Boards for future generations

The benefits to a family business of having a board of directors are indisputable. A well-chosen board provides you with honest, objective opinions, uncoloured by the kinds of relational issues that can muddy the waters of governance in an all-family enterprise

A high-functioning board grows your enterprise’s value, too. According to research from Lodestone Global, 96% of companies who implemented boards of directors reported increased revenues, seeing an average revenue growth of 55%.What can go wrong when you don’t have a board of directors, or the one you have isn’t effective? Squabbles that can affect any family are amplified when the family ties include the family business.

In this blog we examine three scenarios of  three different family businesses and how working with their boards (or failing to do so) impacted their organizations.

Scenario 1 : Apportioning Ownership

Three generations back, a family business began with the father at the helm. The father had two children, each ended up with a 50% share when he passed the enterprise on to them, so from a voting and equity standpoint, it was an easy transition. The two daughters each had four children, so, again, figuring out the ownership shares for each family member was simple. By the third generation each owner had 12.5% of the business, and each had an equal shareholder vote. But by the fourth generation, things got complicated as the grandchildren had families of their own. One had a single child; another had four, yet another had no kids, and so it went. Now each of those Gen 3 family branches had to divide their 12.5% into disparate amounts, ranging from 12% to 3.1%, creating a big shift in the value of each person’s ownership.

This complicated things: Although the shareholders were notionally committed to the idea of “one person, one vote,” it was clear that the disparities between how many shares of ownership each family member held made that rule harder to justify. Eventually, the business engaged the services of a business consultant and after careful mediation it was decided to go with the one person one vote irrespective of percentage shares held.

Scenario 2 ; How to Hamstring a Board

Not every story has a happy ending, and this is a cautionary tale of how one person’s determined grip on the reins can derail a board’s efforts and effectiveness. In this particular family business, the founder and sole owner of the business, and although she had a board on which two of her children sat, it was Joan as chairperson and majority shareholder who had control of any and all decisions the board made.

When their mother died unexpectedly, all the conflicts and frustrations that had simmered under the surface erupted into open warfare. Two of the siblings could not be in the same room without a fistfight breaking out between them, creating a potentially fatal challenge to the continued health of the business. At Joan’s passing, the shareholder agreement also required that her two sons be in agreement on any decisions made by the board — but that was impossible. They could agree on nothing; not on a budget, not on hiring.

Needless to say , the above business failed and was eventually sold on.

Scenario 3 : The Importance of Having Difficult Conversations

Succession presents many challenges, whether it comes unexpectedly as it did in Joan’s case, or even when the owner/founder has had time to think about his plan, as was the case with Dale. Dale’s long-term health problems were a ticking clock on his tenure as CEO. There had never been a board in this family business; Dale had run things his way and had taken good care of his three sons and their families. Only one of the boys was involved in the business, the other two followed careers in other fields. When Dale passed, he left the business to his three sons in equal shares but chose the son who’d worked with him — the youngest — to head the enterprise going forward.

The bank demanded that the owners create a formal board of directors to ensure fiduciary accountability — and that’s where the fractures in the family structure began to show. The two older brothers, who were part owners but not involved in the day-to-day operations of the business, felt that they were entitled to seats on the board to protect their interests. Neither of them had any real experience working in the business, nor did they have the business backgrounds or other qualifications a board member should have. Their demands created strife that nearly pulled the family apart.

As the father simply chose not to have the necessary tough conversations with his two older sons, explaining his choices around governance. Had he done so they might have more readily accepted the fact that simply being shareholders didn’t qualify them to dictate the company’s direction.

( All Statistical information presented in this blog has been obtained from an extract of an article from the Family Business Consulting Group based in Chicago)

At the Family Business Office we can offer you assistance in dealing with family business issues through incentives supporting advisory and mediation services. Contact us today on [email protected] or visit our website at https://www.familybusiness.org.mt/ for further information.