Signs You’re Losing Control of Your Family Business

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:

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.

Some of the identifying details in this article have been changed to protect confidentiality

First Published: 07 Apr, 2017. Harvard Business Review