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Non-Active Family Shareholders: Important Allies in the Family Business


Non-Family Shareholders: Important Allies in the Family Business

Not every family member chooses—or is chosen—to be significantly involved in the family business. Nevertheless, every family member has some responsibility. Because the family business is often interwoven into the family’s history, economics and future, the family must figure out levels of involvement for even its more non-active family members. When everyone fulfills their responsibilities, both the business and the family stay strong.
 
Non-active family shareholders are entitled to share in the benefits of the business, and they have an obligation to give something in return. Active family members have a responsibility to communicate with non-active members about the business and to appreciate them as valued partners, not as outsiders or poor relations. Under the best of circumstances, everyone will feel enthusiastic about their shared obligations and responsibilities.
 
Perhaps the most common objection to reaching out to non-active family members is, “Shouldn’t the ones who do the work have the benefits?” We believe that kind of attitude is like cutting off your left arm so you can concentrate more effectively on using your right arm. Dismissive attitudes toward less involved family members can be alleviated by acknowledging the advantages of including everyone and by recognizing that the perks and responsibilities of involvement can be apportioned on principles of fairness rather than equality.
 
Fairness must always be a two-way street. Members actively involved in the family business must reach out to the non-active family members, and the non-active family members must find a balance between remaining interested and expressing their opinions and advice, but not unduly interfering. Family members involved with the business on a daily basis need to have clear, incontrovertible decision-making powers. They can neutralize non-active family members’ disappointment over their lack of decision-making powers with respect and creative compensation and by promoting other meaningful participation. For example, non-active family members can be awarded life insurance, nonvoting stock or other assets. The company can distribute larger shares of nonvoting stock to non-active members and smaller shares of voting stock to active participants.
 
Two things will help your family achieve fairness:
 
First, control resentments. This doesn’t mean ignoring or denying resentments; it means recognizing them without allowing them to pollute communication. If resentment exists, find a way to soothe it—without compromising the business. Managing family members should remember that they’re stewards of the business, with an obligation to past, present and future family members. Stewards should acknowledge, try to understand, and then transcend jealousies and resentments. Non-active family members who may feel resentful about being excluded need to ameliorate their resentment through positive actions and find ways to be more actively involved. Otherwise, they’ve helped lock themselves into solitary confinement.
 
Second, speak honestly. “Honestly” is different from “bluntly.” The intention must be to give accurate information, not to blame or insult. For example, don’t bluntly explain the decision to give non-voting instead of voting stock by saying, “You don’t put in any work, so you shouldn’t have a say in operations.” Instead, you can honestly say that the business decisions require intense daily involvement and extensive knowledge of both daily and long-range plans, the competition, and intricate financial details.
 
Now let’s look at some reasons why it’s best to include all members.
 
A family business is intertwined with the family identity. Even members who don’t directly participate in the daily running of the business share this identification. Exclude someone from meaningful participation and you give a disempowering, even embittering, message. Just as you don’t want to alienate any customers, you don’t want to alienate family. Nurture participation and identity, and your family business strength increases.
 
Sometimes non-active family members mask their own emotional involvement with seeming nonparticipation. Managing family members then assume they’re not interested and stop sharing information, which then breeds genuine disinterest and feelings of exclusion. Non-active family members often make unofficial contributions and sacrifices to the business, which ought to be acknowledged and appreciated. The family business may have influenced such major decisions among non-active family members as where they live, or how or where they educate their children. Even the more uninvolved non-active family members occasionally offer ideas, usually informally, about the business. In many ways, they’ve pitched in with logistical or emotional support, either with the business or family life, helping others more directly involved with the business to do a better job as company officers, spouses and parents.
 
Non-active family members have an obligation to honor their identification by showing interest in the business. They don’t have to care about the daily nuts and bolts or the operational intricacies, but they do have to have an interest in the financials, even if only for the sake of their children. And with major decision-making power, they can always find aspects of the business that interest them and in which they can make a meaningful contribution.
 
Finding ways to nurture non-active family members’ interests and identity is a joint venture. Most families schedule annual or biannual family councils that are a combination of family get-togethers and business meetings. (Depending on how your family communicates, you may want to draw up business meeting rules ahead of time that will help everyone stay focused on concrete issues.) If some members seem more interested in creativity or academia than in nuts-and-bolts business, ask them to write a periodic family business newsletter (perhaps for family members only) that will help keep everyone in the web of communications. The newsletter encourages two-way communication, because the active business members will have to keep the newsletter editors updated.
 
Listening opens perspectives; brings new ideas; and enhances harmony, knowledge and wisdom. Family members are such important mutual resources that they frequently take it for granted and forget to tap into each other. Listening is a mutual responsibility.
 
Managing family members need to remember to genuinely listen. The most effective leaders talk—and especially listen—to as many people as possible who have even a tangential connection to their enterprise. A mostly noninvolved grandson had attended a business meeting and sat silently, listening to a long, technical discussion about inventory turns. During a break, he mentioned to a cousin that he was puzzled and perturbed that no one had paid any attention to the company’s mission statement. The cousin encouraged him to mention that. Later, when the CEO asked if anyone had any questions on the report, the grandson asked, “What does increasing inventory turns have to do with our family’s mission statement?” After a surprised pause, the CEO said it was a very good question and asked if anyone wanted to respond. It touched off a spirited discussion during which the family tied inventory turns back into their family’s philosophy, not only validating the grandson but reinvigorating everyone’s sense of why the business was really important.
 
Non-active family members should listen to insiders’ business concerns and plans. At the very least, it’s common courtesy. But beyond that, non-active family members will have surprisingly valuable input. Non-active family members, because they know the history of the business as well as the family’s patterns and personalities, are an excellent source for ideas and insights. Even if they don’t bring much business sense, they can bring a lot of family sense.
 
Like other aspects of family relating, including everyone in the business in a meaningful way is sometimes difficult work. But in the end, broad family cohesiveness is what makes a family business successful.
 

The booklet, How to Be an Effective Shareholder, by Craig E. Aronoff and John L. Ward, available from Family Business Consulting Group Publica-tions, has a handy checklist of the responsibilities of all family business members. Remembering this summary will help everyone navigate the sometimes tricky waters of total family involvement.
 
Owner/managers should be open and accountable for what they do, good listeners, trustworthy, educators, and honest and sensitive about issues of power and status. They should constantly emphasize to everyone that the family business is like an heirloom, with respect toward its past and toward future generations.
 
Non-active family members should take a caring interest in the business, understand and respect the challenges of management, and understand that family business funds are for reinvestment, growth and operations as well as for family members’ more immediate needs. They should do whatever they can to build their own sources of income, independent of the business.
 

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