Understanding Roles and Responsibilities
Confusion over the roles of key positions in the corporate structure leads to many of the typical problems experienced by family businesses. Family and business is complex. But, building your family's understanding of basic business governance concepts is a great first step in preventing or solving problems.
At the top of the corporate structure are the shareholders. Yes, shareholders are the owners. But they actually have very few rights and responsibilities. Here are the primary ones:
Receive dividends if and to the extent any are declared by the directors
Vote on major corporate matters like mergers, sale of the business and liquidation
Receive financial statements
Sell their stock.
Shareholders do not have the right to manage day-to-day operations or tell the officers what to do. They do not have a right to work for the company or to receive salary, company cars or other perks. In fact, they don't even have the right to determine operating philosophies, except by their selection of directors.
Directors Give Direction
As the elected representatives of the shareholders, directors have some critical responsibilities, including:
Represent the interests of all shareholders as a group, not individual shareholder's interests
Elect officers (and fire them if appropriate) and determine their compensation
Determine general business strategies and philosophies, usually in consultation with the officers
Oversee the officers to assure that the board's strategies and policies are being implemented
Vote on significant matters, such as major property acquisitions/sales, incurring debt and mergers
Declare dividends if and to the extent the board believes funds are available after considering future operating and growth needs.
Directors do not manage the day-to-day operations of the business. Their functions are broad policy determination and oversight. They typically meet with the officers several times per year and are entitled to reasonable fees for their services.
Officers Manage the Business
Key officers, like the president and vice-presidents, are responsible for implementing the strategies and policies of the board through the day-to-day management of business operations. They report to the board and provide financial information to it and the shareholders. Officers do not have any rights of ownership, so they are not entitled to dividends or any growth in stock value. Their only economic rights are reasonable compensation and perks for their services, all as determined by the board.
Things become murky when family members have more than one role. Actually, it's not multiple roles that are the problem...It's forgetting the responsibilities inherent in the roles you have. For example, if one or a small group of shareholders have a majority vote, they can 'stack' the board with directors (usually themselves). They then elect themselves as officers and determine their own salaries. As directors, they may forget that they have a responsibility to all the shareholders. They rarely ever consider dividends. They may not provide financial information and may ignore the minority owners' input. Minority shareholders then perceive that the majority favors its own interests to the detriment of the rest of the shareholders.
The minority family members get increasingly frustrated. A public company shareholder can at least sell if he or she is disenchanted with management. But family business shareholders don't have the realistic ability to sell their stock because there is no market for it. Whether or not they have any meaningful knowledge of the business, their only outlet is to try to get involved in management. Of course, the majority calls this 'harassment.'
These are some of the reasons we so strongly recommend a board of independent directors. But the power inherent in being able to stack the board to suit the controlling shareholder(s) wishes is also the reason that so few family businesses give any serious consideration to our recommendation.
The solution to family business issues is not necessarily to prevent family members from having multiple roles. In fact, many family businesses do very well without outsiders on their boards. The key to the success of these businesses is the family's ability to reduce the emphasis on the rights inherent in their roles and instead to focus on the responsibilities of each role.
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