Tag Archives: ownership

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.


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


Legacy and Evolution

Jennifer Pendergast
Jennifer Pendergast

One of the key differentiators of family businesses is a committed ownership group who are proud of the legacy their family business represent.  Research shows that family businesses outperform non-family businesses, and this focus on the importance of legacy is one of the contributors to superior performance.   However, an overemphasis on the past can also have a negative impact on family business performance. 

Ability to change is also important.  Every generation is different, and requires different structures and rules to succeed.  Take just one element – ownership structure.  In earlier generations, many family business owners created a structure where stock was consolidated in the hands of those who involved in the business.  Many felt the alternative of entrusting ownership to family members who may not be as interested in the business could lead to non-employed owners getting in the way of family management’s ability to make decisions.  Further, some thought it unfair that those not involved benefit from the hard work of those involved in the business by participating in the financial gain created by employed owners. 

While this model of ownership may have served a family and company well in the past – as the business evolves and typically gets larger, there can be many benefits to cultivating a group of informed and committed owners who are not employed in the business.  In the interest of brevity, lets just focus on the financial benefits. 

By limiting the ownership group, family businesses may limit the pool of capital available for investment in the business.  For instance, if a business founder has 3 children, only one of whom goes into the business, and he decides to give the business to that child, he will often make a financial gift to other children to treat them equitably.  That money could have been used to fund business growth.  Or, if he gifts shares to all three children at a young age but requires them to sell back their shares to the company if they decide not to pursue a career with the business, again the business capital is limited.

A great strength of family businesses is the patient capital they have by virtue of an ownership group that is interested in managing the business for the long term.  This mindset leads family ownership groups to support management decisions that contribute to long-term business success even if they may not show immediate results.  In fact, research shows that family businesses invest more in R&D and employee training than non-family businesses.  The benefit of a larger ownership group is that they provide capital at a lower cost with a longer time horizon than other investors (including banks) – providing their businesses with a significant competitive advantage.   

So, let’s circle back to legacy.  A commitment to the principles that served the business well in the past is important.  Equally important is a thoughtful analysis of what changes need to be made as the business evolves.  Just as it would be impractical to use a typewriter to generate business correspondence today, it may be impractical to maintain the same ownership requirements from generation to generation (or the same employment requirements or other elements of the family legacy). 

Honoring legacy is important, but if part of that legacy is a desire to maintain the business for generations to come, perhaps a new addition to the legacy needs to be an ability to change.


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.


“Someday This Will Be Yours”

Bernie Kliska
Bernie Kliska

The ability to carry on a successful intergenerational transfer of ownership and leadership is one of the most important and difficult issues facing a family business. One metaphor for succession is the firefly. They flicker brightly for a period of time, then fade away. Consultants call this the rule of thirds: only about a third of family businesses make it to the second generation. A third of those survive to see a third generation and only three percent of those manage to see the fourth generation. Research indicates that failing to transfer the family business can be traced to one major factor: lack of planning. A recent survey (1,952 families) indicated that 66% had no succession plan or had a ” loose plan” that was rarely executed.

Succession planning can be especially complicated because of the relationships and intense emotions usually involved. Most people are not comfortable discussing issues such as aging, death, and their financial affairs,all of which are involved in the discussion of succession. Realistically, it takes years to plan and implement a proper succession plan. A good plan typically covers three main topics: management, ownership, and financial matters. It is important to recognize the distinction between management and ownership. They are not necessarily the same thing.

Often, the most challenging part of the succession process is getting started. First, you should thoughtfully and realistically assess the situation, and determine your objectives. Then, methodically address each issue that may stand in the way of those objectives. Seek input and help from advisers, independent directors and family members.

Succession of a family business is inevitable and the earlier you start planning, the more effective your transition will be.


Adding owners to the family business

Norbert Schwarz
Norbert Schwarz

At some point in their lives, many family businesses face a decision regarding whether to authorize and issue non-voting stock or not. This common strategy can be very helpful in accomplishing tax and estate planning objectives as well as adding family members to the ownership structure without necessarily giving up voting control by the senior generation. However, unlike marketable securities held as financial investments, ownership in closely held businesses, whether voting or non-voting, carries with it important considerations not usually apparent in open market investments.

Some of the factors to be considered when expanding ownership in the family business are whether the prospective owners are perceived to have the following:

  • Shared ownership values
  • A strong sense of stewardship toward ownership in the business
  • Willingness to support board, management, employees and the shareholder majority
  • High level of Trust with other owners
  • Constructive participation in family meetings
  • Commitment to teamwork and collaboration
  • Strong personal bonds and relationships with other owners

When these qualities are present, the chances of future conflict within the ownership ranks is generally minimized.


Where do YOU draw the line?

Chris Eckrich
Chris Eckrich

Position #1:  Our family built this business and we take on all the downside investment risk.  As owners, we take many ownership perks (club memberships, cars, personal services performed by the business) so our owners appreciate some upside at very little cost to the business, providing that it is legal.  That is what being an owner is about.

Position #2:  We believe that owners deserve investment growth and dividends (when performance supports them), and we do not give owners any other special perks.  That way our owners are focused on the performance of the company.  Once you start having ownership perks, it just causes strains between management and owners and distracts us from our common purpose.

Where is the proper place to draw the line when it comes to taking ownership perks?


Creating Flexible Systems for Family Business Transitions

Jennifer Pendergast
Jennifer Pendergast

As my kids start the year at a new school after moving our family to a new city this summer, I find myself reflecting on transitions.  Family businesses are full of transitions – ownership transitions, leadership transitions and family transitions.  One of the reasons family business is so complex is that these transitions, which have both structural and emotional consequences, often occur simultaneously.  Just as we are dealing with an aging parent, who may require additional family support, we may also be dealing with entrusting stock to the next generation and determining how the next generation will be represented on the board of directors.   So, here’s a quick word of advice in dealing with multiple transitions, from someone who has had to open an new office, move into a new home, get children ready for a new school, support a spouse in a new job and begin to build a business network in a new city, all at the same time …                                  

I’ve found the best way to manage the complexity of multiple transitions is a combination of careful planning and flexibility.  Many of the challenges inherent in family business transitions can be predicted ahead of time.  And, often the timeline can be as well.  So, thinking ahead to identify the likely transitions you face and creating a plan for dealing with them can minimize the disruption, just like my spreadsheet with all the names of the utilities I need to cancel and start helped to keep me on track.  At the same time, we can’t possibly prepare for every potential outcome.  So, when the wireless network in my home office took three days to install instead of one, I had to find a coffee shop to work in and a babysitter to watch the kids.  Similarly, when a next generation member doesn’t measure up to your expectations or the current generation is unwilling to step off the board to make way for new blood, the family needs to adjust.  In my case, the adjustment required me to take a deep breath and look for a solution.  In the family context, the solution often involves multiple parties.  The keys to creating a flexible system to deal with the unexpected are a governance structure that supports family decision-making and trust among family members to help the group compromise on the best solution. 

Would love to hear from readers about ways they have used to create a flexible system….


Stock Market Convulsions – Lessons for Families

Chris Eckrich
Chris Eckrich

Last week was a great lesson in the consequences of emotional reactivity to business information.  Monday’s news was gloomy – business conditions had eroded from earlier projections and the debt deal wasn’t enough.  The Dow was in a free fall as investors ran for cover.  The sun came up 24 hours later and investors realized that maybe they overreacted, and much of the losses were won back.  Only to drop again, then roar back as a few key indicators seemed to back away from the story line of financial Armageddon.

Family enterprise shareholders are regularly exposed to information about their businesses, and not all of it is good news.  When hearing bad news, it is natural to catastrophize and begin thinking of all the things that could go wrong, which nurtures further anxious thinking.  Many a family CEO has received phone calls from fearful shareholders questioning management’s abilities at a time when management is usually working very hard to make the business work properly.  Unless both caller and CEO are gifted communicators and can find common ground, it is not unusual to have the call end with the CEO frustrated and the shareholder finding little to ease the anxiety.  There is a better way.

Families do well to work on building strong communication systems between the business and shareholders, and nurture trust through clear and agreed upon governance.  This usually occurs in family ownership forums or family meetings, during which the family creates the rules for how governance will occur, and how information will be disseminated.  Once this framework is in place, trust is built and strengthened over time as each group (Owners, Board, CEO, Family) lives up to its expectations with the others. 

Trust and communication are necessary, but not sufficient to prevent reactivity among ownership groups.  Also needed is a deep sense of long-term commitment towards achieving ownership’s vision.  Securing long-term commitment requires that shareholders be educated about the business, the opportunities it offers to owners, and how it will achieve the owner’s objectives.  For many enterprising families, shareholders are educated regularly (often starting at an early age) about the long-terms benefits of family business ownership.  This education is crucial in helping shareholders appreciate and value the businesses they own, and to deepen their sense of long-term commitment to the business.  Then, when difficult business situations arise, shareholders provide stability to the enterprise rather than chaos.

As for the stock market, one wonders what would have happened if investors all had a 10, 20 or 30 year investment horizon, rather than being driven by the news of the day.  It probably would have been a pretty bland week.


Should family members not working in the business ever be owners?

Chris Eckrich
Chris Eckrich

Recently at a seminar a well-respected advisor proclaimed that any succession plan that allows stock to pass to those not working in the business is a bad succession plan.  For anyone who has experienced family dissension or destruction over conflict between those in and outside of the business, this certainly will sound like sage advice.  But, while this may seem sound advice for a smaller business where there is little chance for significant reward beyond that which can support a single owner or that owner’s family, the issue is a bit more complex where larger assets are involved. 

If the business is successful over time and grows large enough, there is an opportunity for building an enduring enterprise that creates both career paths for those working in the business, and returns (in the form of investment appreciation and dividends) for those who are not working in the business.  Furthermore, an aligned ownership group can support growth models with the patient capital approach that is a competitive advantage for family firms.  When combined with a liquidity policy that allows for the voluntary buyback of a small percentage of shares on an annual basis, the shareholder tree can be slowly pruned over time, increasing the likelihood of a unified shareholder group.

If we think of a family business in terms of a snapshot in time, it does seem logical to keep the family business in the hands of only those employed in the enterprise.  But if we take a longer-term perspective, this decision may exclude the possibility of a family enterprise that ends up being governed by owners with independent directors serving along non family executives in building the business.  Or, we may open ourselves up to the possibility that a next generation leader will come from one of the branches that might otherwise been prevented from ever owning the business.

One size does not fit all when it comes to family businesses.  Each family must decide what path to pursue in terms of who can own the business, and all options should be considered in the decision-making process.