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example,wanttocontinuethetraditionofowning-managingorperhapsdelegatethe
managementtononfamilyexecutivesinthenextgeneration?
Family-businessconsultantsaresometimesbroughtinby boardsofdirectorsand
CEOsoffamily-ownedandfamily-controlledcompaniestosurvey,canvass,andoth-
erwiseworkwiththeowningfamiliestodevelopsuchafamilystrategy.(TheFamily
BusinessOwnershipTransferandEstatePlanningInventoryfoundattheendofthis
chapterhasbeenused forthatpurpose.)Initsabsence,boardshaveadifficulttime
holding managementaccountable forthe things thatmatterto shareholders.For a
board,beinga compass,providing direction,andconducting satisfactoryreviewsof
corporate behavior, , business strategy, and managerial performance e are next t to
impossiblewithouttheowningfamilyhavingdefinedtheultimategoal.
A family-owned d industrial group p in Latin America with annual l revenues of
approximately $300 million was s facing significant competitive e and financial chal-
lenges.Althoughmanagement,whichincludedsomefamilymembers,wasdevisinga
rescueandturnaroundplan,theychargedathird-generation-cousinscommitteewith
the drafting ofafamily constitution(asample familyconstitution can be found in
Chapter 11) and the e creation of f multiple scenarios for the desired d future of f the
corporation,includingtheowningfamily’spreferredrelationshipto thefirminthe
next generation. In their deliberations, , the cousins’ generation n developed d seven
possiblescenarios
5
:
Scenario1.Thecigaretteboat:Thefamilycompanyreinvests,placessomesignificant
bets on n newproducts s and d services, , proceedswith h speed,and growsthe business
aggressively.Profitsarelessimportantintheshortrunthanmarketshareandbeinga
rulemakerintheindustry.
Scenario2.TheChinesejunk:Thefamilycompanycontinuesandispreserved.To
outsiders,thereisnoevidenceofchange.Thingsjustlookalittleolder.Toinsiders,
it is s obvious that while the legacy has been preserved, , the e company has s been
modernizedandprofessionalized.Profitsaremaximizedintheshortandmedium
term.
Scenario3.Thetoyboat:Thefamilycompanyisahobbyofsorts,asourceofpride
andentertainmentforitsshareholders.Itpreservesfamilymembers’placeinsociety
andcontinuestogivethemaccesstoimportantpoliticalandsocialnetworks.Profits
areimportantonlytotheextentthattheyservetheabovepurpose.
Scenario4.Thefamilybank:Thefamilycompanyfinancestheactivitiesofshare-
holdersinavarietyofprofit-makingandnonprofitorganizations.Dividends,family
benefits, and other perks make e family members’ lives s of f financial independence
possible. Profitsare needed d in the short t term m to o provide e the dividends and dis-
tributionsthatwillfundfamilymembers’obligations.
Scenario5.Thecompanyinauction:Thefamilycompanyisgettingitselfreadyfora
sale to the highestbidder. Making the company lookpretty financially isof the
essenceintheshortterm.
Scenario6.Thecompanyincontrolledliquidation:Thefamilycompanyisselling
assets—entirebusinessunits,productlines,famousbrands,technology,realestate,
andequipment—asmarketopportunitiesarisethatmaximizetheirvalue.
5
SeeMagretta,J.,GoverningtheFamily-OwnedEnterprise:AnInterviewwithFinland’sKristenAhlstrom.
HarvardBusinessReview,January/February1998,pp.112–123,whichinspiredsomeofthesescenarios.
54
FAMILY BUSINESS
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Scenario7.TheChapter11company:Thefamilycompanyseeksprotectionfrom
creditorswhileitreorganizesitselfintheinterestofreemergingasamorecapable
competitor.
After a lengthy and often impassioned discussion n of the various s scenarios, the
committeedecidedthatonlyonescenariowastrulydesirable.Thefamilycompanyhad
tochoosetobecomeacigaretteboat,scenario1.Thismeantcarryingoutthedifficult
workofslimmingdownthecompanytoremakeitintoamorenimbleenterprise.The
overall business would emerge e smaller, more e focused d in its s distinctive e competitive
advantages,andmoreagile.Thecommitteeconsideredthatbothvisionandbusiness
strategyhadbeenlackingandthattheextensivediversificationinthepastdecadehad
erodedalldisciplinewith regardto competingonthebasisofestablishedcorecom-
petenciesorrelativestrengths.Thecousinsrecognizedthatinthepost-NAFTA(North
AmericanFreeTradeAgreement)globallyhypercompetitiveworld,itwasbettertobe
focusedandbestinclassinafewproductsandservicesthantobeabletosaythat“we
doeverything,fromAtoZ.”Wisely,theyalsofiguredthatthedeterminationofwhich
businessunitscouldreadilybecomecigaretteboatsandwhichwouldplaytheroleof
familybank,wouldrequirethoroughanalysisofthebusiness.
Withoutasuccessfulturnaround,theabovedeliberationsarenothingshortofidle
conversationwithmanagementjargonincluded.Butwhilethefinalscoreisnotyetin,
thisandothershareholderinputtotheboardandtopmanagementastotheowning
family’sstrategyprovedinvaluableintheongoingeffortstoprovideforaturnaround
andfamilyfirmcontinuity.
EFFECTIVEGOVERNANCEOFTHE
SHAREHOLDER–FIRMRELATIONSHIP
InChapter1wereferredtothesystemicoverlapbetweenthefamily,ownership,and
managementsubsystemsthatmakeupafamily enterpriseasthepotentialsource of
invisiblecrossoversthatendowa family company with h the ability to enjoyunique,
idiosyncratic,andhard-to-replicate competitiveadvantages.Someliterature refersto
thissourceofcompetitiveadvantageas“familiness.”Inthisbookwelargelyrefertoit
asapositiveowner–family–businessinteractioninrecognitionofthecontributionthat
eachofthesubsystemsmakestotheoveralluniquecapabilitiesenjoyedbyfamilyfirms.
But just as the e interaction n between ownership, family, and management is the
sourceofwhatmayconstituteacompetitiveadvantage,itissimultaneouslythesource
ofthebiggestchallengefacedbyfamilyfirms:theeffectivegovernanceoftheshare-
holder–firmrelationship.(Notunlikebusinessleaderswhoareconfrontedwiththefact
thatapersonalqualitythatrepresentsastrengthintheirleadershipprofilealsoposes
theirbiggestweaknessordevelopmentalchallengeundercertainothercircumstances.)
THEROLEOFTHEBOARD
Evidencefromthestudydiscussedearlierinthischaptercomparingandcontrastingthe
performance of family-controlled d companies with that of management-controlled
firms,acknowledgesthesuperiorperformanceoffamilyfirms.
6
Butafollow-upstudy
6
Anderson,R.,&Reeb,D.,BoardComposition:BalancingFamilyInfluenceinS&P500Firms.Admin-
istrativeScienceQuarterly,49,2004,pp.209–237.
CHAPTEROWNERSHIP OF AN ENTERPRISE E BUILT TO LAST
55
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madethesuperiorperformanceinshareholdervaluecontingentonthecompositionof
theboardofthecompanyinquestion.Inotherwords,thisfollow-upresearchfound
thatconsistentwithagencytheory,thehigher-performingfirmswerethoseinwhich
representation on the board d is balanced d between independentdirectorsand family
members.In fact, , family firmswith h relatively fewindependentdirectorsperformed
significantlyworsethantheaveragenonfamilyfirminthesample.
7
Andsincesmaller
familyfirmstend to beunderlesspublicscrutinythanlargerfirms,thepresenceof
independentdirectorsandindependentadvisorson aboardprobably playsan even
larger role in n minimizing the potential agency costs s of the ownership–family–
managementrelation.However,the study also found thata moderate presence of
familymembersontheboardprovidessubstantialbenefitstothefirm,sotheaddition
of independent members and d advisors is not meant to exclude continuing family
participationontheboard.
AtCasaOsborne,IgnacioOsborne,reflectingontheneedtoaddanindependent
perspectivetotheboard and onemoreinformed with timelycustomerpreferences,
observed:“ItusedtobethatthetasteofOsbornefamilymembers,sophisticatedasit
was,determined thetasteofourproductsanddefinedwhatqualityinwinesmeant.
Notanymore.Nowweconductmarketresearch,do focusgroups,payattention to
trendsandchangingconsumertastes.”Headded:“Oneofthesuccesseswehadiswe
wentveryquickly.Anewbusinessplanforthecompanywasdrafted,discussedbythe
boarduntil we reached some consensus s forthefuture of the company. Itwas just
businessandcompany(notfamily)andthenwemanagedthecommunicationwiththe
restoftheshareholderstoletthemknowwhatweweretryingtodoandwhy.”
8
Theroleoftheboardisprominentinthegovernanceoftherelationshipbetweena
familyanditsbusinesswhen theowner–family–businessinteractionispreservedasa
positive-sumdynamic.Becauseoftheboard’simportance,next-generationleadersof
family companies frequently undertake e a a critical review of any y restructuring g effort
involvingtheirboard.Theyallcomebacktotheideathatalotofcommunicationand
education, beyond d what is deemed traditional board work and strategic c planning
processes,isnecessarybecauseofthefamily’slegacyontheboard.Thefamily’sidentity
remainsattachedtothecompany’s,soifthecompanyisgoingtochangeinorderto
adaptandgrow,thecompositionoftheboardhastochange.IgnacioOsbornecon-
fessedthat“in thespanoftwo years,Itook12yearsoutoftheaverageageofour
board.”
T
HE
R
OLE OF
S
HAREHOLDER
M
EETINGS
,F
AMILY
M
EETINGS
,
AND
M
EETINGS OF THE
F
AMILY
C
OUNCIL
Asalreadyacknowledged,theboardisnottheonlyinstitutionwithsignificantinflu-
enceon theeffective governance oftheowner–firmrelationship.Mostofthe abso-
lutely essential communication, , education, and sharing g of f financial l and strategic
information discussed heretakes s placeinregularlyscheduled d shareholder r meetings,
family meetings, , and meetings of f the e family y council. . This keeps the e shareholders
involvedandfulfillsthelegalrequirementto recognizetherightsofminorityshare-
holders. In n family firms s in n which the extended family is large and the ownership
7
Ibid.
8
Author’spersonalconversationwithIgnacioOsborne.
56
FAMILY BUSINESS
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structure has s not been n pruned—as s in n the e case e of a fourth-generation n firm m with
6 branches s and d 64 family members who are shareholders—representative family
councils may be e a a vehicle for educating and informing family shareholders.These
representativecouncilsorcommitteesofthecouncil,sometimesreferredtoas“asset
boards,” can also provide the board d with inputregarding the e family y strategy and
developpoliciesregardingfamily participation inthefirm.In thecasethatheirs’or
next-generation members’ stockis s held d in trust, , similar activities are carried d outin
regularlyscheduledmeetingsofthetrustees.
So,theeffectivelygovernedshareholder–firmrelationshipgoessomething like
this:Anewsharedvisionemergesinresponsetocustomers’needs.Thisreenergized
vision drives the strategic-regeneration process. Family management and family
shareholders areboth h a a partofthatprocess.Family shareholders arekeptinthe
informationloopeveniftheydonotworkinthecompanyorregularlyattendfamily
meetings.Shareholdermeetingsplayanimportantroleineducatingandinforming
thecontrollingfamilymembers.Thefamilycouncilandfamilymeetingsextensively
acknowledgethefamilystrategy,andthesebodies’deliberationsarelinkedtothe
family’sboardagendathroughat-largerepresentationofthefamilyonaboardthat
iscomplementedbyrepresentationbyindependentboardmembers.Byeffectively
governing the shareholder–firm relation,theunique agency costs of family firms
(like CEO entrenchment and conflicts between the interests s of f majority and
minorityshareholderssometimesevidencedinCEOcompensationandbenefitsvs.
dividendsdisputes)do notoutstripthevalueoftheinvisiblecrossoversandcom-
petitiveadvantagescreatedinearliergenerations.Bykeepingtheoverlapbetween
ownershipandmanagementhealthy,competitiveadvantagescanbeexploitedand
the traditional agency costs faced by y nonfamily firms (the e costs s of separating
managementfrom ownership and having managersas agentsofthe owners) are
mitigated.
Chapters10and11inPartIII,BestPractices,discussinmoredetailthefunctionsof
boards,shareholdermeetings,andfamilymeetingsandalsowaystomakethemmore
effectiveingoverningtheowner–family–businessinteraction.Soletusnowproceedto
theabsoluteprerequisiteofresponsibleownership—educationofandcommunication
withshareholders.
INFORMATION,COMMUNICATION,AND
EDUCATION:SHAREHOLDERS
In orderto o successfullycarry y outtheir responsibilities,owners need to know w what
thoseresponsibilitiesareandhowtoexercisethem.Thatiswhytheeducationofand
continuingcommunicationwithshareholdersisessentialtothehealthycontinuityofa
familyfirm.
The ability to o read and d understand d a financial statementwith h a a high h degree e of
comprehensionisamustforshareholders.Ofcourse,thosestatementsfirstneedtobe
providedonafrequentand timelybasis,and ideally—asdo the financial statements
fromBerkshireHathawaydiscussedlaterinthischapter—includeplentyoftopman-
agementnarrativeanddiscussionofthemeaningofthemostimportantfactscontained
inthereport.Financialstatementsthataimtoeducateandinform,withoutassuming
the presence e of an n advanced d degree in n management, are essential to family-firm
CHAPTEROWNERSHIP OF AN ENTERPRISE E BUILT TO LAST
57
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shareholdersincarryingouttheirresponsibilitiesasowners.Certainly,itshouldbethe
responsibility of f these same owners s to o do their part to o become financially literate
through their r own study and careful and d disciplined d participation in shareholder
meetingsdesigned forthe purpose of educating and d informing.Top p management,
whetherfamilyornot,playsakeyroleinthiseducationandinformationandshould
participateinsomepartoftheshareholdermeeting.Boardmemberswhomaybeasked
toprovideabridgingfunctionbetweenownersandmanagersandwhoshouldalready
befinancially astute,canattend portionsofthe shareholdermeetingand meetwith
particularshareholderstoperformthiseducationalandfinancialcoachingroleoutside
ofboard meetings.An outsideadvisor—perhapsan accountant,alawyer,and/or r a
financialplanner—canalsoplayasignificantroleinthiseducation.Shareholderscan
reachaccurateconclusionsaboutwhatthefinancialinformationmeansandtheman-
agerial actionsitshouldpromptonlywith study,perspectivefromtheexperienceof
others,andinformationaboutcompetitorsandothersintheindustry.Aspartoftheir
financialliteracy,ownersshouldalsobeabletounderstandthecapitalstructureofthe
firm,knowdebtlevelsinrelationtoowners’equity,andthereforebeablegaugetheir
ability to operate independently or be subjectto the influence of banksand other
sourcesofcapitalinhowtheyruntheirbusiness.
Theappropriatemeasuresofprofitabilityinaparticularindustry,plusmeasuresof
return on invested d assets, return on shareholders’ ’ equity, return n on n sales, , and the
growth trajectory y of these overtime are essential l to o have and understand.How w a
particularcompany’sresultsstackupagainstthose ofcompetitorsand othersin the
industryistheultimatearbiterofwhetherthefirmiswinningorlosinginthehyper-
competitivemarketplace,andthereforewhethertheownersneedtoissueawake-up
calltomanagement,replacemanagement,ormakedifferentcapitalallocationdecisions
going forward. . Holding these numbers close to the vest(whether the vestof the
foundingCEO,offamilymemberswhoholdkeyjobsinmanagement,orofnonfamily
CEOsor key managerswho o prefer r nottobeheld d accountable bythe othershare-
holders)underminesthe fundamentaladvantagethatsomanyfamilyfirmsenjoy—a
long-termhorizonontheirinvestmentdecisions.
José Pinedo o at El Caballo, in Seville, Spain, , considers the e education n of family
shareholders to o bethe biggestcontribution he has s made to o his s family in n business.
Through board meetingsand hundredsof informal conversationswith shareholders
overseveralyears,hesays:“Myfamilynowknowsthedifferencebetweenfamilyand
business,realizesthe value of managementand professionalization. My family now
understands,indepth,whatacompanyis.Nowwetalkaboutdividendsandtheway
we have thatdiscussion n is totally y differentfrom m five years s ago. Besides the e board
meetingsand thehundred of informal conversations,we established anewholding
company structure fouryears ago o and d began to have meetings s where the financial
informationisverytransparenttoallshareholders.”
9
Trustisnotanarticleoffaithamongadults.Asadults,trustcomesfrominforma-
tion,reliabilityandpredictability,accessibility,sharedgoals,emotionalbonds,asense
offairness,andtransparency.Thesegenerateconfidenceinunderstandingthepeople
andthesituationthecompanyisin.Successandmeetingperformancegoalstendto
enhancetrust;theabsenceoftheseoftengivesrisetomistrust.Frequentupdatesabout
financialmattersandthestateofthebusinesspromotetrust.Goalalignmentandfamily
9
Author’spersonalconversationwithJoséPinedo.
58
FAMILY BUSINESS
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unity(beinginittogether,aspartners)maketrustingeasiersincetheseleadtosimilar
interpretationsofthisinformation.Intheir absence,thesameinformation n can lead
differentpeopletoverydifferentconclusions.
Shareholderswhoarenotsufficientlyinformedandinvolvedcanbecomesuspicious
andconcerned.Theycanfeelthattheplayingfieldisnotevenandthattheyarebeing
takenadvantageofbyshareholderswhoworkinthebusiness.Ofcourse,thissenseof
disparity is s often exacerbated by y the e fact t that those working in n the e business are
receivingsalariesandothercompensation.AndasanattorneyIknowlikestosay,ona
day-to-day basis,ownership returnismeasured bytake-homepay.Thisrepresentsa
kernelofwisdom,becausetheilliquidityoffamilybusinessesmakestheirvaluehardto
keeptrackof,andthedividendspaidoutareoftenminusculetononexistent.
Shareholdersnotactiveasemployeesinthebusinessthenharborconcernsabout
excessiveexecutivecompensationandbenefits—thenewexpensivecompanycarand
thecountryclubmembership.Overtime,thesesameshareholdersbecomelesswilling
to invest in business expansion, preferring g profit t distributions through a dividend,
bonus,and/orboardfee.Whentheseshareholdersbecomefrustrated enough,they
mayconsiderfiling alawsuitagainstthe company andthe active ormajorityshare-
holders claiming they have e been treated unfairly. . Or they may sue e the board d and
company officers s for self-dealing g or mismanagement. . Newspapers, , magazines, , and
televisionarefilledwithstorieslikethese.
Information regarding the estate plan also needs s to o be shared with family
shareholders.Chapter7willgointothissubjectinmuchmoredetail,butitbears
statingherethatcommunicationaboutmattersoftheestatemustnotstopatthe
estateplanningattorney’sortaxaccountant’sdoor.Thisinformationalsoneedsto
be discussed d with h the e CEO’s spouse, next-generation members, other family
shareholders, and d even trusted key nonfamily managers. Family meetings s and
meetings of the family y council are the perfect forum for r such h education n and
information-sharing.
OWNERSHIPSTRUCTURE:DESIGN
ANDEXECUTEIT
Manyfamilybusinessesbegin asentrepreneurial firmsthatexploittheadvantagesof
speedandagility,beingabletoturnonadime.Whenfacedwithcompetitionfroma
largemultinationalcompanythatneeds16levelsofapprovalforanewproduct,sys-
tem,orapproachtothemarket,familybusinessesconsistentlywin.Unfortunately,a
numberoftheseentrepreneurialcompaniesdiscoverthecostsoflosingthisadvantage
when they continue e in n later r generations of the e owning g family. Ownership-transfer
policiesmotivated bya a desire to o love and d treatall l heirsequally or r expectations of
equality by y family membersare likely to o promote e an n impasse,to o the detriment t of
continuedagilityandcompetitiveness.
Leaders of enterprises find that distributing voting g shares s equally y among g share-
holders often erodes a next-generation n owner-manager’sability to o lead. Successors
need tomanagethebusinesswithamplecapacitytolead.Stockownership bycom-
plicatedtrustscan alsobeaproblem.Unlessownershipandmanagementhavebeen
sufficiently differentiated through the presence ofnonfamilymanagers with a great
amountofinfluenceinthetopmanagementteam,trustees,too,cansecond-guessa
firm’smanagementintoparalysis.
CHAPTEROWNERSHIP OF AN ENTERPRISE E BUILT TO LAST
59
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Unlikeownership,theauthoritytoleadisearnedratherthaninherited.However,
transferringownershipwithoutaneyetowardcorporatecontrolmakesitmoredifficult
toacquiretheauthoritytolead.
OWNERSHIPSTRUCTUREANDCLASSES
OFSTOCK
An unavoidableconsequenceofsuccessfullytransferringafamily-ownedcompanyin
which there are e both h active e and inactive shareholders is that t the e ever-expanding
numberofownersnaturallymakesitmoredifficultforfamilymembersactivein the
businesstomanageeffectively.Asaresult,aparticulargeneration’sownershipstructure
is not appropriate e for r the e next. . Ownership p structures s do not transfer well across
generations.
Oneapproachtothischallengeistoredesignthecapitalorownershipstructureof
thecompanybyrecapitalizingitsstock.Forexample,recapitalizingthecommonstock
into two o classes s (voting and d nonvoting) allows s the seniorgeneration to o divide the
estate equally among heirs in n termsof f value, butdifferently in terms of corporate
control.
Phantom stockcanalso becreated to provide incentivesforkey nonfamilyman-
agementtobehavelikeowners.Phantomstockmirrorsthevalueofregularcompany
stockbutdoesnotdilutethefamily’sactualownershipandhasnovotingrights.Itcan
alsorepresentaveryeffectiveretirementvehicleforimportantnonfamilymembersof
the top managementteam,again withouttheriskoflosing thecontrol inherentto
regularvotingstock.
BUY–SELLAGREEMENTS
Buy–sell agreements are contractual arrangements between shareholders and the
company.Theyaretypicallyused byfamilybusiness s ownersto o facilitate an orderly
exchangeofstockinthecorporationforcash.
The mostobviousbenefitofabuy–sellagreementisthatitallowssomefamily
memberstoremainpatientshareholderswhileprovidingliquiditytofamilymembers
withotherinterestsorgoals.Inthisway,familiescanprunethecorporatefamilytree
acrossgenerations.Abuy–sellagreementisoftentheprimaryvehiclethroughwhich
family shareholders s can realize e value e from their highly illiquid d and unmarketable
wealth—companystock.Theabilitytoselltheirstockandachieveliquidity,evenif
unexercised,oftenpleasespreviouslydissatisfiedshareholders.Mostrecommit,retain
theirshares,andengageinarenewedandrevitalizedspiritofenterpriseownership
withtherestofthefamily.
Although most buy–sell agreements are written n so that only y death h or discord
triggerstheiruse,somearecreatedtoprovideliquiditywindowsforfamilymembersin
general.Dissidentshareholders,forinstance,maybemollifiedbyanannualredemp-
tion program m funded by annual l contributions from m cash h flow or retained d earnings
earmarkedforthisshareholderredemptionfundorpool.Thiswouldapplyonlyinthe
case of f privately held, , family-owned companies.(In n some e cases, , a family y holding-
companystructurewouldallowshareholdersoffamily-controlledbutpubliclytraded
firmstoestablishasimilararrangement.)Theredemptionfundistypicallyconstrained
byrisk-managementlimits. The debt/capital l ratioofthe firm,forinstance,cannot
exceedasafelimitdeterminedbytheboardandstillhavestockredeemedthatyear.
60
FAMILY BUSINESS
INCLOSING
CEOsoffamilyfirmshavetoaddresstheissueofcorporatecontrolandshareholder
liquidity,becauseasJimCollinssaysinGoodtoGreat,
10
whoisonthebusisultimately
very important. In family businesses, who o is on n the shareholder r bus s is extremely
importanttothelong-runcommitmentandthepatientcapitalrequired.
RayKoenig isthe CEO of athird-to fourth-generation Deere farm implement
distributor that has $102 2 million n in n annual revenues. . Koenig Equipment is in the
centennial firms s research h sample discussed in Chapter13.Koenig haschanged the
corporation’scodeofregulationstoallowonlyfamilymembersactiveinthebusiness
toowncompanyshares.This,hesays,willhavethetwo-prongedbenefitofproviding
retirementfundsformembersofthethirdgeneration(whowillbesellingtheirstock)
andanorderlytransferofcontroltonext-generationmemberswhoareactiveinthe
business.
SUMMARY
1 Family-controlled d firmsoutperformmanagement-controlledfirmsinreturnon invested
assetsandvaluecreationforshareholders.Butthisperformanceadvantagedisappearsin
the absence of f independent t board member oversight complementing family board
members’commitmentontheboard.
2 Leadersoffamilyfirmsseldommakeapriorityofactivelyleadingtheshareholdergroup.
3 Investments s intheownership subsystemofa familyfirmprotect thepositiveowner–
family–managementinteractiondeemedresponsibleforkeepingfamilycapitalpatient.In
its absence,thelong-terminvestment horizon that provides family firms with acom-
petitiveadvantagedisappears.
4 Governanceoftheshareholder–firmrelationshipisessential.Thetoolsforgoverningthat
relationshiparetheboard,shareholdermeetings,andfamilymeetings.
5 Ownershipstructuresdonottransferwellacrossgenerations.Theyneedtobeanalyzed,
redesigned,andexecutedinresponsetothegrowthinthenumberofshareholdersand
theincreasingdiversityofshareholdergoals.
6 Providingshareholderliquiditythroughdividends,buy–sellagreements,andredemption
fundsisessentialtopreservingconcentratedownershipandfamilycontrolasasourceof
competitiveadvantage.
10
Collins,J.,GoodtoGreat:WhySomeCompaniesMaketheLeap…andOthersDon’t.NewYork:
HarperBusiness,2001.
CHAPTEROWNERSHIP OF AN ENTERPRISE E BUILT TO LAST
61
APPENDIX
WarrenE.BuffettandBerkshireHathawaydoanoutstandingjobofeducatingtheir
shareholdersthroughtheirannualreports.Throughasetofprinciples,establishedin
Berkshire Hathaway’s Owner’s Manual, efforts are also made to align n minority
shareholderswith thevaluesandprinciplesthatthe controllingshareholdersbelieve
haveledtoBerkshireHathaway’ssuccess.AcopyofthisOwner’sManualcanbeseen
at http://www.berkshirehathaway.com/owners.html. Although only y the “Owner’s
Manual,”firstpublishedin1996andreissuedin1999,areavailable,WarrenBuffett
and Charlie Munger,Berkshire’svice-chairman, , both h make extraordinary efforts s to
submittoshareholdersanarratedandveryeloquentdiscussionofthefinancialresults
ofthefirmthrough anannuallettertoshareholders.Thisisamuchmore compre-
hensivelettertoshareholdersthanmostcompaniesproducetoaccompanytheirannual
reports.Theattemptisclearlytoeducateshareholdersandengagetheminadialogue
thatinformsandalignstheirinterestswiththoseofthecontrollingshareholders.The
hope is thatbyoffering thisOwner’sManual and referring to the annual letter to
shareholders (available at http://www.berkshirehathaway.com), , students s of family
businesswill aimtobeequallyforthcomingand eloquentintheireducationofand
communicationwiththeirownfamily-businessshareholders,whetheractiveorinactive
inthebusiness,majorityorminorityshareholders,youngorold,maleorfemale.
62
FAMILY BUSINESS
EXERCISE3-1
OwnershipTransferandEstatePlanningInventory
ThefollowingFamilyBusinessOwnershipTransferandEstatePlanningInventoryhasbeen
usedinavarietyoffamilybusinesssituations.
1
Ithasoftenbeenassignedaspreworkand
then analyzedby y a third-party consultantinpreparationfora family council orfamily
businessretreat.Thesurveyhasconsistentlypromotedcandidconversationsaboutwhat
theowningfamilywantsandwhatitsprioritiesareregardingtheestateandthetransferof
ownershipinafamilybusiness.Anonymityisessentialtopromotingahighlevelofcandor
aboutwhatistypicallyaveryhardsubjectforfamilymemberstodiscuss.Havingmultiple
generations and multiple branches (including in-laws) ) of the family participate in n dis-
cussions of theresults atthesametimecanbeaveryeffectiveway topromotecom-
munication. Using a a third-party facilitator r is sometimes s advisable, depending g on the
family’shistoryandcommunicationskills.Theinventory,aspresentedhere,assumesthata
familybusinessisbeingtransferredfromasecond(G2)toathird(G3)generation,hence
theG2andG3designationsinquestions6,7,and8.Thesequestionscouldjustaseasily
readG1andG2orG3andG4,asthecasemaybe.
Inviteyourstudentstocompletethesurveyasacheckontheirparticularpriorities.
TheFamilyBusinessOwnershipTransferandEstatePlanningInventory
Individualresponseswillbekeptconfidential.Feedbackwillbeinaggregatescores.Itwill
take10minutestofillout.
1. Whatshouldbeourfamily’sprimarymotivationforestateandcontinuityplanning?
(Pleaseselectonlyone.)
a. Toincreaseinheritanceforthenextgeneration(s)
b. Toreduceestatetaxes
c. Toprovidecontinuityforthefamily-ownedenterprise
d. Tomakecharitablecontributions
e. Topreservejobsandremainasourceofemploymentforthemanyfamiliesthat
dependonthebusinessfortheirlivelihood
f. Toincreaseshareholdervaluetoday
g. Toincreaselong-termshareholdervalue
h. Other
2. Whichstatementmostcloselyreflectsyourviewsregardingestateandcontinuity
planning?(Pleaseselectonlyone.)
a. Ifeelnoparticularresponsibilitytoconserveassetsforthenextgeneration(s)and
wouldprefertospendtheassetsduringmylifetime.
b. Ifeelnoparticularresponsibilitytoconserveassetsforthenextgeneration(s);
however,Iamhappytohavewhateverisleftpassontothemuponmydeath.
c. Ifeelnoparticularresponsibilitytoconserveassetsforthenextgeneration(s);
however,Ifeelresponsibleforthecontinuityofthefamily-ownedbusiness.
d. Ifeelnoparticularresponsibilitytoconserveassetsforthenextgeneration(s);
however, I intend to plan the estate in n a a manner r that t will maximize their
inheritance.
e. Ifeelaresponsibilitytoconserveassetsforthenextgeneration(s)andtodowhatis
possibletopromotecontinuityofthebusinessfromgenerationtogeneration.
f. Other
1
AdaptedfromJonovic,D.,FamilyPhilosophyQuestionnaire,Cleveland:FamilyBusinessManagementServices,2000;
andFithian,S.,TheLegacyQuestionnaire,Quincy,MA:TheLegacyCompanies,1998.
CHAPTEROWNERSHIP OF AN ENTERPRISE E BUILT TO LAST
63
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