The Importance of the Owner Room
No matter what the specifics of your family business are, you should set up an Owner Room in which to make the decisions that will shape your business for years (and indeed for generations). The absence of an Owner Room, even in a family business with otherwise well-developed governance structures, is the single biggest gap we have seen in our work.
What decisions happen in the Owner Room?
When setting up an Owner Room, owners explicitly retain a few important decisions. Four decisions sit squarely in the Owner Room and should not be delegated:
- Defining how ownership interests can be bought, sold, and transferred, including to the next generation (often captured in a shareholder agreement, which is discussed later in this chapter)
- Making the final call on actions that change the nature of what it means to be an owner, such as going public, taking on significant debt, or selling the company
- Setting goals that define success for the company (for more on this topic, see the Harvard Business Review Family Business Handbook, chapter 5)
- Electing family or nonfamily board members to represent the owners’ interests
Beyond these core decisions, owners also can reserve other decisions for themselves. For example, we know an eighty-year-old family business owner who decides the location of each of his company’s retail outlets. Firmly believing that store location is the most important decision for the success of the fi rm, he reserves it for himself. Owner groups vary greatly on the list of reserved decisions. To be an effective owner, you need to decide which few decisions are so important that only owners should make them. Everything else can and should be delegated.
Who is in the Owner Room?
The current owners of the business are the core members of the Owner Room. If your business is owned by trusts, then the trustees and beneficiaries are involved in the room. (While trusts bring large tax benefits to owners, they make owner decisions making far more complicated; see Harvard Business Review Family Business Handbook, chapter 7.)
Future owners are only invited into the room when the current generation sees them as fi t to be part of owner discussions. These young people can typically join in discussions in their late twenties and beyond. Having great influence on both the current and the next generation of owners, the spouses of the owners are sometimes invited to participate in the Owner Room. (In our client base, about 20 percent have a formal role for spouses in the Owner Room. In some countries, spouses legally become owners and are naturally included.)
How does the Owner Room work?
Effective businesses must set the right tone in the Owner Room. Unlike in the Management Room, in which the CEO is the ultimate boss of the employees, owners have no boss. Though the person or group with 51 percent of the voting shares has legal control of the asset, minority shareholders also have their own rights and interests, both protected by law and often explicitly spelled out in a shareholder agreement. (For example, a shareholder agreement might stipulate that the business can’t be sold without the consent of a super majority of shareholders.) Minority shareholders don’t report to a majority shareholder. This lack of hierarchy makes the group dynamic in the Owner Room challenging. Without a boss, an Owner Room works on power and influence. Decisions in this room are affected both by vote (where voter weight matches the percentage of shares an individual or group controls) and by voice (where nonvoting input can play an important role in decision-making). Even in a Concentrated ownership structure, a controlling owner risks conflict if they fail to seek input from minority and next-generation owners. Well-run Owner Rooms ensure that all owners have a voice in the major decisions, even if they don’t have a vote. And most operate by consensus, defined as a decision that may not be what each person would do if it were only up to them, but that everyone can live with. Even if you have the votes, we advise trying to work toward consensus first in order to maintain as much unity as possible.
An Owner Room typically has two structures: an owner council and a shareholder meeting. An owner council represents the ownership interests of a family in business. It provides several benefits:
- A forum for family shareholders to receive updates on the business and to express their views
- A working group to make recommendations about key ownership issues (shareholder agreements, dividend policies)2
- A liaison from the shareholders to decision-making groups: board, management, family office, family council
An owner council should convene somewhere between monthly and quarterly. If your company has ten or fewer owners, each owner typically attends all meetings. In larger families, the owner council often becomes a representative body that works on ownership issues on behalf of all owners. In that case, members are elected either by branches or by all the owners. In a Concentrated type of family business, where a subset of owners has control, the owner council may not have any decision-making power. Instead the council is a formal mechanism for the controlling owner or owners to hear from the other owners.
A shareholder meeting is the venue through which the legal rights of owners are typically exercised. In this meeting, board members are elected, bylaws are changed, and major decisions are approved. All holders of shares—either directly or indirectly as trustees or beneficiaries of trusts—are invited to attend the meeting. In smaller ownership groups, the meeting is usually a formality, often happening alongside an owner council meeting. In larger ownership groups, the shareholder meeting is often more formal, with votes cast in person or by proxy. Shareholder meetings typically happen annually unless a major decision, such as selling a business, arises sooner and requires ownership approval.
*Adapted from the Harvard Business Review Family Business Handbook by Josh Baron and Rob Lachenauer. Pages 60-62