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Avoiding the “Family Box”

by Chris Eckrich & Steve McClure

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Chris Eckrich
Chris Eckrich
Steve McClure
Steve McClure

The November article is titled, Building the Best Team Possible: Relationships between Family and Non-Family Employees.  Just as important are the relationships between non-family employees and family members who do not work in the company.  Recently, we heard the following comment from family shareholder about the non-family management team.

“I feel like they want me to just be a figurehead, like the face in the black framed motivational picture with the bold print; Inheritor.  Our professional managers show polite interest in my suggestions about the business, and will point out a little too directly for my comfort; your family hired us to manage.  I feel like they want me to stay in a box; the family box.”

InheritorsIt is not hard to understand non-family management wanting to keep the family in a box, if there has been a history of meddling or politics in the business resulting from family disputes.  If they feel family dynamics are playing out too much, is easier just to concentrate on “business” and do everything possible to make sure “family” is handled elsewhere.  Yet, what about the family shareholder who wants to make a valued and appropriate contribution and is just a little awkward and inexperienced about it?

Family shareholders need to learn all they can about how to exert their influence on a business in an appropriate way… and it is the responsibility of a family to teach its members.  Even so, those who are new to it will understandably make mistakes.   We find it is a two-way street.  The family will benefit greatly from non-family managers who are interested, are willing to learn and engage the family to maximize the family’s contribution to the business.  If they expect the family to know how best to be an active family shareholder, and resort to only telling them how they are getting it wrong, a contest will develop.

If both management and the family are earnestly working toward maximizing the competitive advantage of family ownership by adopting an open to learning, trial and error approach, they will invent procedures for communication and interaction that will fit their unique needs.  There’s not one way to do it; visits from senior non-family managers to the Family Council may work for one family, and be completely inappropriate for another.  Accepting that mistakes are okay, and that constructive feedback is okay too, the family shareholders and management will evolve and get it right.  By working together, they can keep “family influence” alive in the business, even if the family is not in the management ranks.

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The Challenge of Illustrating Complexity

Stephanie Brun de Pontet
Stephanie Brun de Pontet

 

Families are complicated, business is complicated and clearly the overlap of these two entities is VERY complex.  In order to simply illustrate some of this complexity, those of us who work with families in business often talk about the ‘Three Circle Model’ which aims to illustrate the overlapping dimensions of ‘OWNERSHIP,’ ‘FAMILY,’ and ‘BUSINESS,’ which can help clarify how different stakeholders may perceive issues differently by virtue of where they are in the overall system. 

3 circles 

While this simple model is very helpful for starting conversations and understanding, it is – as all models are – a simplification of reality.  For instance, one dimension that is not captured in this model is the dimension of TIME and how each circle tends to grow and shift over time.  A family of 5, with only two generations present is very different from a family at a third generation, that has grown to involve 18 adults.  Similarly, when the business has sales of $10 million and 30 employees it is run differently and affects the family and ownership circles differently than when it has grown to $70 million in revenues and a workforce of over 100 people. 

Another element that is not well captured in this standard model is the multi-directional influence that is present within circles and across circles.  For example, while employee development is clearly a responsibility that is in the domain of the BUSINESS circle, when it comes to developing employees who may also be prospective owners – there may need to be some communication between all three of the circles to get that done in a way that works for all stakeholders (reflects values of family, needs of business and goals of sustained ownership).  Similarly, while the owners are the ones who have to determine what their tolerance is for risk and their targets and goals for economic returns on their investment in the business – those who run the business day to day are the ones who need to provide information and feedback about what is feasible in that regard. 

Clearly there is a lot of flow and movement between the circles, to say nothing of the variety of inputs and opinions that exist within any one circle.  The challenge is that if you tried to capture all the complexity and moving parts in a model – the model would become so busy that it would be impossible to read or follow.  My point is not to question the usefulness of these tools – but merely to remind us all that they are just that, TOOLS – a conversation starter, a simple model that is a framework by which we can start to talk about more complex issues and think through how to handle the fun and idiosyncratic ways in which this complexity gets expressed for real in any business.

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What does it take to make it as a next gen leader?

Drew Mendoza
Drew Mendoza

Our colleagues Asa Bjornberg and John Ward have both spent considerable time reflecting on and analyzing the answers to this question.  Their sage advice:  cherish what was as you embrace what will be.  Base your entrepreneurial initiatives on the spirit and culture of the business you are taking over. 

Read on to learn more.  Making the Most of Your Emotions

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Board Webinar – Sept. 29th, 2010 – Q&A

Kelly LeCouvie
Kelly LeCouvie
Jennifer Pendergast
Jennifer Pendergast

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.

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Generosity

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.

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Welcome to the new FBCG Blog

Stephanie Brun de Pontet
Stephanie Brun de Pontet

Welcome to FBCG’s new more active (and hopefully interactive) Blog. As we transition from our monthly newsletter, to a mix of new media: sending articles to all our contacts by email, developing comprehensive webinars to dive deep on a topic, and reaching out to a broader public via this blog space – we hope to touch a wider audience, and engage folks in conversation about all things family business. In fact, in our experience a lot of issues in family business are more threatening to the business or the family when ‘things are left unsaid’ than when we grab the bull by the horns and broach the topic as adults. We hope these short communications may serve as a vehicle to facilitate ‘starting an important conversation’ for a number of our readers. In addition, we hope to provide you with fun facts, tips, or advice that can help you navigate the complex world that is the family-business overlap. As with our earlier blog, we will certainly address topics relating to education, but we will also speak to issues on governance, family meetings, family relationships, best business practices, and many others. In fact, we would welcome your input on topics you’d like to see covered here. Also, if you have a general question on which you’d like our thoughts – please feel free to post this and we will share our thoughts and offer some advice as appropriate. We genuinely hope you’ll join the conversation and help us make this a great resource for all folks involved in family enterprises.

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