Family Business Ownership: How to Be An Effective Shareholder

Overview

Ownership in a family business can be a rewarding and important role.  It means stewardship, protection and nurturing the family business.  As a guide for shareholders, this book will developing understanding and insight into the role of becoming more valuable as an owner, not just financially, but intellectually and emotionally as well.  It aims to provide the philosophical foundation that will support the decisions owners make about technical and legal issues and to help all shareholders ...

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Family Business Ownership: How to Be an Effective Shareholder

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Overview

Ownership in a family business can be a rewarding and important role.  It means stewardship, protection and nurturing the family business.  As a guide for shareholders, this book will developing understanding and insight into the role of becoming more valuable as an owner, not just financially, but intellectually and emotionally as well.  It aims to provide the philosophical foundation that will support the decisions owners make about technical and legal issues and to help all shareholders understand how to be constructive in their roles.  Ownership ought to be an interesting, challenging, profitable, and spiritually enriching experience.

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Editorial Reviews

From the Publisher

"Knowing when and how to be involved in a family business can be a challenging task...shareholders need to know what their role is to make them effective and make their family businesses profitable now and for the future.  If you want to be a "good" owner--this book is for you."  —Philip A. Clemens, Chairman & CEO, Clemens Family Corp.

"If you are associated with a family business, you need to read this user-friendly primer.  Not just family business owners, but indeed everyone even remotely connected to a family business will want to read this.  Family Business Ownership: How To Be An Effective Shareholder is a much needed and superb addition to the already excellent Family Business Leadership Series."  —Bill Lucas, Laird-Norton

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Product Details

  • ISBN-13: 9780230112308
  • Publisher: Palgrave Macmillan
  • Publication date: 12/15/2010
  • Series: A Family Business Publication Series
  • Edition description: Second Edition
  • Edition number: 2
  • Pages: 104
  • Product dimensions: 5.40 (w) x 8.20 (h) x 0.50 (d)

Meet the Author

Craig E. Aronoff is Co-founder, Principal Consultant, and Chairman ofthe Boardof the Family Business Consulting Group, Inc., the founder of the Cox Family Enterprise Center and current Professor Emeritus at Kennesaw State University. Heinvented and implemented the membership-based, professional-service-provider sponsored Family Business Forum, which has served as a model of family business education for universities world-wide.

Stephen L. McClure is Principal at the Family Business Consulting Group, Inc. and specializes in family communications and decision making, succession planning and implementation, and governance & management in family firms.

John L. Ward is Co-founder of the Family Business Consulting Group Inc. He is Clinical Professor at the Kellogg School of Management and teaches strategic management, business leadership and family enterprise continuity.

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Read an Excerpt

Family Business Ownership

How to Be an Effective Shareholder


By Craig E. Aronoff, John L. Ward

Palgrave Macmillan

Copyright © 2011 Family Business Consulting Group
All rights reserved.
ISBN: 978-0-230-11230-8



CHAPTER 1

Introduction

On Being an Owner


If you are a shareholder in your family's business, this book is for you—no matter how many or how few shares you own, whether or not you work in the business, and regardless of how you came by your shares.

Being an owner of a family business should be a satisfying, fulfilling, and profitable experience. For some, however, ownership is represented by a stock certificate, a "piece of paper" that has little meaning. For others, ownership leads to grief, conflict, and frustration. Owners who are managers employed in the business may feel unappreciated and may be distrustful of or even disdainful toward owners outside the business. At the same time, owners outside the business may feel treated inequitably, concerned that they aren't getting enough attention, appreciation, or dividends or that information is being withheld from them. Younger shareholders may be confused about their roles and responsibilities and feel inadequate to the task of ownership. Still others may be simply overwhelmed by anything "financial" and try to avoid having to deal with ownership issues altogether.

For too many shareholders, being an owner just isn't any fun. But it could be. In fact, it could be one of the most rewarding experiences of your life—and we don't mean just financially.

For some individuals, ownership is all about money—the dividends they receive, the frustration they feel at having their funds tied up in the business, or, if they're managers, the stress of trying to improve the bottom line so that cantankerous shareholders are mollified and the business can grow.

But, in our view, ownership can mean more than monetary rewards. It can return to you and your family much more—spiritually, psychologically, intellectually, and emotionally—than mere cash.

While not underestimating the importance of financial return, we may challenge your ideas about ownership. We hope to offer some insights that can make your experience as an owner take on a whole new meaning and transform your thinking, so that being an owner of a family business becomes one of the most worthwhile aspects of your life.

Ownership, at its best, means stewardship—protecting and nurturing the family business and preserving it for the benefit of the next generation of family members and for employees, customers, and the community. As such, ownership can be a vehicle for adding purpose to one's life; for being a better parent, spouse, brother or sister, son or daughter, uncle or aunt or cousin; for enhanced performance as a manager or a strategic decision maker inside or outside the business; and for providing an opportunity for service.

This book will help you develop yourself as an effective family business owner. It will show you why family business ownership can be good for the business and good for the family. It will help you understand your role as an owner. You will gain the knowledge needed to become more valuable as an owner. You will also discover how to manage some of the most difficult issues that face family business owners, as well as how to prepare the next generation for their responsibilities as future owners. The glossary beginning on page 85 will help you understand many of the terms used in these pages, and a section on Suggested Readings and Resources will lead you to materials that will expand on what you learn here.

We think this book can be a vital tool for any family business owner. However, our guess is that it will prove most useful and valuable to those shareholders who see ownership in a family business as a privilege, who regard the family business as a noble institution, and who have a well-developed interest in and concern for the welfare of others.

One of our most important aims, however, is to help bring about greater harmony between two sets of owners: those who are employed as managers in the family business and those who are not. These two groups often have disparate interests and perspectives. When each speaks the same language as knowledgeable owners, and when all seek understanding of and empathy for their fellow owners, the family and the business are both better served.

This book is not a technical or legal treatise on how to set up buy–sell agreements, establish a valuation method for the business, or the like. We urge you to see your attorney and your financial advisor for such matters. We will give you the language and the concepts to make those discussions more efficient and productive. Furthermore, if you follow the principles outlined here, this book will provide a philosophical foundation that will support the decisions you make about technical and legal issues. It will enable you more consciously to integrate your values into the technical decisions that you make and the agreements that you develop.

Chances are you didn't choose to become an owner. Owners who founded their businesses could be said to have volunteered for ownership. So could individuals who bought shares from other family members. By the time you get to the second or third generation of a family-held business, however, owners generally are individuals who inherited their slice of the family business pie. Often heirs feel unworthy or undeserving of ownership because they have not earned it. If you are such an heir, this book will address some of those emotional issues and help you resolve them.

In our minds, however, heirs become deserving of ownership and turn it into a voluntary act by stepping up to their responsibilities. They study, they learn, they participate, they look out not just after their own interests but the interests of the business and the family. In short, they transform themselves into effective owners. This book will show you how. Ultimately, it is designed to help all shareholders understand how they can be as constructive and as contributing and as responsible and as fulfilled as they can be in their role as owners. It is aimed at helping shareholders find a higher purpose as owners. It is about making ownership work.

CHAPTER 2

What Is a Family Business Owner?


Legally speaking, if you possess even one share of a family business, you are an owner. There are different categories of ownership, however, and different situations and conditions that affect ownership. We will get into these. We will also talk about what owners deserve—as owners—and about some of the limitations of ownership.

"Good" family business owners, no matter what category of ownership they fall into or how few or how many shares they own, do the long, hard (and rewarding) work of ownership. They are involved , in the best sense of the word. They help nurture and guide the relationship between the family and the business, and may make some sacrifices or some tough decisions in the best interests of both. They are concerned, in a way that goes beyond narrow self-interest, about the future of the family business and the family.


OWNERS VERSUS INVESTORS

While owners are investors in the sense that they have at-risk assets tied up in a business, an investor and an effective family business owner are not the same. Investors are people who are simply risking their money in hopes of a good financial return. They are not really personally or emotionally involved with the company in which they are investing. Typically, they do not personally identify with the business in which they have invested.

Being an effective business owner is a more intimate matter. Suppose you buy some shares in a natural gas company. Soon after, a number of employees are killed in an explosion involving one of the company's pipelines. Even though you have an investment in that company, does knowing about the explosion and its consequences bother you any more than learning about some other disaster? Probably not, because you don't really have any personal connection to it.

On the other hand, if you own stock in your family business and there is a similar disaster, you will most likely feel it very deeply. The company and your family may share the same name. If you are an involved, effective owner—that is, a "good" owner—you may actually know some of the victims of the disaster. Even if you don't, you will feel a sense of responsibility to and caring about the employees and their families. It becomes very personal.

The danger is that as family businesses move from generation to generation, ownership becomes depersonalized if a family is not vigilant or fails to take preventive action. By the third or fourth generation, there can be many owners. Most will have inherited or married in, and some may feel that "we're only here for the financial return." Others may object, saying, "No, we have a legacy here. We have a personal connection. We have responsibilities."

As authors Robert M. Blonchek and Martin F. O'Neill say in their book, Act Like an Owner (John Wiley & Sons, Inc., 1999):

You don't create owners by giving people stock—you create investors. Think about the personal investments you may have in publicly traded companies. Do you feel any sort of accountability to help those companies perform? Sure, you want the companies to perform—you probably demand that they perform. But you probably don't feel accountable for the performance of the businesses ... Investors hold management accountable for business performance, not themselves.


The continued success of a family business requires active teamwork involving owners, managers, and the board of directors. A business family that slides into a situation where owners think mainly like investors can expect trouble.

If you are an owner who feels and acts exclusively like an investor, it's time to consider your choices. You can take a greater interest in the business and turn yourself into an effective owner. Or (and hopefully the family will bless this decision and make it possible), you can divest yourself of your stock and invest the proceeds elsewhere. If your motivation is purely financial while the bulk of the shareholders' motivations include other goals besides financial ones, you're just not on the same page. There's nothing wrong with having different motivations. But when some owners' goals are not in alignment with those of most of the other owners, serious conflict and damage can ensue.

Likewise, a group of owners may sense that some of its members are interested only in financial return and not in the other factors that move a business forward—family culture, strategic planning for the business and the family, contribution to the community, and so on. If that is the case, the committed owners should make it possible for the less-interested ones to exit ownership. (The concept of "graceful exits" is further discussed in Chapter 7.)


TYPES OF OWNERS AND FORMS OF OWNERSHIP

Owners sit at the top of the pyramid in a family business. They choose who will sit on the board of directors. The board, in turn, chooses and oversees management:

[ILLUSTRATION OMITTED]


From a legal standpoint, the types of family business owners can be described as follows:

Majority and Minority Owners. A majority owner is one who controls more than half of a company's voting shares. He or she can outvote other owners and is therefore said to be a controlling owner. Majority owners may use their voting power to control major decisions for the company.

Minority shareholders own less than half the shares. In companies where there is no clear majority—where stock is split equally among three siblings or five cousins, for example—some owners can band together to outvote other owners, unless stock ownership is divided into voting shares and non-voting shares.

Voting and Non-voting Owners. Many a founder has worked with his or her lawyer to pass on shares of the business to children without passing on control. Such founders reason that as long as they are alive, they want to be in charge. So two classes of stock are set up—voting and non-voting, sometimes called Class A and Class B. The parent retains the voting stock and passes the nonvoting stock on to the kids. It's not unusual for the next generation to own most of the stock while a parent retains control of the company through his or her voting shares. (Similar techniques are also used by family businesses that are publicly traded. For example, the family may retain the voting shares with only non-voting shares available to investors from outside the family. The family may choose to retain a block of stock so large that it effectively serves as a barrier to outsiders gaining control.)

General Partners and Limited Partners. When family businesses are structured as partnerships, a general partner has voting power; limited partners do not. General partners (and there may be more than one in a business) have unlimited personal liability, while limited partners can lose only what they have invested in the business. We will treat partners as shareholders in this book.

People who are not typical owners but who must be considered in this discussion are trustees and beneficiaries. Some shares in a family business may be held in trust for the benefit of an individual or individuals known as beneficiaries. Control of the trust is in the hands of a person or institution designated as the trustee.

Even though the beneficiaries are not owners and do not enjoy voting power, in many cases we consider the next generation members whose shares are held in trust to be "like owners." Under such circumstances, we recommend that they be treated like owners and given all the respect and consideration due an owner. Likewise, we urge trust beneficiaries to act like owners, taking an interest in and becoming knowledgeable about the business, and participating in family meetings and family councils. The enhanced relations between the legal owners and the beneficiaries that will result will benefit both the business and the family. In addition, the beneficiaries will gain a greater sense of connection to the business that their granddaddy or great granddaddy started. They will not only benefit financially from their asset; they will receive some psychic income and feel more worthy of their inheritance.

Similarly, many family businesses give consideration to future or intended owners. These people typically are younger-generation family members who are preparing for their inheritance. While neither officially owning shares nor having the rights and responsibilities of ownership, they may be encouraged to develop the knowledge and attitudes of "good" owners.


TYPES OF OWNERS—ANOTHER PERSPECTIVE

The types of owners described above represent legal and technical distinctions. There are other ways of categorizing owners as well. A given shareholder can fit in more than one of the categories:

Operating Owners. The operating owner is an owner-manager or employed owner with direct responsibility for the business. He or she is a hands-on owner who is in the business every day, helping to run it and make decisions.

Governing Owners. These individuals work not as operators but as overseers—watching, learning, and keeping tight, supportive relationships with management. Governing owners may also be employed in the business, but when they are, they are not in an operating position. Instead, they would be an equivalent to the board chair, a director or a corporate ombudsman.

Governing owners typically are very knowledgeable about the strategic issues confronting the business and often help to shape corporate strategy. They are also active in shaping the culture of the organization by virtue of their presence, their behavior, or their interests.

Active Owners. These owners are not employed in the business and may not even be on the business site very often. However, they are attentive to the issues facing a family business. They develop relationships with management, they make it a point to understand the company strategy, and they take the time to promote the culture of the business. In other words, they take a genuine interest in the company, offer support to management, and involve themselves as appropriate.

Proud Owners. These owners may not be engaged in the business, its board, or its management. They don't really understand its strategy, they're not knowledgeable about its governance, and they don't really feel comfortable around the business. Nevertheless, they are proud to be owners, they read the information that is sent to them, and they attend what family business related events they can. They take joy in what they own.

Passive Owners. In our view, passive owners are often just along for the ride. They are happy to receive the benefits of ownership but don't acknowledge their responsibilities. They typically pay little attention, and neither educate themselves about the business nor participate in it, except perhaps to express largely uninformed opinions. They merely collect dividends, abdicating responsibility for the business to others.

Investor Owners. Investors are very much like passive owners except that, if they are satisfied or dissatisfied with their returns, they may make a deliberate decision to keep or to sell their ownership. They do not take a personal interest in the company nor become involved in strategy.

What kind of an owner are you? If you are reading this book, you are probably an owner-operator, a governing owner, an involved owner, or maybe even a proud owner.


(Continues...)

Excerpted from Family Business Ownership by Craig E. Aronoff, John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

EXHIBITS,
1 Introduction: On Being an Owner,
2 What Is a Family Business Owner?,
3 The Power of Cohesive Ownership,
4 The "Ownership Attitude",
5 Roles and Responsibilities: Owners, Directors, and Managers,
6 Preparing and Nurturing Good Owners,
7 Owners by Choice,
8 Managing the Insider-Outsider Dilemmas,
9 Summary,
GLOSSARY,
SUGGESTED READINGS AND RESOURCES,
INDEX,
THE AUTHORS,

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