From Meddling to Leadership

From Meddling to Leadership

by | 'Oct 27, 2017' | Family Business Basics | 0 comments

“From Meddling to Leadership” discusses the interplay of roles in family business leadership between family business owners and the board of directors.

Question:

Which of the following is the measure of success for a multi-generational family business?

  • Top-line (sales) growth through geographic expansion
  • Going public
  • Exit through sale to an industry giant
  • Diversifying into new products or services
  • Expanding through acquisition
  • Employing family members

Answer:

Only the owners know. There is no single definition of business success, and no single path to achieving it. 

So, who should decide which path to take?

Not the CEO of the business, or the board (though they will make critical contributions to the discussion and the decision-making). It is the owners—the shareholders, those who hold the equity—who determine the vision and direction for their capital and, therefore, for the business. It is the owners’ prerogative to set the bar through effective family business leadership.

Those who inherit shares of family businesses often look to public companies for models—but they absorb the wrong lesson. Public company shareholders generally are looking for a financial return on their investment. Family business owners certainly seek a return as well—but not just a financial return. Owning a family business encompasses family values, a legacy of innovation and entrepreneurship, and, often, a commitment to something larger than the business itself. Ownership of a family business means ownership of all the core capital: human capital and enterprise capital, as well as financial capital. A financial yardstick is useless—even misleading—for measuring these other forms of capital, but that is the yardstick public company shareholders use.

If family business owners choose to act like public shareholders—passive, reliant on the board of directors to watch over their interests, measuring return purely with a financial yardstick—then they risk losing control over their non-financial capital, and potentially, losing it entirely. By becoming engaged, owners can play an active and important role in guiding the future of the business.

“But if we get more involved, won’t we be meddling?”

If the owners start directing which firm the company should hire to plow the driveway, or at what price to sell a new product, or how much to pay the new COO, then yes, that’s meddling. Engaged ownership means acting at a higher level: it means defining the vision for the future of the capital that is invested in the business.

The owners’ vision of success for their family’s capital has important ramifications for business strategy.

Without input from the owners, it is almost impossible for an independent board to set strategy that meets the owners’ objectives for their capital. Independent directors might see bringing in private equity capital (and expertise) as a swift path to financial growth, while to the owners, such a path would involve an unacceptable loss of control. The board might fear nepotism and prefer to cultivate a non-family employee base, while the owners see the business as an important source of jobs for family members, both as a source of financial capital for younger family members and as a proving ground for the family’s human capital. And the directors might assume that a sale of the business at an attractive multiple of EBITDA would thrill the owners (and provide a nice return on their own shares, should they hold some), even as the owners envision passing their shares to the next generation of family members. The board may want to reinvest profits in the existing business, while the owners seek to harvest capital to invest in the entrepreneurial ideas of their rising generation.

Engaged ownership takes time, commitment, and focus.

The owners need to be able to articulate a shared purpose—the answer to the question, “Why do we want to be owners of this business together, if at all?”— and their vision for the future of the business as an integral part of their core capital. Then they need to work with the board to help them understand that vision. When the board points out the tradeoffs inherent in that vision—as they should—the owners will need to be able to stand up for their position.

“Owners who don’t know where they’re going, won’t like where they end up. Engaged owners see their destination and lead the way.”


For more information on the the role of owner-led family business leadership and how it affects business decisions, read “Aligning Shared Purpose and Strategy