Category Archives: Business Governance

Family Business Owners – Beware the Tyranny of Public Markets

Otis Baskin
Otis Baskin

Many successful family businesses have made the decision to become publicly traded while still maintaining a controlling interest within the founding family.  Since family controlled companies represent approximately one-third of both the Fortune 500 and the S&P 500, it is logical to conclude that funding from the public markets is a useful strategy for some family firms.  In fact, some of the most famous family business names, such as Ford and Nordstrom, have taken this path. 

Initial public offerings (IPOs) have been used successfully to fund growth and provide liquidity in conjunction with ownership structures that provide for control to be maintained in the family.  While the current recession significantly reduced the appetite for IPOs in most markets, as the economy improves so does the expectation that IPOs will once again become popular.  However, before a family business decides to trade any portion of its shares in the public markets there are several important issues to consider.

Of course, the help and advice of excellent attorneys, accountants and investment bankers is critical to any successful offering.  Yet even before engaging experts to take their company through an IPO process, business owning families need to have open and honest discussions regarding how even the smallest portion of stock in public markets can drastically change the way they do business.  Here are some issues to consider:

  • When your business becomes a publicly traded company it will be subject to a wide range of regulations, reporting requirements, and scrutiny that you and your management team may not be familiar with or comfortable in performing.  Even with structures in place to preserve family ownership voting, the responsibility to meet SEC and other regulatory requirements can be onerous for many.  In a very real sense it ceases to be your company, your capital and your decisions, even when it represents the combined wealth of your family.  While perhaps a dramatic example, it has been argued that some of the business practices that led to fraud convictions for members of the Rigas family (Adelphia Communications) would not have been illegal if the stock had not been publicly traded.
  • Those who buy your stock may have very different interests from you and your family.  Today’s public markets are largely driven by traders not investors and they do not share the “patient capital” perspective that has traditionally represented the strength of family business.  Their desire for timely returns on investment can represent a major conflict with the long-term planning and next generation focus of family owners.  Under existing legislation, an owner of as little as 3 to 5 percent of a public company has significant rights that impact corporate governance.  Both Barnes & Noble and the New York Times have faced challenges from these types of conflicts of interest, at considerable costs in both money and the time of leadership.
  • In addition, the rules keep changing for public companies.  In our post Enron/Lehman Bros. world the costs of being a public company have increased significantly.  Smaller firms that once found IPOs a great source of capital now must carefully consider the “carrying costs” of public filings and the professional services needed to meet these requirements.

 The very nature of public markets drives decisions that have short-term pay-offs.  While good corporate governance theory maintains the importance of long-range results, efforts to incentivize, regulate and monitor such decisions have met with mixed results at best.  Once a family business becomes publicly traded it may find that the very values that made it successful are under attack.


Do Good Board Candidates Find Your Business Attractive?

Kelly LeCouvie
Kelly LeCouvie

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 Emotional Benefits of a Board

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:

Stephanie Brun de Pontet
Stephanie Brun de Pontet

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 Hope you can make it!


Should Family Council Members be Paid?


Amy Schuman
Amy Schuman

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?


Tensions in Family Governance


Amy Schuman
Amy Schuman

A large family business in the Midwest with an active – and highly effective – Family Council has been struggling recently with two nagging questions: 

  • Should the bulk of Family Council work be done by one designated leader, or should it be spread out among committees and committee chairs?
  • Should we pay Family Council leaders and committee members for their time and efforts? If so – how much pay is reasonable?

Clearly, on the first question, a ‘both/and’ approach is desired, but not always easy to accomplish. 

One strong, designated leader provides efficiency and clear accountability, but can also lead to a de-motivated and disconnected family.  Relying too much on one person for a long period of time may lead to their burnout, with no prepared successor. Others in the family may not fully develop their leadership abilities or have the pleasure of serving as leader. 

On the other hand, an active group of committee members and committee chairs provides a wider family connection and fosters family passion and commitment, but can take a lot more time to get things accomplished. It’s hard to hold a group accountable for results, and the Family Council can bog down in the face of multiple, often diverging approaches and opinions. 

This paradox – the need for both “Strong Centralized Leader and Strong Dispersed Group” – is probably very familiar to you. Although at first the two appear to be mutually exclusive, upon closer examination we can see that they actually support each other. A strong individual leader will foster strength in committees, and strong committees create conditions for strong individual leadership. 

Have you faced this common tension – and if so, what has been your experience? 

We’ll talk about Family Council compensation later this week… stay tuned.


Governance : Why is it so hard to define?


Amy Schuman
Amy Schuman

This week I’ll be speaking to a group of family business owners in the Milwaukee area, and the topic they chose was “Governance”.  When they requested that topic, first I felt excitement – but it was soon followed by a bit of dread.

I felt excited because governance is such an essential component in family enterprise strength and continuity. I also felt dread because, even after years of helping families reap the benefits of governance structures like Family Councils and Boards of Directors, I still find it difficult to come up with a simple, clear definition of governance.

Like most people, my mind immediately seizes upon Boards of Directors as the prime example of governance. Indeed, a web search on the term ‘governance’ quickly yielded the following:

That relatively simple (!) definition may work for public companies, but, the complexities of family enterprise can require more of a multi-faceted approach to governance.

For example, as families become larger and more complex, they also appreciate the benefits of more formal family governance, most often in the form of a Family Council.

Families that pursue their own foundations and other philanthropic efforts come to appreciate the benefits of strong governance in the form of Foundation Boards.

As families move into the cousin stage – and beyond – they seek governance structures to serve their larger, more dispersed ownership group. Often called Ownership Councils, these bodies provide a structure for balanced participation and oversight on behalf of shareholders.

Families with Family Offices also find significant benefits from the oversight and expertise of an objective governance group of some kind.

Given all this complexity – what’s a good, simple definition of family business governance? To inspire you, I will go out on a limb and offer my own working definition – as follows:

  • Family enterprise governance provides an established set of systems and structures that ensure sound and fair actions and decisions, often by a small number of well-qualified people on behalf of a larger number of stakeholders.

I know this definition has plenty of room for improvement – what’s missing? What’s your current working definition of ‘family enterprise governance’  – and how does it help you get the results you seek?