Mark sat across the conference table from me utterly frustrated and ready to resign. He'd had enough. Running a $20 million company was not an easy task. He was responsible for four locations, 180 employees, and over 20,000 retail customers. The industry was under assault from Chinese competitors and low unemployment was making labor hard to find. His controller and right hand person was 70 years old and struggling with health issues. But it wasn't these challenges that had Mark on the brink of resignation. It was his family.
Mark’s company is owned by three different generations of family members. Poor estate planning decades ago had resulted in the ownership being handed down haphazardly to cousins, siblings, aunts and uncles. Year's of profitability had trained these family members to expect and depend on their dividend checks. Now Mark needed to replace four aging fork lifts, one of which employees refused to use because of its age and unsafe condition. He also needed to replace the roof on one location and refurbish the showroom in another. He had the money, but on his screen there was an email, from an uncle, four states away, complaining about Mark's "frivolous" spending habits. Mark had no doubt the uncle was more concerned with his upcoming quarterly dividend check.
Mark was just weeks away from the annual family board meeting, and he told me he was done. He didn't know what he was going to do next. His wife had a good job outside the family business, and he'd figure it out in time. He was 51 years old. He had taken the company from $8 million to $20 million in sales. And now he was leaving.
The more I heard about Mark's situation, the worse it got. The fundamental problem was one of role confusion. There were few distinctions between family members. Mark was dealing with shareholders, non-shareholders working in the business, those with family meeting votes and those without, executives and entry level children of passive owners who lived thousands of miles away. It seemed like everyone had their noses in places they didn't belong, and I could see exactly why Mark was leaving. His company had failed to properly identify three distinct roles. We will call them hats, because just like hats you can take one off and put another one on. And you can't wear more than one at a time without looking like an idiot. Here are the three hats family businesses must manage.
The Shareholder Hat
Shareholders own the company. In good times they can collect dividends. In bad times they may have to invest more cash to keep the company going. Sometimes there is one shareholder who owns 100%. Sometimes there are two who own 50% each. Sometimes there are more with wildly different shares of ownership. In most cases dividends get paid out and capital gets raised in proportion to each individual’s ownership percentage.
But there is one just one critical role of shareholders. They elect the board of directors. In this role their votes are usually counted in proportion to their shares of ownership (but not always).
That's it. Shareholders don't work in the business. They don't manage the business. They don't make investment decisions or hire and fire employees. To do those things you must take off the shareholder hat and put on another hat. And that was the biggest problem in Mark's situation. People with a shareholder hat were doing things that shareholders don't do. It is a recipe for disaster and it makes more sense when you understand the other two hats.
The Board Member Hat
Board members are voted in by the shareholders. It is their responsibility to hire the CEO and hold that person accountable. The board is responsible for major decisions such as when dividends will be paid and how much will be paid. The board may also approve financing and capital raise decisions. But the main function of the board is to hold the CEO accountable while serving as a sounding board for long term strategic decisions.
Board members may or may not be shareholders. Having outside board members to provide a different perspective can be very valuable, especially when it comes to breaking tie votes between family members. Outside board members are also able to consider things from an objective perspective not clouded by potential financial gain or loss.
It is important to remember that just being a shareholder doesn't guarantee a board member seat. Shareholders with little business experience or technical skill should probably stay off the board. Unlike shareholder votes board votes are usually counted equally meaning a 1% shareholder appointed to a four person board has a 25% say in appointing the CEO and holding her accountable.
The Employee Hat
Employees are hired and can be fired. They get a paycheck. They have job descriptions, accountabilities and get evaluated for their performance. The CEO is an employee. In that capacity he or she makes a million decisions about both the long term direction of the business and the short term day-to-day operations. The CEO is responsible for the financial performance of the business as well as the culture, public perception, marketplace reputation, and overall influence the company wields. The buck stops at the CEO's desk. In short the board hires the CEO and the CEO hires everyone else.
When the board hires the CEO it should provide an employment contract that guarantees some insulation from shareholders and even the board itself so that the CEO can run the company without undue interference. When you hear about CEO's getting million dollar payouts as part of their severance package this is what you are seeing. Those CEO's were recruited under the following two conditions:
If I come work for your board of directors you will leave me alone to do what I do best.
If you don't leave me alone you'll pay me a bunch of money to leave.
There were a lot of things wrong with Mark's situation, but this was probably at the top of the list. People like Mark don't suffer fools meddling in their business, at least not without a lot of financial compensation. But Mark didn't have a contract and the board had no financial consequence for its meddling. In the end both sides lost.
The CEO often isn't the only family member in the business. In Mark's case he worked alongside cousins that were store managers and a brother who ran the vehicle fleet. His dad still did some HR work part time. All of them received paychecks. But they all felt entitled to weigh in on daily business decisions because they were shareholders.
Venues
As you can imagine in most small businesses these hats are not defined very well. It is hard to know when to take one hat off and put the other on. But the concept of VENUES can make it much easier. There are venues where you only wear the shareholder hat, other venues where you only wear the board member hat, and everywhere else you wear the employee hat (if you are indeed an employee of the company).
Think about it this way. If you go to a wedding you don't wear your gym clothes. Similarly when you show up to work on Monday morning you leave your shareholder or board member hat in the car. It's time to put on your employee hat and go to work.
The shareholder hat gets worn roughly once a year. This is true of public companies and it should be true of most small businesses. There is an annual shareholder meeting where board members are affirmed or replaced, an annual report is presented and shareholders are given access to board members and executives for Q&A. There is also an investor relations function within the company that disseminates information to shareholders regarding company performance and the status of their share holdings. But that's it. Shareholders don't weigh in on the strategic plan or day-to-day business decisions.
The board member hat gets worn quarterly and sometimes monthly in fast growing businesses. Board members receive updates from the CEO and executive team, ask questions, vote on long term strategic issues and short term decisions requiring capital. Their function is primarily accountability for the CEO and vetting long term strategic decisions. They will review financial performance against expectations and should have a decent knowledge of how the business makes and spends its money. In times of transition the board may hold special meetings as they recruit and hire a new CEO. In moments of crisis the board may be convened for emergency sessions, but those should be rare.
Board meetings are governed by the company by-laws and one or more board members should be familiar with Roberts Rules of Order. Most of the time the formality will seem like overkill, but when you need to address a contentious issue orderly motions, discussion and voting is absolutely critical. The trick is to use them all the time because when you need them most it will be too late if they are not already a part of the board's standard meeting procedure.
How it works in the real world - One Owner/Operator
The single owner/operator has to wear all three hats. Let's address each one in turn.
The CEO hat
We are big fans of Gino Wickman's Accountability Chart idea. This looks similar to an organization chart except that we focus on the 5 or 6 key accountabilities for each person on the chart, not their job title. The CEO should have accountabilities for leadership (what Wickman calls LMA or leadership, management and accountability), success of the strategic plan, financial performance and a few others. Defining these accountabilities is important, especially as the team grows.
Every day the CEO's job is to fulfill these responsibilities. And every day when he shows up for work these are the most important things on his plate.
The Board Member Hat
Most Single owner/operators don’t have a board, but they should. You can recruit some outside advisors to the board and meet with them quarterly. Often the spouse is a member of this group, but not always. Sometimes a CEO roundtable group serves as a proxy for a board of advisors. I think it is better to recruit a small group of 3 or 4 trusted advisors whose sole focus is your business and holding you accountable to your plans. For the cost of a nice meal once a quarter you can add significant horsepower to your business.
Alternatively you can hire an outside firm to act as your board-for-hire. This has the benefit of paying people whose role is to tell you things you may not want to hear. Several times a year they force you to put on the board member hat and critically examine the job you have done as the manager of the business.
The Shareholder Hat
For a single owner/operator this is usually a formality, but an important one. Almost every corporation, no matter its jurisdiction, needs to have an annual meeting to legitimize its corporate standing under state law. This can be done when the tax return is signed or at some other discrete annual event that can be documented. After all it is unlikely that the shareholder is going to appoint a new board and hire a new CEO. But documenting an annual resolution to affirm the existing board, acknowledge newly appointed members, accept the financial statements as presented in the tax return and sign off on any other state mandated compliance requirements is hugely important if anyone every attempts to pierce the corporate veil in a law suit.
Multiple Owners
Businesses with two or more owners essentially follow the same path with a few important modifications:
The accountability chart becomes critical. Very few "Co-CEO" arrangements work. Someone has to be administratively responsible for the overall business on a day-to-day basis. The formal existence of a board makes this much easier to accomplish because the non-CEO owner knows that several times a year the CEO will be held accountable and the votes will be equal.
The board or outside advisors should establish a tie breaker vote by creating an odd number of members. Two board members with an equal vote is a recipe for disaster. Without a board the owners try to make board decisions while relying on shareholder voting percentages. The majority owner either tries to cast the tie breaking vote or (just as often) defers to the minority owner in an abundance of unwarranted caution. With three owners this is less likely, but a separate board with outside advisors is still a good idea.
The annual shareholder's meeting needs to be more than just a formality. In most states the assets of one spouse are joint property in the marriage meaning your partner’s spouse is just as much a partner as the person listed on the share certificate. It makes sense to get everyone in the same room, include the spouses, present the results for the last year, talk about plans that are being executed for the future and give people a chance to ask questions.
Multiple Family Members as Owners
As we move to multiple family members the stakes get higher. Everything that was important for multiple owners to address is even more so for multiple family members:
Without an accountability chart family members are virtually guaranteed to speak out of turn. Without core accountabilities it also becomes nearly impossible to call out poor performance among family members. It is very common to see parts of the business that are struggling because family members have been given a job title with no specific accountabilities. Job titles might have their place on a business card, but it is much more important to know what the key non-negotiables are when it comes to job performance.
Outside board members or advisors are necessary to defuse sensitive topics and make sure everyone adheres to the ground rules of decorum and civil discussion. Outsiders also help insulate the business against family factions or sibling rivalries. This is also the critical point at which CEO's can become extraordinarily ineffective if not shielded from board interference by a good employment contract. All of this costs money, but as the complexity of the ownership structure increases so do the costs of managing it all and making sure the company continues to grow and thrive.
The annual shareholder's meeting essentially becomes an annual family business meeting. And that is a good thing. Having a safe place where family members are not only allowed to ask questions, but are in fact obligated to do so helps make sure the table talk at Thanksgiving remains civil. Establishing clear boundaries where issues are and are not open to discussion is huge for these small businesses. But you have to provide a venue and a structure for this to happen. It won’t magically appear without considerable effort.
If you would like a playbook for setting up the structures above reach out to us with "Family Playbook" in the subject line of your email.