What Family Business Owners Deserve
By Craig Aronoff and John Ward
Every owner has certain legal rights—for example, if they have voting stock, the right to vote their shares. In a family business, however, where intimacy and emotion co-exist with bottom lines and strategic planning, it’s much more important to consider what owners--ALL owners--deserve and should expect from their position as shareholders. Ideally, family business owners deserve:
A Financial Return. Ownership means having one’s capital at risk. Some family businesses fail to reward ownership with either dividends or the opportunity to sell shares. Some family firms make working for the business the only path to financial reward, a dangerous approach that confuses ownership and employee rewards unless ownership is restricted to those who work in the business. While family businesses often have goals in addition to financial return, a tangible financial reward is an appropriate expectation for owners of any business asset.
Leadership. Ownership, the board, and management should make a priority of leadership development and succession planning to assure that the necessary competence, trustworthiness, and vision will be available to nurture company growth and success.
Information. Shareholders deserve adequate information from the management and board of directors. Further, shareholders deserve ``transparency’’ from management--that is, managers need to be open about their plans, pay and performance. Management that is miserly and secretive with information breeds distrust on the part of shareholders that do not work in the business.
Psychic Income. In addition to financial reward, family business owners deserve a sense of belonging and a sense of purpose as a result of their ownership. They should be able to feel that they are participating in and contributing to the success of the enterprise. Psychic income is an important and unique bonus of family business ownership. If you as an owner are not experiencing psychic income or if, worse, you feel a real sense of emotional cost as an owner, then something is wrong and needs to be addressed. (Unfortunately, we find that in some family businesses, owners are expected to subsist entirely on psychic income. We don’t think that’s appropriate either.)
Accountability. Shareholders need to be able to hold management and the board of directors (and each other) accountable in a number of dimensions, among them:
1. A set of values. Management should be able to demonstrate that it is running the company in accordance with values set forth by the family. (See Family Business Leadership Series #12, ``Family Business Values: How To Assure a Legacy of Continuity and Success.’’)
2. Performance standards. The board and top executives need to articulate what ownership can expect in terms of short-term and long-term performance. Goals relating to profitability, return on investment, growth, and other financial criteria should be made clear, with results reported on a timely basis.
3. Processes that assure accountability. There should be a board of directors with independent board members on it, as well as rules, policies and procedures that govern the processes.
4. Non-financial goals. The desire for financial return is a given. However, family businesses have other goals as well--in such areas as innovation, employee relations, community relations, and philanthropy. Accountability needs to be established for non-financial goals as well as for financial ones.
A Board of Directors. We think business owners deserve a competent board that includes exemplary independent directors--business leaders from other companies who can complement your team and help you take your business where you want it to go. (In the process, they’ll help increase the financial reward to owners.) As we discuss at length in Chapter V, the board has fiduciary responsibility for the business and represents the ownership group as a whole.
Respect. This includes an honest effort to be listened to and responded to, in terms of your goals as an owner. Owners deserve to be taken seriously and to be heard (although they cannot always expect to have their way). Respect also means that the business should not be used to attempt to control the behavior of adult shareholders by playing favorites with jobs or perks or manipulating dividends.
Protection for the Business. Family business assets represent long-term commitments. Few family businesses can offer to redeem shares at a shareholder’s discretion. Shareholders should not be permitted to put the business at risk by giving or selling their stock to inappropriate owners. Shareholder agreements should be developed to deal with such issues. A business-owning family needs to find a balance among the freedom of the individual, the welfare of all shareholders, and the integrity of the business.
Reprinted from Family Business Ownership: How To Be An Effective Shareholder by Craig E. Aronoff and John L. Ward. This is Volume 15 of The Family Business Leadership Series.