When it comes to family business, what's a shareholder to do?
The conventional wisdom in family-owned businesses is that what shareholders do is elect the board of directors and that's pretty much it. Not so in today's world.
John Carver, a noted author who developed the policy model for boards of directors called "Policy Governance," has this succinct advice: "Noses in, fingers out." I suggest that is great counsel for business families. Understand as much as you can about the strategic issues of the business without meddling in the day-to-day operations.
What then are the responsibilities of the shareholders in a family-owned business? I recently had the privilege to talk with the fifth generation of a business family. The group ranged from college-age to early forties, and I presented two lists of responsibilities to that shareholder group.
Responsibilities as a Shareholder
(For a complete understanding of these principles you may want to read Ernesto Poza's Family Business, 3rd Edition, Chapter 3).
Responsibilities as Family in the Family Council
I believe these two lists are so important that the next two articles in future issues will expand on how to implement both business and family expectations. I have long held that it is necessary to build the emotional equity of your family while you are building the fiscal equity of your business. All shareholders assume responsibility for these two lists of responsibilities, whether they are employed by the company or not, because both contribute critically to business family success.
Where's A Shareholder to Go?
There are three types of meetings in family-owned businesses:
1. Ownership Meetings - Only the business owners attend.
2. Employee Meetings - Only the family members employed by the business attend.
3. Family Meetings or a Family Council for larger families - Open to all adults in the family. Shareholders get to exercise their role in the context of Family Meetings where the family formulates its own expectations for the business, communicates those expectations to the shareholders, and shareholders elect the board of directors who carry out the family's expectations for the company. In larger families the Family Council has, along with its elected responsibilities, the ability to organize family meetings and provide the governance function for the family.
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The conventional wisdom in family-owned businesses is that what shareholders do is elect the board of directors and that's pretty much it. Not so in today's world.
John Carver, a noted author who developed the policy model for boards of directors called "Policy Governance," has this succinct advice: "Noses in, fingers out." I suggest that is great counsel for business families. Understand as much as you can about the strategic issues of the business without meddling in the day-to-day operations.
What then are the responsibilities of the shareholders in a family-owned business? I recently had the privilege to talk with the fifth generation of a business family. The group ranged from college-age to early forties, and I presented two lists of responsibilities to that shareholder group.
Responsibilities as a Shareholder
- Develop financial literacy. Be able to read a balance sheet and a profit-and-loss statement.
- Describe what you consider the family values and principles of doing business.
- Define how you "own" the family's strategy and communicate to the board how to govern family priorities.
- Define (and then demand) reasonable returns on shareholder equity and invested assets.
- Establish family expectations for distributions, liquidity, redemptions, dividends and buy-sell agreements, and communicate them to the board.
- Establish shareholder development, education and leadership as a company and family priority.
(For a complete understanding of these principles you may want to read Ernesto Poza's Family Business, 3rd Edition, Chapter 3).
Responsibilities as Family in the Family Council
- Create a common family vision to unite the family and build trust.
- Create opportunities for family business education.
- Create a culture of transparency in family communications, business and financial matters.
- Create, maintain and celebrate family rituals.
- Create a standard for family communication that is win-win and promotes a trusting family culture.
- Discuss shareholder development and the purpose-driven life.
- Discuss how wealth and money can incorporate the family's values concerning service, philanthropy and gratitude.
I believe these two lists are so important that the next two articles in future issues will expand on how to implement both business and family expectations. I have long held that it is necessary to build the emotional equity of your family while you are building the fiscal equity of your business. All shareholders assume responsibility for these two lists of responsibilities, whether they are employed by the company or not, because both contribute critically to business family success.
Where's A Shareholder to Go?
There are three types of meetings in family-owned businesses:
1. Ownership Meetings - Only the business owners attend.
2. Employee Meetings - Only the family members employed by the business attend.
3. Family Meetings or a Family Council for larger families - Open to all adults in the family. Shareholders get to exercise their role in the context of Family Meetings where the family formulates its own expectations for the business, communicates those expectations to the shareholders, and shareholders elect the board of directors who carry out the family's expectations for the company. In larger families the Family Council has, along with its elected responsibilities, the ability to organize family meetings and provide the governance function for the family.
If you enjoyed this article please consider leaving a comment below, sharing it and/or subscribing to have future articles delivered to your RSS feed reader.
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