Case study
Chapter Three
The Ownership Challenge
Chapter 3
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The Systems Theory Model
Family Members
Other Shareholders
Family Shareholders
Owner-Manager Family Members
Owner-Managers
Family
Employees
Non-Family Managers & Employees
Source: The Systems Model. Adapted from Davis and Tagiuri, 1981.
Chapter Three
Family
Management
Ownership
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Concentrated Family Ownership
- Results in higher overall corporate productivity with elements of:
- Systems, Resource, Stewardship theories
- The higher performance seemed to be related to the different posture taken by these firms toward:
- Diversification
- Investment in training and development
- Research and development
Investments in the Ownership Subsystem
- If a family business is going to preserve one of its intangible competitive advantages.
- We are family.
- That means investing in:
- The design and execution of an appropriate ownership (stock) and control structure
- The education, access to information, and engagement of shareholders
- The creation of institutions that govern the ownership–firm interaction
Shareholder Meetings
- Represent one of the best opportunities to educate owners about their responsibilities and what the company and its management expect of shareholders
- Allow for financial, business, and competitive information-sharing and communication on other issues critical to a family firm in a disciplined and proactive manner
- Represent the best safeguard to a healthy governance of the family’s influence on the business and vice versa
Two Missions: Some Alignment
Ownership:
Return on Invested
Capital, Family Unity,
Shareholder Value,
Continuity?
Management:
Competitiveness,
Growth, Career
Opportunity,
Profit?
There is overlap here.
Adapted from: Chrisman et al, Family Involvement, Family Influence, and Family-Centered Non-Economic Goals in Small Firms. Entrepreneurship Theory and Practice, 36(5), 2010, 1-27.
Educating and Informing Shareholders
- Family shareholders expecting to fulfill their responsibility of aligning management interests with shareholder priorities by:
holding management accountable
a thorough understanding of financial statements
Profit &Loss statement at minimum
Year to year comparison (or quarter to quarter)
making sense of what the numbers say about the firm and its competitive condition
Without this knowledge, family-business shareholders can become indifferent and impatient
- This will hamper effective operation of the family-controlled business
And lead to erosion of founding culture
https://www.youtube.com/watch?v=OTB3W5HZCuM
Shareholder Responsibilities to the Company
- Define and then demand reasonable returns on shareholder equity or invested assets
- Strong family members could pressure for short term rewards
- Provide the values and principles of doing business and ensure they remain instilled in the company (see handout)
- Define the owning family’s strategy and communicate family priorities
Governance of the Shareholder–Firm Relationship
- The interaction between ownership, family, and management is a source of competitive advantage
- It is simultaneously the source of the biggest challenge faced by family firms:
- the effective governance of the shareholder–firm relationship
The Role of the Board
- The role of the board is prominent in the governance of the relationship between the owner–family–business interaction
- Balance of moderate family members with independent directors
- A board that does not exclude family members
- Leads to better financial performance
- Next-generation leaders of family companies frequently restructure the board
- Requires board members to conduct research
What is a Board of Directors?
Meetings and Family Councils
- Most of the absolutely essential communication, education, and sharing of financial and strategic information takes place in regularly scheduled
- shareholder meetings, family meetings, and family council meetings
- This keeps the shareholders involved and fulfills the legal requirement to recognize the rights of minority shareholders
- When the extended family is large and the ownership structure has not been pruned, representative family councils may be a vehicle for educating and informing family shareholders
- Representative councils or committees of the council, sometimes referred to as “asset boards,” can also provide the board
- with input regarding the family strategy
- develop policies regarding family participation in the firm
Educate the Shareholders
- Sharing the estate plan
- Shareholder understanding of financial statement with some degree of comprehension
- Shareholders can reach accurate conclusions about what the financial information means and the managerial actions it should prompt only:
- with study, perspective from the experience of others, and information about competitors
- As part of their financial literacy, owners should also be able to understand
- the capital structure of the firm
- know debt levels in relation to owners’ equity (debt to equity)
- The ability to operate independently or introduce leverage and influence
Ownership Structure: Leading
- Leaders of enterprises find that distributing voting shares equally among shareholders often erodes a next-generation owner-manager’s ability to lead
- Unlike ownership, the authority to lead is earned rather than inherited
- Transferring ownership without an eye toward corporate control makes it more difficult to acquire the authority to lead
Ownership and Classes of Stock
- Ownership structures do not transfer well across generations
- One approach to this challenge is to redesign the capital or ownership structure of the company by recapitalizing its stock
- (e.g., recapitalizing the common stock into two classes: voting and nonvoting)
- Phantom stock can also be created in order to provide the incentives for key nonfamily management to behave like owners
- Phantom stock mirrors the value of regular company stock but does not dilute the family’s actual ownership and has no voting rights
- You must cash out the manager if they leave https://www.youtube.com/watch?v=OTB3W5HZCuM
- Herschend leaders discuss family business engagement strategies – YouTube
Buy–Sell Agreements
- Contractual agreements between shareholders and the company
- Typically used by family-business owners to facilitate an orderly exchange of stock in the corporation for cash
- Often the primary vehicle through which family shareholders can realize value from their highly illiquid and unmarketable wealth—company stock
- The most obvious benefit of a buy–sell agreement is that it allows some family members to remain patient shareholders while providing liquidity to family members with other interests or goals