All posts by Drew S. Mendoza

Ten Qualities of Successful Family Businesses

Drew Mendoza
Drew Mendoza

This week’s blog is an easy-to-grasp list of 10 qualities I’ve noticed about the underpinnings of high-functioning family businesses over the last 25 years. These are not things I made up. They are philosophies and guiding principles of families I’ve been honored to serve and speak with.

  1. Estate planning is NOT continuity planning. Confuse them at your peril. Estate planning is necessary but usually not sufficient. Continuity planning will include these critical matters: leadership transitions of the company, the board and the family; the rules that govern the board, compensation and performance measures; company strategy; shareholder education; and your vision and purpose for being in business together.
  2. Family meetings should help plan for future generations of ownership and encourage leadership, fun, shareholder development and meaning. If the meeting does not work out as well as hoped the first time, give in and go hire an expert to facilitate the conversations that are required. And, while we’re on this subject, another reason to use an outside facilitator is because it is hard to come across as neutral and objective when you’ve got a large stake in the outcome of the conversation. Being a member of the family, an employee of the business or a member of the board may skew your thinking and ability to seem unbiased to everyone else in the room.
  3. The family will need expectations aligned around many areas including their expectations for growth, risk, profitability, liquidity, purpose and policies like how we select leaders and who can be on the board.
  4. Salary, bonus and distributions/dividends are different. I’ve seen many a family co-mingle them in order to minimize or avoid tax liabilities. For families that intend to continue the business to the next generation, this is frequently the source of big problems later on.
  5. Have an appropriate, functioning corporate governance structure.
  6. Run the business and the board as a meritocracy.
  7. Beware of conflicted advisors.
  8. A leadership change will likely take five to 10 years of preparation and execution and another three to five years for the new leader to get their sea legs. All concerned must commit to hang on and work through the difficult times that sometimes arise. Remember that although we’re related, we usually view aspects of our realities differently from one another.
  9. The transition of the company’s ownership and leadership is a dynamic strategic imperative that will benefit from having the right foundational building blocks in place. Know your values and divine a strategy that reflects those values. Be honest with yourself and each other. Have thoughtful policies about compensation, the purpose of profits (in all their forms), the responsibilities and purpose of ownership, and be open to accountability.
  10. Be patient with one another and the process of transitioning leadership and ownership of an enterprise.

If one or more of these strike you as something you’d like to read more about, let me know.  I’ll be happy to introduce you to articles and books specific to each of these 10 points.  And, by the way, each of these points can be a discussion item for shareholder, family or governance meetings.

To contact Drew Mendoza, Managing Principal, please call (773) 604-5005 or email mendoza@thefbcg.com.

When best practices (and Mini Coopers) backfire

Drew Mendoza
Drew Mendoza

A little knowledge can be dangerous – no matter how well intentioned.

The family member Chair was a regular face at the local university’s family business center events. She had heard a presentation about how having independent outside directors could be a powerful addition to the company’s competitive arsenal and be an equally powerful tool in managing shareholder relations. The presentation, delivered by an expert in the field with more than 20 years of experience, lasted three hours.

Bubbling with enthusiasm and new found energy, she entered the next board meeting a month later. Over the course of 10 minutes, she informed her cousin shareholders that what was most needed was the addition of three independent directors. She came to the meeting prepared with a slate of directors. The director slate presented would have been impressive to just about any other company in their space. Fantastic academic and career pedigrees, international experience, strengths in finance. In fact, the slate of directors were the equivalent of Indy 500 cars. By comparison, her cousins were Mini Coopers. (I mean no disparagement toward the Mini. I’m sure they’re fine little cars well made for in-city travel.)

Guess what happened next?

A fire storm erupted in the board room. The directors were taken off-guard, felt insulted and threatened. It took the chairwoman over a year to regain the board’s trust and educate the directors about the rationale of the changes she had proposed.

It’s one thing to understand best practices. It is another thing entirely to know how to educate and prepare an ever increasingly disparate shareholder group for change.


Today’s blog is inspired by and written in support of FBCG’s newly announced event, The Chair Forum. We invite family firm chairs to continue the conversation by joining us to share experiences, generate ideas and hone their skills at productive corporate governance. Click here to learn more>>

Understanding the complex role of board chair

Drew Mendoza
Drew Mendoza

I’m a fan of good corporate governance particularly in family enterprises with the complexity or size that warrants having a (well) functioning board of directors. How complex and what the thresholds are for having a board of directors that has bench depth, structure and independence depends on a wide array of factors and are the focus of articles, books and blog postings throughout the family enterprise world. But, for today, I want to plant this seed in your thinking.

I believe the global community of family enterprises is awakening to and realizing the value and importance of good corporate governance and, more importantly, excellent management of those boards by qualified chairpersons.

Being the chairman of a family firm board is not like being the CEO. The CEO focuses on growth, profitability, strategy implementation, and the processes and structures that keep the business moving toward its strategic imperatives. The chairman leads the business’ governance function, not the day-to-day management of the company.

 Yet, most family firm chairs are the men and women who were the company’s previous CEO. Do they know their company’s operations? You bet, thoroughly and deeply. But, do they have the skills necessary to be the chairman? Can they manage the board in ways which reflect shareholder expectations and ensure the CEO is receiving clear direction? Do they know what data the board needs and in what format to do its job? Can the chair develop accountability measures for both the board and management without alienating family managers and family shareholders? Is the chair ready and able to listen to director input and facilitate difficult conversations without resorting to the meeting management style s/he used when they were the CEO? Is the chair able to identify the needs for creating or dissolving board committees?

We believe the role of the chair is very different from the role and responsibilities of the CEO. And, we believe that the chair is not just another director. The chair has special responsibilities that add value to the company and help align shareholder expectations.


Today’s blog is inspired by and written in support of FBCG’s newly announced event, The Chair Forum. We invite family firm chairs to continue the conversation by joining us to share experiences, generate ideas and hone their skills at productive corporate governance. Click here to learn more>>

A chairman defines the role

Drew Mendoza
Drew Mendoza

Did you ever hear the expression:  Tell them, remind them and remind them again?

For decades, FBCG has been preaching the value of corporate governance in general and the very special role played by the board’s chairman in particular. This short piece, originally published in The Family Business Advisor in print version in 1993, still captures the essentials of what it means to be the chairman of the board in a family enterprise. It’s worth a review.

A Chairman Defines His Role

We know a thoughtful family business leader who is retiring as CEO, but will continue as Chairman of the Board. (The firm has an active board with for outsiders and two family representatives.) In preparation, he attempted to define the chairman’s responsibilities. We wanted to share it with our readers.

  1. Assure that shareholders are kept adequately informed of affairs of the company, and develop and maintain shareholder relations program of the company. This includes giving thoughtful consideration to shareholder concerns and needs and reporting those concerns and needs at least once per year to the board.
  2. Accountable, with other directors, to shareholders for proper execution of duties and responsibilities of the Board in connection with shareholder rights and interests.
  3. Develop responsibilities to be assumed by the company’s Board of Directors.
  4. Through the President and CEO, (a) offer counsel when asked; (b) assure that Board decisions are understood and implemented; and (c) assure that management has an active and effective strategic planning process.
  5. Keep informed on state of the company’s affairs, and through the President and CEO, assure adequate flow of information to the Board.
  6. Develop Board as dynamic, constructive force in company and guide it in discharging its responsibilities. Propose methods to the Board to help it identify opportunities and means to improve Board functioning.
  7. Ensure Board members are knowledgeable in industry matters.
  8. Propose time and place of Board meetings; call meetings; preside at meetings of shareholders and meetings of family shareholders.
  9. Review reports and proposals of management with officers prior to presentation to the Board.
  10. Lead Board in preparing annual slate of directors and selecting candidates to fill vacancies.
  11. Responsible to secure reliable, certified audit to verify management’s conduct of the business.
  12. Make recommendations to committees of the Board. Present to the Board reports and recommendations made by committees of the Board. Serve on the compensation committee.
  13. Maintain top level contacts with members of the community to ensure that company is properly recognized, dealt with and appropriately represented in community affairs.
  14. Identify ethical dilemmas in the company and report on those annually to the Board.
  15. Consider leading special projects as proposed by CEO.

 Excerpted from The Family Business Advisor, Copyright © 1993.

Sustainable family policies answer “Why?”

Drew Mendoza
Drew Mendoza

Increasingly, owning families rely on an array of policies intended to guide future decisions and actions. They may address who can serve on the family council or the board, set compensation for next generation members, determine whether in-laws can own stock or guide how profits will be deployed (re-invested or paid out to shareholders).

In our experience, an important quality a sustainable policy will have is that the reason or rationale for why the policy was written is explained in the form of a preamble or some sort of introduction. When preambles describe the philosophical basis of the policy, it conveys the intent of the policy. It’s akin to understanding the meaning or intent of a law as compared to the letter of the law. A policy that doesn’t convey the intent may be difficult to interpret or enforce as holes or ambiguous language is put to the test in later years.

Information and Communication: The Challenge of Data Overload

Drew Mendoza
Drew Mendoza

A keynote speaker I heard twenty years ago, who promoted himself as a ‘futurist’, made the point: “don’t worry about the trash, we’ll find a way to deal with all the trash as better recycling technologies arise.  The thing you’ve got to worry about is the data.  We’re all going to be drowning in information.” 

Turns out he was spot-on.

In enterprising families, attention to information flow seems to be on the rise.  So too are family meetings, family councils and boards of directors are becoming more disciplined and more thoughtfully and strategically comprised.  *

The challenge for leaders of families and family firms is building the processes by which family members are educated and enlightened so that they can understand the data they’re receiving and apply it to metrics which indicate the degree to which the family and its enterprise(s) are reaching its goals.  Doing so results in more fully aligned shareholder groups and, as any CEO with multiple family shareholders will tell you, an aligned shareholder group makes the CEO’s job much easier.  In my experience, these are the same families that are more likely to achieve their business goals.

We’d love to hear from you – what steps are you taking to keep family shareholders both aligned and informed?

*For a great read on family enterprise boards read Building A Successful Family Business Board: A Guide for Leaders, Directors and Families

Long-term Views: Embracing a Long-Term Perspective on Balance

Drew Mendoza
Drew Mendoza

We observe that one differentiating quality of multi-generational enterprising families is their tendency to take a longer term view than non-family controlled companies.  They tend to grow more incrementally.  They are often more patient in their expectations of return on capital.  And, they are often more patient with people and are rewarded with loyal employees among other benefits.

In my almost 25 year career studying and serving enterprising families, an interesting thing that has rubbed off is recognizing that while work-life balance is important, I’ve come to embrace it with a long term perspective.  Most folk I meet who profess to value work-life balance measure their sense of balance on a daily or perhaps weekly basis.  I’ve come to believe that the longer the window I use – years, rather than weeks or even months — the less stressed I am by today’s emergency.  I’m more patient with myself and those around me including my family members.

Readers from enterprising families – what’s been your experience?

What’s in a name? Use the right words to describe the family meeting

Drew Mendoza
Drew Mendoza

The caller told me that in her family, they have a family meeting every six months.  I asked who is invited to the meeting: “All of the family members who own stock” she said.  Spouses? “Nope.”  Siblings who don’t work at the business?  “No”.  Adult children in the next generation in college? “Of course not.”

Another (and more descriptive) name for these gatherings would be a shareholder meeting.  Why does it matter?  To my thinking, excluding spouses, the next generation or any siblings (not working in the business) from a family meeting runs the risk of communicating ‘You’re not a part of the family.’

Eckrich and McClure’s book The Family Council Handbook does a nice job of differentiating among all the many different sorts of meetings

Three ingredients to multi-generational firm success

Drew Mendoza
Drew Mendoza

Over the last twenty-plus years of working with and observing multi-generational family businesses, three attributes common to the oldest, largest and best performing ones seem to present themselves repeatedly. 

First – the family shareholders are aligned around matters of vision, purpose and expectations of each other and the enterprise.  And, as often as not, they reach alignment through the use of family meetings or other such important forums for shareholder and family education, development, trust building and communication. 

Second, the output of those family meetings – their vision, purpose, sense of unity,  policies and agreements – these all serve as important contributors to strategy.  The outputs inform management of what is expected of them and the rules they’ll have to play by; what some may call the non-negotiables.

Third, their values implicitly or explicitly include transparency, accountability, stewardship, outside input and a responsibility to others.  These values usually guide them to establish appropriate and active governance – both for the family and the operating company.

At our website, www.efamilybusiness.com, you’ll find dozens of books, webinars and thousands of articles loaded with ideas about family meetings, governance and being an effective family firm shareholder.

The road to ruin is paved with good intention – What it takes to be the company’s next leader – Part 3 of 3

Drew Mendoza

 

In our line of work, it is common for one family member to describe another family member in less than glowing fashion.  We hear a lot, no make that A LOT, of descriptions by one member of another that suggest or proclaim themes, hidden agendas or perceived personality flaws.  

And in every case, the descriptions are true and valid from the speaker’s point of view and based on their own personal perception. 

In family business the stakes not only include family relationships but they also  include money.  Significant amounts of it relative to the overall net worth of every member of the family.  And we humans predictably and understandably become worried, anxious and / or frightened at the possibility of our own financial ruin, and that it could be caused by another member of the family.  In the saddest and worst case scenarios actions like, time with grandchildren being withheld as punishment against grandparents, siblings no longer speaking to each other, and estrangements and cutoffs occur.  We have all read tragic sagas in the newspapers of family members going to court, or worse family implosions that cause the demise not only of the business, but the family. 

And yet, in most cases, these same family members who seemingly judge, criticize, battle with, or do not trust one another – when assessed by independent, objective and trained professionals – are determined to be, not only normal, but, in their heart of hearts, well intentioned.  Sure, they can sometimes appear to be mean spirited, arrogant, or self-serving.  But, beneath that facade, usually lies someone who is well intentioned, and loves their family, despite the not-so-great ways they manifest their own fears and worries. 

Current leaders, next generation leaders and family leaders may sometimes not appear to their cousins or siblings as being well intentioned. And, it is just as common that these leaders view those same cousins and siblings as being less-than-well intentioned too. 

The empirical research is clear:  the genesis of family enterprise failures most often are caused by strife among two or more people who, really, in their heart of hearts, have the very best of intentions. 

So what is the answer? It seems like it might be complicated, but the simple solution is to always keep the lines of communication open, take the time to understand what another might perceive. If you shut down the communication there is no hope, but choosing the often difficult path of trying and trying once again, it is at least possible that families could eventually understand and uncover the good intentions of their family.