Family Business Owners Must Set the Agenda (Without Micromanaging)
1960s and, after building it to $500 million in revenue, had passed ownership down to Charles and his four siblings, then stepped away from the executive suite and ultimately from the board.
This may seem like the perfect succession; in fact, it was a perfect set up. The five siblings couldn’t get real control over the business. The non-family CEO – selected by the father – had gotten used to running the company with minimal direction. Board seats, too, were filled by their father’s friends, some of whom doubted the business capabilities of the next generation. True, the siblings chose a new chairman and replaced some board members. But they still struggled to put their mark on the business.
Then something happened. At a priority-setting meeting of their Shareholder Council, Charles got fed up listening to all the talk about how to convince managers to do things the way that the owners wanted. He put a stake in the ground. “Why are we cow-towing to the managers?” he said. “It’s our legacy. It’s our money.”
The tectonic plates began to shift. The siblings clarified their hopes for the business in a vision statement. They pushed management to change the metrics they used for measuring success from a focus on gross earnings to an emphasis on returns on their invested capital. They began to take charge over some critical decisions and worked with the board to implement them. There were inevitably some squabbles, but ultimately management adjusted to the greater role that family members wanted to play in the business that they owned.
Don’t get us wrong. We’ve worked with businesses where the owners can sabotage the success of the enterprise. There’s even a famous Harvard Business School case – J. Perez Foods – on the subject. In it, a family owner named Mercedes starts interfering in HR decisions, firing the employees she doesn’t like. Ironically, while the case is written to point an accusatory finger at Mercedes, when we’ve taught the case to business families, class participants often blame Mercedes’s father, who failed to find an appropriate role for his daughter in the business. That’s what sent her down the path of looking for grossly inappropriate ways to exercise some power.
Our experience in the classroom brings us back to Charles and the question: “What is the appropriate role of the owners of family businesses?” Our view is that the most successful owners must make a small number of very important decisions. They are to:
Set the goals for the business. Many family business owners don’t focus solely on economic returns, but also on jobs for their families, liquidity for their lifestyles or outside investments, or contributions to the community. Owners need to spell out their objectives, knowing that otherwise the business may end up serving somebody else’s interests.
Define the metrics to measure the business’s success. Owners often receive too little or too much information. To get just what they need, they should develop a dashboard that allows them to monitor business performance – and then have a regular venue in which to discuss those results.
Hire the board. Though it’s often forgotten, the board’s primary job is to protect the owners’ interests. Therefore, the owners need to design and oversee the process by which board members are selected and evaluated. This process is complicated by the fact that owners themselves often sit on boards, and therefore need to be acutely conscious of, and conscientious in, separating their roles and responsibilities. This means very clearly establishing criteria for what gets discussed where.
Determine the dividend policy. The board generally makes the annual decision about dividend payouts, but owners should define the policy and share their preferences with the board about what portion of profits to reinvest rather than take out. This is important: in the absence of the rigor of the market place, dividend policy is a means of enforcing discipline on management through the constraint on resources that management can access for the business.
Beyond this, the best owners do not meddle: they delegate decision-making and let the board and management do the jobs they’ve been hired for. So how is your ownership group doing? Here’s a quiz from our client work. Score your owner group on each question, “3” being doing extremely well to “1” being not at all.
Choosing your goals
Do you discuss and write down the specific objectives you want to accomplish together – e.g., growth, liquidity, family employment?
Have you established and communicated to the board and management clear guidelines about the goals they should pursue?
Have you agreed on the top 3-5 measures of the company’s performance? Do you have a scorecard ready?
Does this scorecard compare performance with your company’s peer group?
Do you have a process for regularly discussing company performance where your views will be heard by the board/management?
Hiring the board
- Do you actively choose board members – i.e., consider multiple candidates, set clear criteria, and hold discussions about candidates’ qualifications?
- Does your board clearly represent the interests of owners rather than of management?
- Have you clarified which decisions you will delegate to the board and to management and which ones you will stay involved with?
Setting distribution policy
- Have the owners discussed, written down, and communicated to the board a distribution and/or dividend policy?
- Do you have an annual conversation where you discuss among yourselves your preferences for receiving distributions/dividends vs. reinvesting in the business?
For our clients, we have found that a score of 25 or more means that they are well in control of their companies. A score of 15 to 24 indicates that they’ve not yet found the way to be effective owners. A score of 14 or lower suggests that they have lost control of their company or are at risk of doing so. If you had trouble with some of the survey questions because your board and owner group are one, you have uncovered a fundamental problem.
Where do you fall on the survey? Are you minding your own business?
**Some identifying details about this business have been changed to protect client confidentiality.
First published: 18 Mar, 2014, Harvard Business Review