountability is built through freedom of choice to contribute on the part of the individual.  Absent a voluntary choice to contribute, there are too many ways to blame others for behavior and results that don’t measure up.  The motivation to be accountable is derived from the satisfaction of choosing to contribute.

Certainly articulating goals, roles, policy, procedures, consequences, etc. to provide additional clarity on expectations can be helpful to developing a culture of accountability.  However, no amount of structure will substitute for shared values, a shared vision, and freedom of choice when it comes to making accountability an achievable reality in your family business.

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