Engaging 8 | Via Skype Part II
Engaging 8 | Via Skype Part II
If you haven’t visited Engaging in a while, you may wish to re-read Episode 7, wherein the Owen Products Owners Council meets to discuss Christopher Owen’s redemption request.
So, what happens next?
Amanda Owen Cooper, Thursday
Christopher read his request to the group. It was simple:
“I request that Owen Products, Ltd. redeem my shares for cash at current value, with closing as soon as possible.”
Mike started to sputter something about “what do you think we are, a bank?” when I reminded him that the Forum had agreed to ask only clarifying questions to begin. We went around the group one by one, and we learned quite a bit—for example:
Martha: “When do you need the funds?” Christopher: “The equipment is ready to ship from Japan but it will not be released to the shipping firm until payment is made.”
Mike: “How much do you need?” Christopher: “The total to release the equipment is $850,000, and we need $150,000 more to install it and do test runs.”
Me: “Do you intend to redeem all your shares?” Christopher: “I’d prefer to remain an owner, but I need to raise as much capital as I can.”
Mike: “Do you have other potential investors? Maybe your existing investor group would increase their investment?” Christopher: “I’m talking with them and reaching out, but everyone thus far has indicated that they have capital constraints at least until the new year. I don’t believe we can bring in a new investor quickly enough.”
Me: “You’ve asked for a redemption but would a loan be an option?” Christopher: “Perhaps. It depends on the terms and whether it would violate other agreements with lenders and investors.” I noted that we are familiar with those agreements, since Owen Products, Ltd. is an investor in CombuSynth.
Before the Skype call, I had prepared by pulling the Bylaws, the Vision, and the Distribution Policy. The Bylaws as written permit a redemption with Board approval, and set out a procedure for valuing the shares. I read the provisions to the group. I noted that the process is not quick—we would need to engage an appraiser and hold a board meeting. Christopher looked concerned when he heard that.
Our Statement of Vision says: “We encourage Owen family members to create new entrepreneurial opportunities and consider redeploying Enterprise Capital from our existing business activities to help fund them. We have in place a Forum (the Owners Council) to evaluate and support such opportunities.”
When I read that, Martha looked thoughtful. She said, “We need to remember that CombuSynth is an investment of our Owners Council too—not just Owen Products.”
Then I read a section from the Distributions Policy that the Owners Council developed last year and was accepted by the board. It created a War Chest within Owen Products of $3 million for capital investments, special distributions, and acquisitions: “The Owners Council may request a special distribution or a redemption of up to $1 million from the War Chest in addition to regular distributions, provided that the War Chest is not reduced below $2 million.” Christopher brightened at that—his request is below the threshold. Mike looked crestfallen—he is seeking $1 million for kiln improvements for the Western plant.
We had a discussion about whether the War Chest is primarily for investments related to Owen Products or outside of Owen Products. I remembered clearly that the purpose was to enable us to expand our investments of financial capital so that we could invest our human capital and enterprise capital outside Owen Products, but I noted relevant sections from the Minutes of our meetings so that we wouldn’t just be relying on my recollection.
Mike commented that he agreed with the War Chest idea then and he agrees with it now—he said it wouldn’t be smart to invest all our capital in terra cotta production long term—but he added that the War Chest is dependent on Owen Products for funding at this point. Owen Products requested 5 years to fund it, and the account only has $1 million now. Mike stressed that we need to be careful about pulling too much capital too quickly from the business’s general accounts until other investments begin to generate excess capital. (He gave Christopher a pointed glance and held up the capital request for the Western plant as he said it.) Martha agreed, and we made a note that we need to amend the Distributions Policy to clarify time frames for building and disbursing the War Chest. Christopher was looking worried again.
“I just want to float an idea,” I said, hoping to keep the group in a productive discussion and prevent Mike and Christopher from going into their separate corners to prepare for a fight over scarce capital. “We all want to see CombuSynth succeed, Christopher. My understanding is that we do have about $1 million in the War Chest right now, and Mike reported that Owen Products has an untapped line of credit of $2 million as well. Christopher is asking for a redemption, but is that the only way to deal with the problem he is facing? For example, is Owen Products in a position to make a short-term loan to CombuSynth so that the equipment can be shipped? I think if that’s possible, it would be quicker than a redemption. With a loan, CombuSynth could bring in, install and test the equipment until investor funds begin to come in. And if Owen Products were to help put a loan together, might it not be possible to ask other investors to join in?”
Stay tuned to find out what happens next…
Family Business Governance Analysis:
- “Via Skype Part II” finds the Owen siblings still on the Skype call resulting from Christopher’s request for a redemption of his Owen Products shares. Christopher is in a bind—CombuSynth has ordered custom equipment to prove scalability of their combustion synthesis process. However, the equipment can’t ship until the invoice for the equipment is paid, and one of CombuSynth’s investors has just pulled out, leaving them in a serious cash bind.
- In Part I of the Skype call, the Owens were fractious and not very productive—they reverted to their sibling roles, blamed each other for the situation, and failed to follow their code of conduct. Amanda, chair of the owners council, was finally able to restore order by making a motion setting forth a process for dealing with Christopher’s request:
- Christopher will read his request, to help ensure that the council members understand it completely.
- The council members other than Christopher may ask clarifying questions, but not engage in discussion or debate.
- The council will review relevant documents, agreements and policies, and also understand the financial implications of the request. Martha, Mike and Amanda must come to consensus about what information they will need to evaluate the request.
- The council members must agree on the voting threshold for making a decision concerning Christopher’s request, if the threshold isn’t set forth in the governing documents.
The Owens passed Amanda’s motion, and in Part II, we see the process at work.
- Amanda’s focus on process first, substance second, helps the Owens refocus on the question at hand, and forces them to deal with Christopher’s request in a step-by-step basis. Without the motion, the Owens would probably have fought over the issue that popped up first—whether Christopher is irresponsible—rather than his request for a redemption and the strategic and financial issues related to that request.
- We have probably all been in a meeting where tempers run high and personal issues begin to dominate. Amanda is demonstrating one way to defuse the situation and make the meeting productive again: propose a step-by-step process, have the group adopt it, and then manage the meeting in accordance with the process. Just going through the proposed process allows time for tempers to settle, and voting on it means that the group must agree to hold itself accountable.
- Had Amanda simply tried to control the meeting, she almost certainly would have failed—her siblings would have felt free to ignore her role as chair. We see this happen often—when a group is relating as siblings rather than as co-owners, the oldest take over as leaders. It is important to have tools to restore order and remind the group of the hats they are wearing at the time. Amanda’s tactic of proposing a sensible process gave the group members time to take a deep breath and refocus. In essence, she asked them to remove their sibling hats and put on their Owners Council hats.
- Watching the process play out, we can reverse engineer what worked. In particular, the process avoided premature debate by focusing on three steps:
- Getting out the facts through clarifying questions. This expanded the information set available to the Owners Council while minimizing editorializing and grandstanding.
- Looking at relevant documents, agreements and policies. Rarely is a decision completely new—there are almost always relevant precedents. The group needs to know what those are—it can be very helpful to see how the same or similar issue was dealt with previously. This doesn’t mean the group must follow precedent, necessarily, but the group needs at least to acknowledge prior decisions and actions. Looking at the Distributions Policy helped the group consider whether the War Chest might be a relevant option.
- Coming to consensus about what additional information is needed. As Part II closes, we begin to see some ideas come forward—in particular, the idea of making a loan to CombuSynth—but the owners council clearly will need more information. Even if Owen Products, Ltd. has cash on hand, do the bylaws permit a loan and will the board agree? What about loan covenants between Owen Products and its bank? What would the terms be? Would other CombuSynth investors be willing to join in—in effect, to syndicate the loan?
By focusing more on process and less on getting straight to a decision, the owners council is making progress at helping CombuSynth, protecting Owen Products’ interests, and managing the family’s human and enterprise capital as well as its financial capital.