When the non-family chairman/CEO unexpectedly told family business owners that they had to live without dividends or sell the business, Tommy leaned over and whispered in his cousin’s ear: “Do you get what’s going on? The numbers have always been terrific.”
Despite their shock, Tommy and other family owners shared responsibility for this painful situation. For years, they’d been detached and unengaged owners. No family member worked in the company, and those who sat on the board rubber-stamped management’s decisions. The owners sat passively until faced with the reality that they were at risk of losing the business that had been in the family for three generations.
While the details vary, stories of family owners losing control of their businesses are common. Consider what happened when a relatively young patriarch died unexpectedly, leaving no succession plan in place. The children were unprepared to take over, and the widow had no business experience. She brought in a non-family CEO who treated the business as his personal fiefdom. Eventually he tried to buy the business himself at a deflated price. The experience broke the family, emotionally and financially.
Sometimes a non-family CEO plays the role of villain in these situations, the blame lies more often with the owners, who created a power vacuum for others to fill. Lacking substantive direction from the owners, these executives understandably followed their own self-interests. But even when families are fortunate enough to find that selfless, protective non-family leader – and we have seen many – owners still need to speak with a single voice about what they want. Otherwise, there is no way to ensure that their ownership interests are being served.
Are there warning signs that you may be on the path to losing control of your family business? We primarily see five red flags:
- Dividends never change. If you receive stable dividends year after year, then you should grow concerned. Dividend targets are fine, but the dividends of a well-run company are always uncertain and should vary depending on the company’s performance and its future opportunities. Every year there should be some discussion about the company’s profits and what to do with them. If you grow accustomed to receiving annual dividends — in the worst cases, treating them as a birthright — then you forfeit an essential mechanism for controlling the business, namely, deciding how much of your money should be reinvested annually.
- Board meetings are a formality. A board of directors (or advisors) is essential for ensuring that the business is pursuing the owners’ objectives. At their best, independent directors bring wisdom, expertise, and a willingness to challenge management. As owners, you must see to it that the board is properly formed and empowered. Do you have a “paper board” that rarely meets or essentially rubber-stamps the recommendations of management? Is the board filled with family friends, or with the CEO and his allies? Is the board’s role murky and undefined? If you answer “yes” to any of these questions, then you’re giving away a key lever for maintaining control.
- Too much or too little information is provided. As an equity owner, you should receive information about business performance in a timely and appropriate way. Either fifteen-minute updates (“The business is great!” “Enjoy your dividend!”) or 200-page “summaries” should set off alarm bells. If you don’t work in the company, you are already at a disadvantage, lacking first-hand knowledge of what’s happening. When management either skimps or drowns you in details, it’s very difficult to understand your business’s performance and potential.
- The CEO seems irreplaceable. There are business leaders who can run your business and deliver outstanding results, while also cultivating proper family engagement. Do what you can to keep these people. Watch out, however, if you (and they) talk and behave as if they are irreplaceable. Respect and appreciation for a job well done are healthy. Fear and dependency are not. Irreplaceable executives can begin to make decisions independently, believing they know better than you do. They may even refer to you as “the kids.” If your family ownership group walks on eggshells around your non-family CEO, your behavior may signal a dangerous imbalance of power.
- Family members are shut out of the business. Sometimes family owners lose control of the business because the previous generation has shut the door to them during the succession process. There is either a real or perceived lack of talent among the next generation — or fear about the dangers of family conflict — and employment policies are put in place that either prevent or make it very difficult for family members to work in the business. There are times when this “professionalization” of the family business may make sense. But be aware that the family’s direct link to the operations of the company will be severed. You don’t need to run the business. But having owners employed there helps the family to keep a finger on the company’s pulse.
When you realize that you’ve lost some or most of the control over your company, then it’s time to ask yourselves whether or not you wish to continue to own your family business. You may decide it’s time to sell. But if you choose instead to become an active owner, then you must first reclaim active ownership. This decision doesn’t mean that you suddenly have to start micromanaging executives or meddling in operational decisions.
What does active ownership mean? To grapple with this and other important questions, the first step is to create a place where you and other owners can meet (without non-family executives or board members) to talk about your role and your aspirations for the business. We often call this place an Owner Council. It’s a forum where you can decide your priorities as owners and discuss how to speak to the board and management about these priorities in a united voice.
After creating an Owner Council, you can then begin to set your objectives for the company. It’s the owners’ responsibility to put in place clear financial policies for dividends and debt levels, as well as to set financial and non-financial guardrails, such as setting a return on investment target or banning investments in, say, tobacco. One of your most important jobs is to manage the process of selecting board members. You may, of course, solicit advice from others, such as a nominating committee, but the ultimate decision rests within the ownership group. It’s then up you as owners to hold the board accountable for choosing a high performing CEO who supports your owner agenda.
Keeping control of your family business isn’t easy. For a start, ownership is not typically a full-time job, but is rather peripheral to your everyday work and lives. You can also feel ill-equipped to exercise your rights thoughtfully when the financials of the business can seem impenetrable. You may never become an expert on, say, return on invested capital, which only underscores the importance of structures that let you rely on the knowledge of people who appreciate your values and follow your agenda. By becoming more active and effective owners, you can let go of many decisions without losing control of your family business.