Category Archives: Ownership & Shareholders

Profit: Counterpoint

Chris Eckrich
Chris Eckrich

The word profit invokes thoughts of selfishness amongst some, benefit amongst others, and a necessity in family business. While the love of money may be the root of all evil, the pursuit of profit is necessary in order to sustain any ownership group’s goals. But what role should profit play in driving behaviors of business owners?

Recently, I was confronted with a discussion in which a person shared that the only goal of business should be the pursuit of profit. When this view is taken to its extreme, employees in a company end up being viewed as replaceable automatons and leadership drives towards ever increasing levels of accountability to the point that a business starts to represent a slave enterprise.

One of the most rewarding experiences of my consulting career has been to experience the many ways that families approach earning business profit as an essential goal, but not to the exclusion of other goals they may have as an ownership group. One family ownership group may choose to organize their enterprise in a way where work life balance is of primary importance, believing that the essence of humanity is not either work or play, but a balance between work and the enjoyment of life in its many forms.

Another family may view their enterprise as an entity whose financial performance is critical to achieve their philanthropic goals outside of the business. A return therefore becomes imperative not just to provide a comfortable living for owners, but to further support their efforts to impact the world in positive ways – sometimes to the benefit of the business, but often times without any spotlight to gain publicity or benefit.

One other reason many owners are concerned about profit is to sustain their ability to keep their workers employed. One of our clients shared with great pride about a long-term employee who has sent two children through medical school while working for her family business.

In all of the situations above, the owning families could choose to focus on profit to the exclusion of all other ownership goals. Instead they see profit merely as a tool to achieving something greater than themselves.

When it comes to leaving a legacy, if the legacy consists of dollars alone it is likely to be an empty legacy void of any real purpose. The lasting legacy runs far deeper than money.  In fact, the families who pass on the strongest legacies rarely focus on wealth as their primary purpose, even though they may possess great wealth.  Instead, they seek to create an impact on the world through their core beliefs, business practices and philanthropic efforts.

Profit is just a tool to help them complete their noble journeys.

Does Distance Makes the Heart Grow Differently?

Brun de Pontet 100x150
Stephanie Brun de Pontet

While some of my clients have their extended family all in one community, that is more the exception than the rule.  Our North American culture is very mobile and it is common that young adults find professional or other opportunities that will take them away from “home” and may lead them to put down roots in new cities and states.

This leads to a few common challenges for enterprising families. First, family members who grow up in the home community of the family’s business are raised with the visibility of being affiliated with the owning family in a way that is less central to the experience of those growing up elsewhere.  This can be a burden if it leads to a lot of negative attention (e.g, if the company has layoffs that affect your neighbors) or if it casts you in a stereotypical and narrow role: “Oh, he’s from THAT family.”  Family members who grow up away from this limelight may not always appreciate the extent to which this facet of the family can dominate one’s broader community and growing up experience.

Another difference is that family members who grow up in the home community are more likely to have parents working in the business, which can also impact their sense of connection. I have seen cases where this leads the next generation to feel a deeper connection to the business because they know executives, attend company holiday events, regularly visit the offices, etc.; and others where they feel less connected because in their mind: “that is what mom does” and is inherently something from which they want a little distance.

Of course, the impact of growing up elsewhere can also lead to feelings of distance or closeness. I have observed that if the initial generation that moved away has a negative attitude about the enterprise, their kids are likely to grow up disinterested and detached.  On the other hand, if the parent’s generation feels connected to the legacy and engaged as owners, their kids often grow up deeply curious and eager to learn as much as they can about the business.

Finally, the other place where family geography can lead to different perspectives is around the family and business’s shared philanthropy.  While most family members understand that a significant proportion of family giving may be anchored in the community where the business is situated, those who grow up elsewhere often want the opportunity to also expand the reach of these efforts into their own communities. Getting a family aligned on how and where they want to make a difference certainly gets more complicated with expanded geography.

While you should not assume family members who grow up elsewhere are inherently less connected to the business – you do need to proactively engage them as committed stakeholders.  Strengthen lines of communication, nurture their interest and curiosity, proactively look for ways for them to interact with the business or business leaders, help them appreciate the challenges and joys that come from living and working in the home community, and expand your sense of what the family’s “communities” are and mean. These efforts help all stakeholders feel as strong a connection as they can to the legacy of the past and the vision going forward.

When the Dead Pick Your Business Partner

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Barbara Dartt, DVM, MS

“I had always wanted to be a nurse,” explained Rachel. “After 15 years as a stay-at-home mom, I went back to school, earned my degree and then got a great job. I worked just one town over from where we live and where my husband Tom’s family business is located. Tom was at work all the time, managing the business and I was close by with a flexible work schedule. After 20 years of patience and work, our ideal plan had come together. And then Tom died.”

When Tom died, Rachel became a 50% partner with her mother-in-law, Rita. Rachel’s father-in-law had passed away many years ago and Rita had been an active business manager and owner for years. She’d recently begun to step away from day-to-day decision making. But now that Tom was gone, she moved back into her active role.

Tom has three siblings, two of whom had worked in the family business, on and off. Rachel had never worked in the business and was concerned with Rita’s intentions. Rachel and Tom’s dream had been for their (young adult) children to have an opportunity to work in and own the business. What did Rita want? “Rita won’t say what she wants right now. I think she’s afraid that whatever she says, it will make someone unhappy. It will be hard to get her to decide.”

Rachel chose to quit her job and come to work in the family business. She saw no other way to ensure that her voice was heard. And no other way to protect the future she and Tom had discussed for their children.

Tom passed away with life insurance and strong operating agreements for his entities – ones that protected owners and the businesses from liability. However, there was no buy-sell agreement. No future plan for business ownership. Today, the business is saddled with two reluctant owners.

Rachel is an owner by default. She’s chosen to exercise her owner’s voice by trying to manage the business, with no experience and very little knowledge about financials or operations. Rita is an owner by legacy. She had hoped to back away from management but also felt the only way to exercise control and “protect” the business was to be an active manager. And that’s about all they have in common.

A team functions best when they have common ground — a shared purpose. Logically, Rachel and Rita could work on that shared purpose by jointly answering the question, “Why do we want to be in business together?” Practically, they don’t have the depth of relationship, the understanding of their roles (as both owners and managers) or the trust to answer that question today.

So they are 50/50 owners, yoked together by fate. They are both working to overcome grief of Tom’s loss that came suddenly and too early. Owners, thrown together by the death of a key business figure, rather than owners who affirmatively chose to be in partnership together.

The obstacles are huge. And preventable.

This is obviously an extreme example. However, every family member who owns or manages a business can ask themselves two key questions:

  1. First, do you have “affirmative” and engaged owners? Affirmative owners are those who have chosen to be owners. Engaged owners are ones who are clear on the rights and responsibilities of ownership and have the knowledge and maturity to effectively make ownership decisions.
  2. Second, are the owners aligned around why they are in business together? This trait is fundamental to effective owner teams.

Talking about what ownership might look like after you are gone is not usually fun or easy. But it’s one of the best gifts you can give your family. And one of the best investments you can make in the future of your business.

How one family got started with family education

Steve McClure
Steve McClure

When a large family was moving into its fifth generation of adults, their Family Council knew it was time to invest in future shareholder development.

The family had 20 fifth-generation future owners and beneficiaries who ranged in age from 14 to 39 (plus several more who were younger) and were geographically dispersed. There were also a few members in that same age range from the fourth generation. Some relatives had worked for the company in summer jobs, but most had not. Some attended shareholder meetings and many did not.

Faced with these challenges, the Council asked themselves: “How do you educate the family, and on what?”

They agreed to form an Owner Development Committee consisting of five fifth-generation members and one fourth-generation member. The mission was to research and design their own education program. Over the course of nine months, the committee organized their recommendations into four segments:

1) What should we do together? Seeing as some family members barely knew their cousins, the committee recognized that teamwork development was necessary to become a unified shareholder group. They decided to set aside one day prior to the annual shareholders’ meeting to conduct group programs. In turn, this would naturally increase attendance for the shareholder meetings. Programs would be oriented toward the whole group, but the day would also have three breakout sessions with age-appropriate content aimed (1) at the teens, (2) the college-aged group and (3) the older cousins. Programming would include tours, management presentations and education about the company. There would also be projects, plans and decisions requiring collaboration, leadership, organization and accountability. By learning and accomplishing projects together, they reasoned that teamwork would develop as they achieved their desired educational goals.

2) What body of knowledge and skills do we need to master? The committee identified subject areas based on their research drawn from attending family business seminars, speaking with other business families and reading related materials. Skill and knowledge areas included financial statements, investing, communication and negotiating skills, knowledge of their business and industry, family values and history, business strategy, and an understanding of the role of the board, shareholders, family governance and management.

3) What education should we provide and what should individuals learn on their own?  Next, the committee defined what individuals are expected to learn on their own (primarily from books, articles and seminars), what will be provided to the group (customized programs presented by other business families, speakers and trainers), or made available to attend (seminars, courses and training programs). For the seminars and other resources, they established rules and procedures to address education costs and set expectations about expenses covered by family members.

 4) How do we implement?  Understanding that implementing all the educational initiatives at once would be overwhelming, they designed a multi-year, roll out strategy. The first step was introducing the one day, pre-shareholder meeting to inform everybody of the curriculum and obtain buy-in.

The committee presented their recommendations to the Family Council, and then to the entire family at a family assembly meeting where they received unanimous support.

A dialogue on the role of the family council

Steve McClure
Steve McClure

At a recent family meeting of more than fifty shareholders, spouses and future shareholders, an 18 year old asked a question during the Family Council Chairman’s report: “How did you set the priorities of what you worked on during the last year?”

It was a great question and the Chairman was on his game with the answer – it allowed him to remind the family how communication and decision making is supposed to work between multiple family members and a five person Family Council. He said, answering for the Family Council, “We purposely approached family members outside our own family branches and asked each individual what they thought was most important. Then we compared notes in a Family Council meeting and decided as a group for the family.”

A follow-up question quickly emerged, “Why didn’t you let us all vote on the priorities?”

Again, the Chairman, “We view our responsibility to the entire family, as elected representatives, to listen well and then make decisions and plans on behalf of the family. We carefully try to not overstep our authority by bringing our decisions and recommended policy to a vote by the entire family when appropriate. Yet, we must be productive too. Thus, we thought it best to proceed as we did.”

In this case, the Chairman could also refer to the qualifications of Family Council members which were written. One qualification is that individuals must be able to understand the family culture well enough to know when to act as a representative and make informed decisions and when to invite the entire family’s input on a decision.

Power without Knowledge – An Unnecessary Burden

Mike Fassler
Mike Fassler

In my work with sibling or cousin shareholder groups, I often encounter unprepared, or “sudden” shareholders.  These individuals come into ownership of their family’s business as a result of a gift or the death of a parent with little to no preparation for the role of owner.  As these shareholder groups come together to align for the future, a challenge they face is that some of the shareholders who now have decision-making powers have not been equipped with the knowledge on how to effectively manage this responsibility.

Often the “sudden” shareholder becomes dazed and confused about what being a shareholder means.  Questions like: “What are my responsibilities?”; “How much time do I have to commit?”; “Do I have to do real work if I am a shareholder?” “What if I really don’t want to be an owner – what are my options?”  arise in their minds.  They don’t really understand what ownership of the family business means to them or the broader family.

This situation can bog down the governance process and lead to ineffective decisions as the shareholder group seeks a threshold level of knowledge to “get up to speed.”  In addition to the time each individual shareholder may need to wrap their mind around their rights and responsibilities, the group of shareholders also has to learn to collaborate as a team of owners – something that doesn’t just happen by virtue of kinship! The governance process tends to slow to the pace of the family shareholder with the least knowledge.

A critical component of multi-generational family business continuity is a cohesive shareholder group.  The better prepared the family is for transition of ownership from one generation to the next the smoother the transition will go.  A key part is preparation of all potential next generation shareholders through a deliberate next generation shareholder development effort.  By learning about being an effective shareholder well in advance of a triggering event, the family and the business will be better equipped for continuity and will not run into the unnecessary burden of power without knowledge.

How is as Important as What in Decision Making

Deb Houden
Deb Houden

Three siblings sat in a room discussing the details of a new shareholders agreement they wanted to create. Through a recent lawsuit with two other siblings, their current shareholder agreement, which had been put together by their father, had been helpful in defining settlement terms, but they knew it wasn’t comprehensive. The three siblings had gotten over the shock and hurt of the lawsuit, the dust had settled, and they were ready to proceed with a new shareholder agreement, but old habits had started to reemerge. They were stuck in a positional standoff. Eventually, after a year of building trust, they got to the point of having an honest and open discussion with each other regarding what they each wanted out of the shareholders agreement. They were (rightly) very proud of how far they had come.

They were also contemplating succession and their children were now employed in the business. One of the senior generation siblings suggested that since the three of them had come so far, it might be important for the next generation to sit in on the facilitated discussions regarding the shareholders agreement. They wanted the children to see that they could have tough discussions without being positional, judgmental, and/or defensive.

The meeting didn’t get very far through the parts of the agreement. There were a lot of side questions, a lot of meandering, but always came back on topic. Eventually, the three siblings went off on their own to discuss a few of the points on the shareholder’s agreement. After the siblings left, the next gen were asked what they thought of the meeting. A couple of them were confused about the lack of progress on the different points. Why was there so much discussion and meandering? Another was grateful to start hearing some of the terms that were used. He didn’t understand all of the different aspects of the agreement, so he was intrigued. And finally, the last one said he was happy to understand why they were making decisions about certain things instead of being handed a document and told “that’s how it is.”

The three siblings came back in the room and one of the next gen asked if they got anything done. One sibling answered that they got a lot done – they uncovered more questions. Two of the next gen were confused. They again said it seemed like the older generation siblings weren’t accomplishing anything. But the eldest sibling was excited. He told the next gen they accomplished so much more than just the points of the agreement. They gained trust and understanding and were enjoying the new found teamwork around the important document. They had come so far in their communication and were now enjoying solving tough problems together.

It was such an important illustration of how much the process matters when making decisions among family members. The next generation began to understand how to work together as future shareholders. It is incredibly important to teach the next generation many things, but most importantly, how to be a good partner. Next time you’re having an important discussion among the shareholders, keep these following points in mind:

  • Understand the process of making decisions is as important, and sometimes more, than the end product.
  • Exemplify what good communication and decision making can be for the next generation – they’re watching you.
  • Don’t hide difficult situations and conversations from the next generation.
  • Understand that the next generation wants to know WHY you made the decision you did.
  • Introduce terms that may be foreign, confusing, or misunderstood.
  • Don’t be afraid to veer off-topic for the sake of understanding. Just remember to come back to topic again.

Good decision making is so much more than good decisions.

Siblings to Cousins: Ownership Goals for Growth, Risk, Profitability and Liquidity

Amy Schuman
Amy Schuman

In the transition from siblings to cousins, families are often called to define the ownership role for the very first time. In earlier stages, a relatively small family allows for more direct involvement of family owners in business operations and tends to put issues of ownership on the back burner.

It is at the cousin stage when ownership goes – frequently for the first time – to a significant number of family members with no direct involvement with the business. It is common for cousin owners to have minimal natural contact points with the business they now own. The majority of cousin owners do not have careers in the business, and some likely live a great distance from business operations.   There is much to understand about the ownership role  – and some excellent resources exist for further reading (see below). In this post, I’d like to focus on the opportunities contained within an ownership goal setting process.

Owners need to know enough about their assets to be able to set educated goals for their performance. What level of return is reasonable to expect? How much risk would be needed to achieve different levels of return, and what is our risk tolerance as an ownership group? What is a realistic expectation for growth of our enterprise at this point in time? What returns should we expect in terms of asset appreciation and liquidity?

A few of my clients have dubbed this goal-setting process “GRPL”, based on John Ward’s suggested four ownership goals of Growth, Risk, Profitability and Liquidity (see article referenced below).

Realistic family ownership goals will vary widely according to factors such as industry of business – age of business – location of business – and many others. But grappling with the GRPL goals allows a large, potentially dispersed ownership group to have a focus for their learning and involvement in their business as owners. In fact, ownership education can provide a clear mandate for the Family Council, which tends to coordinate shareholder education.  Ensuring the ownership group develops the knowledge they need to articulate clear and achievable ownership goals is an investment in the ownership, management, and family circles of the family business system.

In my experience, Boards of Directors welcome the ownership goal setting process with enthusiasm. Written and agreed-upon goals from owners makes the Board’s task easier, especially as independent directors join the effort. They know owners’ expectations, and can conduct themselves in the boardroom accordingly.

Some management teams may initially have reservations about the owners setting these goals.  As the management team is so intimately involved in every aspect of the business, they may question ownership’s ability to set realistic, informed goals for asset performance. However, if management has a role in educating owners about their industry and the company’s competitive position in the market, they usually becomes enthusiastic supporters of the process. Instead of having to worry or wonder if their decisions and actions are aligned with ownership’s expectations, management can now more easily evaluation their actions against stated ownership objectives. I’ve had CEO’s tell me that they sleep better at night, knowing more clearly the owners’ shared goals for the enterprise they have been entrusted to lead.

There is much more to explore in this regard. Hopefully this post has whetted your appetite to learn more. Please feel free to share your questions or experiences with ownership goal setting here, and to explore the resources below.

“What do Owners Do?”, John L. Ward, Families in Business Magazine, June/July, 2003

Family Business Ownership: How to Be an Effective Shareholder, January, 2011,  John L. Ward, Craig E. Aronoff, Stephen L. McClure, Palgrave/MacMillan

“Why Family Business Owners need a Job Description”, Jennifer Pendergast, Family Business Advisor, June 2010

What is Stewardship?

Jennifer Pendergast
Jennifer Pendergast

Stewardship is a term often used when describing the perspective of family business owners.  As many owners of family businesses seek to pass their business on to future generations, the term stewardship is an accurate one.  The dictionary definition of stewardship is “the careful and responsible management of something entrusted to one’s care.”  This is quite different from the term ownership, defined as “the legal right of possession, full claim, authority or dominion.” 

I see stewardship and ownership as two sides of the same coin – the former emphasizes responsibility, the latter emphasizes rights.  In truth, ownership implies both rights and responsibilities.  Too often, owners are concerned about their rights – to a dividend, to a say in how the company is managed – but pay less attention to their responsibilities.  Yet, if they seek to pass on their business to future generations, owners should be equally or perhaps even more concerned with responsibilities.  What are the responsibilities of owners?  They include:

  • Ensuring the business is well-run, ideally by electing a qualified board of directors who oversee a capable management;
  • Planning for the orderly transition of ownership across generations;
  • Staying informed about the business and its operating environment;
  • Representing the business and family well to employees and the community
  • Investing time in education to ensure one is prepared to make big decisions around the business.

As the old adage goes – to whom much is given, much is expected.  An emphasis on stewardship responsibilities will help to ensure that the aspiration to pass the business will be achieved.

The Ford Family as Owners

by John L. Ward

Friend and colleague Amy Schuman urged me to read American Icon: Alan Mulally and the Fight to Save Ford Motor Company (by Bryce Hoffman, 2012). It’s a compelling and captivating story of a dramatic turnaround. It’s also a great family business story.

The family business topic I want to focus on is the role of the Ford family as owners and governors. There are 13 fourth generation cousins with 30 members of the next generation ascending.

  • For the longest time the G4 cousins have met quarterly – mixing a social and business briefing agenda. They never voted; they always worked for consensus.
  • For decades they believed that their role as owners was to provide unity, stability and long-term commitment.
  • Where there was conflict it was not from company issues but from old resentments over perceived fairness in family matters.
  • In their meetings, as controlling owners, they discussed
    • Confidence in the CEO;
    • Contingency plans if the CEO or strategy didn’t work out;
    • Significant debt decisions;
    • Dividend policy;
    • Maintaining control of the company.
  • Bill Jr., as executive chairman, took on several roles:
    • Emphasizing company innovation
    • Fighting off cultural complacency
    • Providing institutional memory
    • Identifying CEO candidates with the board
    • Managing family owners relations
  • Other family members
    • Served as cultural ambassadors with dealers;
    • Visited locations;
    • Participated in local philanthropy.

Family business owners will find even more value in the book. Founder Henry I was a classic example of “founderitis.” He also had a magnificent vision and social purpose. His son, Edsel II, was overwhelmed by his father’s inability to let go. Subsequent generations had to work hard to earn credibility and fight off perceptions as “rich dilettantes.” Bill Jr., now chairman, received invaluable, trusted coaching from independent directors who themselves understood family business – especially Hocksday of Hallmark.

Then there’s the bulk of the fantastic book telling of Mulally’s turnaround strategy and his philosophy of management.

Enjoy. I’m quite sure you’ll embrace the stories.  Thanks, Amy.