Why is it that some family businesses thrive and the entire family seems to be at peace while others seem like World War 3 is just around the corner? Why do some families in business together seem to have tremendous trust and respect for each other? According to Bill Alexander during his recent presentation at the S. Dale High Center for Family Business, it is probably the result of lacking good governance.
First, what is governance? It basically is how a corporation is governed. Who has the authority to make decisions for a corporation within what guidelines? When an entrepreneur starts a business, he is ownership, management, and clearly a member of a family. As the business grows, more people are introduced into the business. Likely, some additional managers and decision makers are added. Maybe some additional family members start working in the business and possibly some become owners.
It is at this point that internal conflicts and ambiguity often start to arise. This is the time, as Mr. Alexander states, that family owned businesses will need focus on governance.
Mr. Alexander spent time focusing on the role of family meetings and how they provide a forum for discussion of ownership-level issues. He stated that no governance tools can be effectively developed and endorsed by the family until productive family meetings are in place. These meetings help to increase the trust level of the family.
Another key topic that was covered related to family charter and the 6 key questions each family should be asking:
1. How does our family govern participation in our family business?
2. How does our family plan for transition in our family business?
3. What is our family’s policy with regard to ownership of and compensation for our family business?
4. How does our family strive for harmony in all that we do?
5. What is our responsibility to each other (and others) as family members?
6. How do we keep our family charter updated and current?
He also spoke about the importance of shareholder roles and responsibilities. The four key points were:
1. Define ownership Values, Vision & Mission
a. Who are we?
b. Where are we going?
c. How do we get there?
2. Create/elect management oversight structures
a. Empowered Board of Directors
b. Advisory Council
3. Financial benchmarks and basic liquidity
a. Dividend: 90% of profits reinvested
b. Growth: Exceed industry standards
c. Profitability: After-tax net operating profit to equal 5% of sales
d. Leverage: Debt to Net Worth not to exceed 1.5 to 1
e. Sales: Must receive ownership approval to sell more than 25% of the value of the company
f. Liquidity: Buy-sell agreement
4. Family involvement policy
a. Compensation: Equality or differentiated compensation
b. Employment: Entitlement or opportunity
c. Family roles and responsibilities: What is the role of a shareholder in our family
d. Conflict of interest policy: Outside activities and ownership
e. In-Law policy: Will in-laws be allowed to work in our company
Mr. Alexander also spent a considerable amount of time on the importance of an outside board of directors. His feeling was that a board’s role was to help maximize shareholder value.
In summary, most of what was covered really was about family members spending time communicating, planning and documenting. However, too often family members do not spend the time to work on the business and instead, spend all their time working in the business.