Tony Leahy, the retiring CEO of the UK’s largest retailer, Tesco, offered great insights to what’s different about family firms. Though Tesco is no longer a family business, he explained, “Tesco began life as a family business and one of our strengths is that we’ve not forgotten the values and approach we inherited from our founder.”
He goes on [the underlining is mine]: “We have a stable management.” In fact, he and many of his top management colleagues spent their entire careers at Tesco. “Our employees are encouraged to own a stake in the company; and there’s a willingness to take risks and to plan for long-term value creation… they enjoy the benefit of loyalty, long-term thinking and the courage to make bold decisions. Add to that a slim line, tight management and the stability families can bring and you have laid strong foundations for a powerful company.”
He closes with a profound observation about the distinction of family company ownership when he asks fund managers who invest in listed companies to consider, “Next time you’re in a meeting with management from a company…try referring to them as ‘we’ rather than ‘you’.”
A recent piece by Dave Logan in “Tribal Leadership” made a compelling argument about why most business books are ‘bad for you’ – and while I am not sure that many are actually dangerous, I do agree with his premise that most offer painfully simple advice OR read like stories about ‘hero-figures’ that can mislead the reader into thinking that an individual’s personality is what leads to business success. To quote Logan:
“Most business books use stories to cover over their complete lack of insight. This week, I read a galley of a book that I hope will never come out. After some catchy anecdotes about hero CEOs, it advised, among other things, that leaders figure out what’s really important, then do those things. It went way out on a limb by saying that great leaders are remarkable at forming relationships. And (are you sitting down?) the best leaders are honest when a strategy isn’t working.
Are you kidding me? How about we add that true leaders can dress themselves, use full sentences, and bathe before work.
Business success isn’t a checklist, and that’s the implied message from many business books: do these things and you’ll be the hero. Business success is a dance: with the market, employees, investors, customers, landlords, and creditors — not to mention spouses and kids.
Business leaders need a reboot on the ideas that make organizations run. Is your time best spent reading business books, or talking with people with radically different ideas? Put down the business book and go interact with ideas that challenge you, frighten you, or piss you off.”
He then went on to suggest some useful non-business books that aspiring leaders should actually invest time in reading, such as the Odyssey and Atlas Shrugged. While these are certainly classics that are thought-provoking, I would add Stewardship by Peter Block, Flowby Csikszentmihalyi, and Predictably Irrationalby Dan Ariely to a recommended reading list for thoughtful business leaders. Would love to hear about other books that have pushed your thinking and excited your imagination.
This is a follow-up to the October issue of the Family Business Advisor, which presents the non-strategic value of directors. We are often so focused on finding “the best” director candidates, that not a lot of thought is given to the circumstances under which they will find our family business attractive. How do we appeal to outstanding directors?
The list can be very lengthy, but there are a number of questions we often get from the candidates we try to recruit – some food for thought:
Is there currently a functioning board in place?
Are there other independent directors, or would I be the only one?
Does the family really want outside advice or are they just attempting to appease a group of shareholders?
Have they developed specific expectations for this position?
How would you describe the communication within the family (collaborative, conflictive, for example)?
Does the business have a strategic plan?
How would you describe the leadership style of the current Chair? The current CEO?
Remember that board candidates are interviewing you and your business as well. They want to commit to a board that works well together, knows how to be productive, and presents a culture that is aligned with their own values and business principles. So getting your ducks in a row prior to your search is a good way to send the right message to great candidates!
The Family Business Consulting Group held a webinar on September 29th titled Developing Your Board of Directors for Maximum Impact. Jennifer Pendergast and Kelly LeCouvie were the presenters and Stephanie Brun de Pontet was the moderator for this program. Below are a few of the questions posed by a few of the several hundred attendees and the responses from the presenters.
Asked: Isn’t the function of a board – whether family business or not – to be supportive and also constructively critical?
Absolutely! The model we discussed during the webinar represents a continuum between the two – and boards that behave at either extreme will not add the same value as a board that can be both. Fiduciary responsibilities demand constructive critique; a board that sends a message to management that says “we believe in you and want to navigate with you to a mutually desired end result” is also a necessary act in any partnership.
Asked: What are the essential attributes of a successful Board Chair….i.e. competencies, experiences, skills, etc.
A successful board Chair brings a mix of skills, experience, expertise and attributes that is appropriate for a specific board, so there is some variation. However, in terms of attributes, good Chairs typically will:
Demonstrate excellent listening skills
Exhibit empathy to directors and management
Foster creative and constructive dialogue among directors
Extract the most value from each director
Summarize discussions and share the primary conclusions during board meetings
Manage dissention effectively
Asked: Is there an ideal term for directors? 2 or 3 years? overlapping?
Ideally, directors will remain on a board for at least three years. Part of the reason for that is because it typically takes at least a year (which is often only four meetings) before a director feels really equipped with appropriate knowledge about the company to contribute in a meaningful way. So given that searching for, recruiting and orienting directors requires a significant investment, at least three years is optimal. Having said that, many boards have one term limits and vote directors in annually. Ideally, you would not have turnover of more than 20% of your board in any given year.
ASKED I have a family that thinks the “executive committee” can make the CEO accountable-v.s the Board. They see the committee as all the C roles. Your thoughts? We have an urgent situation in that 4 key people have left a company and the son and father are in disagreement as to the next best steps. How will a board sort this out without being involved day to day?
This is an interesting concept, and perhaps one that can work under your circumstances. However, the two primary roles of the board are to contribute to strategic decision making and to ensure the CEO is doing his/her job. They are also somewhat connected. So if the board is enhancing the strength of both the construction and execution of the strategic plan, part of that process will involve evaluating the CEO’s performance. Typically the Compensation Committee will do this, and will certainly solicit input from other C level executives.
If four key people have left the company the first question to ask might be “why”? It sounds like there is perhaps more going on than just four, more attractive employment opportunities emerging for four individuals at once. People do not like to work in an environment of conflict – it’s stressful and unrewarding. That source of conflict should be addressed within the family, or with an outside facilitator if need be, before directors participate in such a process.
Asked: Can you please address how a) family members in management who also sit on the board and b) family members not in management who sit on the board are compensated?
Family managers acting simultaneously as board members can be tricky. They can often find themselves in a conflicted situation where the area or division for which they are responsible is discussed at the board meeting. Directors will likely feel uncomfortable discussing this with a shareholder who is also the manager of that area. If a family manager is VP of marketing for example, then marketing plans, budget approvals, and critique should not really take place at the board level while that family member is in the room. That said, we do see family shareholders who are managers (non-CEO) sitting on the family business board. They must excuse themselves from any discussions that might pose a conflict. Typically, the CEO is the only voting board member. Other family members who are in management often attend various parts of the board meeting but do not have a vote.
In terms of compensation, there are a few options: 1) in some cases family members who serve as directors are not paid at all. The rationale is that they receive distributions from the company and therefore do not require or merit board compensation; 2) other families pay family directors the same amount as independent directors. They have to prepare for meetings in the same way, attend meetings, and there are opportunity costs to do so; 3) finally some families pay a percentage of independent fees to family directors (50%) for example.
Asked: We currently have 8 directors on our board (5 family owners who work for the company and 3 outside directors). We are looking at the right number and whether or not to stay at 8, add or subtract. Any advice?
The 8 member typical board size shown in many board studies is not really tied to a company size. That said, smaller companies may have a smaller board, in the 5 to 6 range, but larger companies don’t necessarily have a larger board. We find that the size of the ownership group is one of the main drivers of board size. If all owners feel a right to be on the board, then that can drive board size up. As we said yesterday, we believe 3 independent directors is a good number of outsiders. So, if combined with 4 to 5 owners that gets you to the 7 to 8 range. Many families have a problem with giving a majority of seats to independents, although we don’t think it should be an issue. The degree of control given up is small, since the owners can always unseat the board if they don’t like their contributions.
ASKED: Is a board more effective if the CEO is not chair of the board ?
The answer is – it depends. There are pros and cons to splitting the chair and CEO roles. The negative is that the CEO has a handle on the strategic issues facing the business so is in the best position to set the agenda for the board to ensure he/she is getting the input required from the board. That said, the board is also responsible for overseeing the CEO, so when the CEO is chair, he/she is essentially his/her own boss. And, sometimes the CEO is not the most qualified to facilitate the board meeting. If the job is split, the key is to ensure the chair and CEO coordinate appropriately.
ASKED: Please comment on board interaction with management outside of board meetings. Frequency/Time
The board’s job is to oversee management at a high level, not on an operational level. So generally the board would not have a great deal of interaction with management outside the board room. This can encourage the board delving into operational issues and perhaps subverting the authority of the CEO. Contact with the level below the CEO should be with the CEO’s knowledge and approval. That said, board members may have expertise that can be valuable to that layer of management. And, if a board member has experience in a particular area, market research for instance, that may be valuable to a particular manager in the company, then getting together to share that expertise would be reasonable. Typically, most of the out of the boardroom interaction for a board member would be with the CEO. This may be a couple of phone calls a month at most, but would most likely be originated by the CEO asking for the board member’s input.
ASKED: How long should we expect search process for independent directors to take?
With respect to timing, we find that an independent board can be put together in 6 months or less. Three variables that affect timing are whether or not you have to take time to get all owners on board with the value of independent directors, how much support you will have in searching for candidates (if you use a search or family business consultant, they can source people quite effectively) and how many owners will be involved in the process (the more people, the more time it takes, but also greater buy-in so having more involved can have value).
ASKED: How do you review operations and financials without raising issues and asking questions?
My response would be that the board’s job is to raise issues and ask questions. So, that should be happening. The board is there to be supportive of management but also to oversee them and ensure they are running the company well….. That said, questions should be not be overly critical or challenge management’ authority or competence.
Recently I was at my own family’s business board meeting. We are at a transition point in leadership.
We started to have a bit of a discussion about the difficult topic of succession. It began with a discussion around how to “replace” the CEO and founder of the company. While listening to the various comments, experiencing a strong feeling of resistance from some and push from others I remembered how difficult this inevitable stage is for all family businesses.
At FBCG we frequently field calls for family businesses that need a “succession plan” or we have organizations contact us about having someone come and deliver a talk about succession planning. Our leadership series book on succession planning is hands down the most popular of all of our books.
But what really struck me while sitting in a board room with my own family, was the struggle that occurs from an emotional, a family, and a developmental perspective. While you can talk about structures and mechanisms and best practices all you want, and they are definitely important, it seems to me it is equally, if not more important, to be able to wrap your mind around the struggle to understand what is going on with the founder or head of the company when they start to realize that a transition is inevitable. I believe that when you understand this you begin to understand what is keeping this important stage in the life cycle of a business from happening.
And lets not forget the flip side of this transition, the “one in waiting”. They have experienced a seemingly endless wait, they usually have an internal struggle to not push too hard but then at the same time to be heard and for someone to understand, “Hey it’s my turn! “
We can always wait around for the proverbial bus to hit…but is that really the best way? Of course not!
The challenge is, how do you make someone, often in their seventies or eighties, feel good about the fact that they are in the last third of their life? The truth is the incumbent knows that they need to move on for the business and often for the sake of their relationship with the child that has stuck it out and is waiting. But the gap between knowing this intellectually, and being able to act on it in the face of powerful emotions, is another thing altogether.
No matter what though, some kind of transition will happen. Whether the transition ends up well-planned and intentional, or comes about due to a sudden change in circumstances, it will still be a sad day for both the incumbent and the next generation.
An important ‘process’ point that is often overlooked is the need to honor the range of feelings, whatever they are, anger, disappointment, sadness, grief – that come about as a result of this transition.
Possibly we think about something ceremonial to mark the day. In addition, we want to ensure the incumbent has thought through a plan for his or her retirement, a solid process to make the transition occur. We want to be sure there is a system in place to ensure the successor has the best chance at success in his or her new role.
But, after dealing with all these practical dimensions, we could say it’s okay just to cave to the sadness for a bit, understand there is a grieving process. In so doing, be mindful and intentional about acknowledging what was built and by whom so as not to focus too much on the loss but rather what has been gained for the family, for the community, for customers and employees. We all know there is a business there and a legacy that we are trying to steward along to the next generation.
And my last piece of advice? …. as family members, board members and advisors just remember that no matter how frustrating it gets, no matter how difficult , no matter which process or path finally gets taken… something as simple as a little empathy and understanding for all can go a long way…. (Recommended reading: Dan McAdams, The Redemptive Self, Stories Americans Live By)
While there are many things that I appreciate about working with families that own businesses together, one aspect that always takes my breath away is the depth of generosity that so many of these families demonstrate. While recently looking for examples of statements or philosophies around giving for a family that wanted to have a discussion of how they could make a powerful contribution, I came across a few good quotes that I share just for interest…
From Andrew Carnegie: “I resolved to stop accumulating and begin the infinitely more serious and difficult task of wise distribution.”
From Eli Broad: “To me, money is a means to do good. I reached a point in my life where I had enjoyed tremendous business success that afforded my family everything we could possibly want. My wife and I then decided that we could use our wealth to make a difference. So we created the Broad Foundations to do four things: to improve urban public education, to support innovative scientific and medical research, to foster art appreciation for audiences worldwide and to support civic initiatives in Los Angeles.”
From Carlos Slim Helu: “I’ve always said that the better off you are, the more responsibility you have for helping others. Just as I think it’s important to run companies well, with a close eye to the bottom line, I think you have to use your entrepreneurial experience to make corporate philanthropy effective.”
As always, we are eager to hear about how your family addresses its responsibilities around philanthropy and community service.
The Emotional Benefits of a Board: By Stephanie Brun de Pontet, PhD
While many articles have been written on the importance of a well-functioning board of directors to the sustainability of a family business over generations, it is not unreasonable to also pose the more immediate and selfish question: why would I want a board? What is in it for me today? How can a board help me tackle the ‘hard stuff’ that I sometimes would rather not have to address? There are plenty of good ‘business’ reasons for having a board – but the truism that ‘it is lonely at the top’ generates a series of emotional benefits that can also be derived from having a board.
Just to name three:
Experience, Expertise and Empathy. A board of risk-taking peers can ease the fear of the unknown and help anticipate new challenges. Individuals who have the experience of having been in the CEO chair in a down cycle, with limited access to credit, will not only have practical advice and possible solutions, they will also have true understanding of the pressures a business leader faces every day.
A Sounding Board. Like most anyone else, family business owners are full of ideas that range from great to mediocre. What many of them lack is a sounding board to help evaluate those ideas—a panel that is knowledgeable and objective and will listen and react honestly, appropriately and without unintended consequences.
Confidential and Empathic Counsel. The empathy independent directors have for the leader and owners of a family business confronting an intense dilemma will enable them to lighten the mood, and think through rational options in a way no others could. For example, how can we decide if we should pay more dividends to appease frustrated shareholders, or hold more cash in reserve to put the company in the strongest possible position coming out of this recession? Making the decision to put together a board of directors with independent outsiders who can really push you to address the hard questions can feel like a frightening leap to many business leaders. However, in our experience those who take the plunge find far more emotional support and encouragement from this group of individuals than they ever expected.
We would love to hear about your experience with your own board, or in sitting on someone else’s board and the opportunities you saw for this kind of emotional support (and sometimes push) for the CEO.
I would also like to invite you to consider our upcoming webinar on Family Business Boards. We will be addressing many of the issues that face family businesses when trying to get the most out of their boards.
Our September 29th webinar, Building your Board for Maximum Impact will answer many of the questions around developing your board, give you practical ideas and best practices and allow you to ask questions that are pertinent to your family’s board.
To register or learn more about our webinar just go to www.efamilybusiness.com Hope you can make it!
As a family business consultant who has a background as a family therapist, I often reflect on the profound impact of emotional issues on family business functioning.
For example, I have always thought that from a developmental perspective it’s a bit wrong to grow up in a family, live with a family and then go work with your family. I say that not because I don’t believe in family businesses (I do!), but rather because it’s very difficult to become an individual AND to hold your own inside of your family system. And this can be made even more difficult by working with your family every day and maybe getting a bit “stuck” in your family role.
Developmentally, you need some kind of break, you need to spread your wings, go out in the world, work for someone else, make your own way and gather your self esteem from what you accomplish for yourself using your own brains, charm, personality, skills etc. This is certainly some of the reason that best practices suggest children work outside the business for three to five years before deciding to join the business.
When you move right into the family business sometimes you are locked into your role in the family, you are locked in by yourself, your parents, your sisters, brothers, cousins etc. and you probably do the same thing to them!
Some of you might find your ‘assigned family role’ is positive. Maybe you are the one everyone thinks of as the leader so you get to continue with this role. But what if you are the troublesome black sheep?
How do you get past that and not continue to be labeled by your family?
In my case, I laugh about how at 52 years old my family still thinks of me as “the kid who constantly gets in car wrecks”….they used to call me Crash.
When I was talking about the car I recently purchased with my family members, the first thing out of everyone’s mouth was have you wrecked it yet?
Funny thing, I haven’t wrecked a car or gotten a speeding ticket for more than twenty years! But old labels take a long time to die – and apparently, some never really do…!
And on one hand it’s okay, as long as you still can stand up to people and forge ahead being who you are and not just becoming the person that everyone expects you to be. I promise you, I will not be having any car wrecks just to make my family happy or right!
People do change, we have to stand up and hold firm in our families and not cave to our “role” if it no longer suits us.
And even if you were always thought of as the leader that is not always such a great label either. Because when do you get a chance to NOT be that person? Leaders can really disappoint people when they don’t do what others expect, and the expectations are high – that is a heavy burden to carry.
I feel like all of us who are involved in the world of family businesses need to remember that these issues around family are always there and can be the most complicated, the most embedded, the most deeply internalized.
The emotional issues are difficult to deal with, but when you do, when as a family we start to respect who each member is, as part of a group AND as an individual, it opens up communication, it frees us from ourselves and our own internalized beliefs about who people think we are and it really makes us happier people. I believe that, and I have seen this truth in action countless times.
In addition, once we can be authentic, mature individuals who have a perspective based on our individual experiences, as well as our family experiences, our contribution to the business can be even greater.
There is nothing more liberating than knowing who you are and letting your family see that, and then finding out that the reality is they accept us….because down deep families want the best for each other and more than likely, just want you to be happy.
Family firm CEO founders often make really bad decisions when given the opportunity to select their successor. They’re terrific at running the company, unequaled in closing deals and driving a hard bargain but ask them to name their successor and watch them lose their ability for human reason and corporate leadership. “After much thought, (I decree that) my successor will be insert-first-name-here.
“Much though” is often the son, daughter, niece or nephew s/he thinks will upset as few people as possible or the one with the longest tenure. No matter – the real kicker is this: selection of successor CEOs, by all rights, belongs in the sandbox of the Board of Directors. If the board consists of family and inside managers only, it’s a safe bet they’ll do whatever it is the senior leader – usually parent to many – decides. No open debate among qualified, experienced business people. No obvious linkage between next generation shareholder vision, corporate strategic objectives and successor skill sets. Simply the decree.
Then estate plans are drawn up, control willed to the successor at the death of the second parent to die (if a first to second generation transfer) and, “by golly – I sure handled that well. No arguments among the kids and no room for arguments later on because control is in the hand of the anointed one” the founder assures himself.
Nothing could be farther, father, from the truth! Instead, what may likely happen is the siblings or cousins not given any control will find ways to express their wishes. They will argue during holiday dinners on matters of compensation and reward. They will try to gang up on the new CEO. They may even punish you and your spouse during the waning years of your life by withholding visitation with grandchildren.
Estate plans and bifurcated stock do not equal family harmony. Family and shareholder harmony in family enterprise is achieved through robust governance, perceived procedural justice and healthy debate with unbiased input from serious-minded, experienced business people with no stake in the outcome.
And – here’s another reason to abdicate the decision to a more impartial process and jury. Life is hard enough. You’ve built a terrific enterprise, the source of employment and financial security to all those families. You’ve bested the competition in tough times. You have earned the right to dodge this bullet and avoid being the source of future family discord. Over the long haul – you’ll stand a much better chance of being remembered as a great leader and terrific parent.
One family pays its Family Council President a salary comparable to that of the company President and CEO. The underlying theory is that both roles are equally important to the successful continuity of the family enterprise.
Another family has a young cousin that spends 20 hours/week on family council matters, but will not accept a salary. Her perspective is that she is not working actively in the business, but gains tremendous financial rewards from the business. She sees her participation in the Family Council as a way of ‘earning’ those financial benefits.
In another case, a family with a California-based retail business began paying Family Council members a small salary after years of intensive, unpaid work on family council activities. Instead of having a positive result, this practice led to widespread bad feelings. Family members that had worked on family council activities in the past – with no compensation – felt unfairly treated. If the current family council really cared, they reasoned, they wouldn’t accept any financial compensation for this service. Tensions in the family were heightened until the practice was discontinued.
So, once again, we are faced with a situation that has no clear ‘right’ answer. Paying a salary for Family Governance service is an individual decision, and each family will approach it differently.
It would be fascinating to hear your experiences on this matter – what is working for you?