All posts by Norbert E. Schwarz

Distribution Policies

Norb Schwarz

When the family business has shareholders with diverse financial needs and interests, disagreements over distribution policies can be challenging to the business and the family.  To better manage these discussions, it may be helpful to know or consider the following:

  • Estimate the financial needs of the business utilizing both strategic and operational business planning.
  • Determine the shareholders’ risk tolerance –are they willing to utilize leverage to finance future needs o the company?  The current environment for obtaining outside capital should be taken into account.
  • Determine shareholder attitudes regarding desired ownership percentages into the future. Are they willing to take on outside investors? 
  • In situations where shareholders are taxed personally for business profits, allow for tax related distributions at the highest tax level applicable.
  • Set a base annual living expense distribution that the business should be able to accommodate without endangering its ability to compete.
  • Based on best estimates from the business planning process, estimate the capital needs of the business over the next 3 to 5 years.
  • Establish a distribution formula based on the needs of the business and risk environment of the business. Some businesses have relative low risk levels as a result of stable markets, strong customer base or niche products or services not easily challenged or duplicated. Potentially higher business volatility will generally demand a higher level of reinvested earnings and a lower level of shareholder distributions in excess of tax and baseline distributions.

Remember these issues are not static, it is important to review shareholder concerns on liquidity and risk on at least an annual basis. Discuss with the board potential implications of the answer to these questions on the existing distribution policy and capital needs of the business. This also underscores why it is critical that management of the company establish and review strategic initiatives with the board on a regular basis, and that the board consider the impact of those initiatives on shareholder objectives.  Finally, shareholders need to revisit their objectives and distribution expectations in light of the strategic opportunities identified for the business.

The Year of You

Norb Schwarz

By now most of us have made our New Year’s resolutions and have put them on a back shelf.

For 2012, I am working on a new challenge. I am concentrating on self-improvement as opposed to focusing on the business. The process will be much the same as my business planning process. First take an inventory. Who am I? What are the elements that make up “me”? I came up with eight potential elements for myself; the spiritual me, the emotional me, the relational me, the financial me, the professional me, the experiential me, the intellectual me, and the physical me. Given those elements of “me”, the next step is to look at how I have fared in each area in the past, where I am now, and where I want to be in the future. The final step is to outline what I have to do to meet each of my future goals and begin the process for each.

I like to keep the following favorite verse in mind as I go though my “year of me” process:

Isn’t it strange that princes and kings
And clowns that caper in sawdust rings
And common people like you and me
Are builders of eternity?

To each is given a bag of tools
A shapeless mass and a bag of rules
And each must make, ere his life is flown,
A stumbling block or a stepping stone.
R. L. SHARPE

Silos are great for corn but destructive to your business.

Norb Schwarz

John had been working for the company for 25 years and is close to the patriarch. In fact, Dad hired him and has consulted with him in making key decisions over the years. Today the company is facing some real challenges.  The market appears to be growing, and its products are still well received, but profitability is lacking due to internal inefficiencies.

An outside consultant was called in to assist in getting the company on track again.  What he found was a common problem in many previously successful family businesses. Over the years, the company had developed management “silos”, the most destructive of which was led by Dad’s valued confidant, John. Because of his position as a top manager in the company and his close relationship with dad, John was thought to be immune to challenge by the other managers, even when they knew that his departmental decisions were harming the rest of the company. In order to cope with the situation, the other senior managers began to develop their own silos to protect their departments from John’s power plays. Interdepartmental teamwork and communication almost ceased to exist, as did overall profitability.

It took the outside consultant’s report on the situation to open Dad’s eyes to the cause of the problem. John was given an ultimatum to destroy his silo and become a collaborative team member or retire. John chose to retire. On his retirement, other silos began to collapse and an effective management team began to evolve. Internal efficiencies began to improve and profits began to rise again.

Silos are not restricted to farms or companies. Some of our worst defeats during WWII were caused by admirals or generals who were not team players. The resulting lack of communication often led to lapses in intelligence and failure to coordinate battlefield or naval campaigns, causing unnecessary loss of lives.

Unfortunately we see many family businesses using silos as a way to ‘work around’ family tension – where one brother is put in charge of one area, and another in charge of a different division and they make a ‘pact’ to stay out of each other’s sand boxes as their personal dysfunction prevents them from working effectively together.

Don’t be blindsided by loyalty and longevity, and don’t use silos as a way to ‘divide the enterprise’ between feuding factions of the family. Silos in the company lead to unhealthy internal competition, breakdowns in communication and opportunity for your competition.  Beware the silos as they can really set you up for failure.

Great boards do exist!

Norb Schwarz

In our work we sometimes come across a board that is working exceptionally well and adding substantial value (both financial and organizational) to the business and for the shareholders. I have been fortunate to work with a number of such boards. Following are some common characteristics I have found in these highly functional boards.

  1. Majority (usually minimum of three) experienced independent directors.
  2. Commitment from shareholders and management to welcome independent perspective and insight.
  3. Director commitment to prepare for meetings and to be available outside of meetings.
  4. A minimum of financial/audit – compensation – and governance committee functions.
  5. A knowledgeable and committed Chair who is willing to take responsibility and grow with the job.
  6. Effective board structure and process.
  7. Positive synergy among all board members.
  8. Strategic focus.
  9. Open communication.
  10. Willingness to make difficult decisions.
  11. Management and shareholder willingness to accept board decisions.
  12. Director familiarity with shareholder expectations and senior management capabilities.

This is certainly not meant to be an exhaustive list, and we would be interested to hear your thoughts or experience with board effectiveness.

Accountability: “Evaluate to improve, not to prove.”

Norb Schwarz

A young next generation executive working for the family business her father founded recently told me that lack of accountability among family members in the business was hampering the successful transition of the company to the next generation.

Unfortunately her comments mirrored those of other clients who have had difficult transitions due to apparent lack of accountability. Why is accountability such an elusive issue in many family businesses?

Perhaps it is because accountability is thought to be synonymous with “consequences” and thought of as punishment for failing to accomplish a task.  Yet, if we looked at accountability with a different lens, perhaps some of the barriers to its acceptance might be torn down.

Rather than looking at it as a way to impose consequences or punishment for failure, we should be welcoming accountability as a process that offers an opportunity to learn and improve on results that are both positive and/or miss the mark. Clear communication of agreed upon goals and measureable benchmarks to achieving the goals are prerequisites for the successful integration of accountability into a positive culture for the family business. With this positive process in place it will be much easier to establish a meritocracy based on accountability as opposed to an aristocracy.

“Evaluate to improve, not to prove.”

Five Reasons People Don’t Perform

Norb Schwarz

Perhaps the most difficult job I had as a manager was to complete timely and constructive employee evaluations. As I struggled with the process, it struck me that there were five primary reasons people did not perform satisfactorily in any job. 

  1. They did not know what to do. This is a shortcoming of communication within the company.
  2. They did not know how to do it. This tends to focus on shortcomings in the training area.
  3. They did not have the resources necessary to do the job. This is a matter of allocating the proper resources within the company.
  4. They did not want to do the job. This is simply a matter of appropriate motivation. And,
  5. They couldn’t do the job if their lives depended on it.

Nearly all of my employees who were not performing satisfactorily were in the first four areas. Management shares responsibility with the employee in the performance of the first four shortcomings. It will require a joint effort of management and employee to bring performance up to satisfactory standards. If an employee fell into the fifth category, the handwriting was on the wall. The employee had to be let go for the benefit of both the employee and the company. 

Once I began to see the performance management process in the light of a joint responsibility, it was much easier for me to utilize the process as a productive tool for the growth of both the company and the employee.

What good are boards?

Norb Schwarz

Recently one of the national business news programs asked its audience to call in to vote on whether public company boards are worthwhile or worthless. Commentary suggested that in many cases public company boards were headed by CEOs who were also the Board Chair and questioned whether a board under such leadership could be truly independent with primary loyalty to shareholders. The implied conclusion was that such boards have limited shareholder benefit.

That conversation caused me to reflect on the many family business boards I have had the pleasure of working with. Many of those boards include independent directors, some with a majority of independents.  Like some public company boards, some family business boards might be considered a waste of resources and others return many times the investment to the family shareholders. Interestingly, in my limited personal sample, the boards chaired by someone other than the CEO or those with an independent lead director tend to offer the greatest return to the shareholders. These high return boards have much in common. Among their many attributes, these highly productive boards had the following characteristics:

  • They are truly independent in that their qualifications were based on the skills they brought to the table.
  • The boards have a majority of truly independent directors.
  • They were not known personally to any shareholders until they were interviewed for the board positions.
  • They work well together as a group and respect one another’s contribution to the board process.
  • They respect the family and offer challenging support to management.
  • The independent directors meet regularly as a group.
  • The board engages in independent evaluations of its own effectiveness at least bi-annually. 

In conclusion, let me be quick to point out that the return to shareholders I refer to may not be a financial metric in all cases.  For example, it would be hard to put a value on improved family harmony as a result of the presence of objective and respected voices in the boardroom – but this can be a huge ‘return’ to family shareholders in a privately held business.

My sincere thanks go out to those independent directors who continue to give their best to our family businesses.

Letting Go

Norb Schwarz

I often think of the time when I was just beginning my banking career, had a growing family, and was working toward my master’s degree at night school. After several years of multi-tasking, I went to my boss and asked him if getting the degree was worth it. His short answer was “yes”, but it was a comment he made in support of his advice that has stayed with me and served me well over my half century in business.

He said “Norb, never leave anything, always go to something better”. His advice has served me well over the years. As I work with senior generation family business owners who are transitioning the business to the next generation, I can see that those who have identified something to transition into are much more likely to be able to let go of their role in the business. Whether it be lowering your handicap in golf, teaching, serving on other company boards, philanthropy, community service, spending more quality time with your spouse and family, writing, painting or just doing those things you have always wanted to do, successfully transitioning the business shouldn’t be viewed as leaving anything. It should be viewed as going to something better.

LETTING GO

When I let go of what I am, I become what I might be.

When I let go of what I have, I receive what I need.

By yielding, I endure.

When I give of myself, I become more.

When I feel most destroyed, I am about to grow.

When I desire nothing, a great deal comes to me.

Author unknown

Return on Board Investment

Norb Schwarz

Recently one of the national business news programs asked its audience to call in to vote on whether public company boards are worthwhile or worthless. Commentary suggested that in many cases public company boards were headed by CEOs who were also the Board Chair and questioned whether a board under such leadership could be truly independent with primary loyalty to shareholders. The implied conclusion was that such boards have limited shareholder benefit.

That conversation caused me to reflect on the many family business boards I have had the pleasure of working with. Many of those boards included independent directors, some boards having a majority of independents.  Like some public company boards, some family business boards might be considered a waste of resources and others return many times the investment to the family shareholders. Interestingly, in my limited personal sample, the boards chaired by someone other than the CEO or those with an independent lead director tend to offer the greatest return to the shareholders. These high return boards have much in common. Among their many attributes, these highly productive boards had the following characteristics:

  • They are truly independent in that their qualifications were based on the skills they brought to the table.
  • The boards have a majority of truly independent directors.
  • They were not known personally to any shareholders until they were interviewed for the board positions.
  • They work well together as a group and respect one another’s contribution to the board process.
  • They respect the family and offer challenging support to management.
  • The independent directors meet regularly as a group.
  • The board engages in independent evaluations of its own effectiveness at least bi-annually. 

In conclusion, let me be quick to point out that the return to shareholders I refer to may not be a financial metric in all cases.

My sincere thanks go out to those independent directors who continue to give their best to our family businesses.

Hiring High Performers

Norb Schwarz

 

Every once in awhile we come across a manger who meets out highest expectations. I had the pleasure of meeting a young sales manager recently who fit that description. One of her many attributes was her ability to spot exceptional people for her team. When I asked what she looked for in a good team member, she responded with the following:

  1. Good personality
  2. Customer service orientation
  3. Energy
  4. Ambition
  5. Likes money 

What are some of the qualifications you look for in staffing your company with top performers?