How owners set direction and make decisions

Imagine the life of a family company unfolding over generations. In the very beginning, there is typically a single founder (or a couple of founders), with a great idea and an appetite for hard work. 

Typically, the founder controls all aspects of the company: s/he is the CEO, the board, and the sole owner. The decision-making and direction-setting for all aspects of the business is clear: the founder decides. 

Now, let’s fast forward in time about 100 years post-founder to the fourth generation. There is a CEO, who might be a family member (or not). 

There is now a formal Board of directors, comprised of a mix of family owners and non-family independents. And there is an ownership group of, say, 50 cousins, each with different ownership stakes in the company, because some owners have been bought out over the last few generations. 

A couple of the cousins work in the company or serve on the board, but most don’t have jobs in the business. Now, decision-making and direction-setting for the business is more complex—particularly when it comes to making owners’ decisions. 

This example represents the trajectory of many family businesses, including perhaps yours. With an interest in perpetuating what the founder created, most business families find themselves several generations in, with a need to organize and keep a large, diverse, and complex group of owners decisive. 

So how do you make timely and wise decisions as a group of, say, 50 owners?

How do you remain unified and aligned towards a common goal according to shared values? How do you even know what your common goals are for what you own together? 

To do this well requires more structure and more formality. Or to put it another way, more governance.

Most likely, the first image that comes to your mind when you hear the term “governance” is a corporate board of directors, but the concept is much broader than that. 

Governance comes from the Greek word kubernáo meaning “to steer.” It refers to a system of structures, processes, and rules that direct, guide, and control an organization and provide it with stability. 

Governance includes both forums where people meet to discuss and decide important things, and documents that outline rules, agreements, policies, strategies, etc. 

When it comes to owners’ governance, the main mechanisms are:

• The Annual Shareholders Meeting, sometimes called an Owners Assembly

• In some cases, an Owners Council

• Owners’ agreements and plans

This is the forum where the owners gather to discuss owner-level issues and make owner-level decisions. The owners can gather more frequently if needed, but holding at least one annual shareholder meeting is necessary.

What is the purpose of the annual shareholder meeting (sometimes referred to as an Owners Assembly)? For the company’s board and management to share information with the owners, and for the owners to learn, discuss important issues, and make formal owner decisions. It is important to remember that these are not operational or management discussions, but rather higher-altitude, owner-level discussions and decisions. 

A sample agenda for a Shareholder Meeting might look like this:

1. Company update provided by company executives and/or the Board

2. Presentation of high-level summary of 3-year business strategy

3. Educational presentation related to an emerging industry/portfolio trend

4. Discussion and voting on any issues that require the owners’ approval

5. Election of Board of Directors

6. Open Q&A

As a supportive owner, you should make attendance at this meeting a priority. Showing up is important but so is coming prepared. 

Review any advance materials. Do your research, and come ready with your point of view, and constructive high-altitude questions. 

Remember that your voice is heard by management and the board as an expression of the owners’ views, so be cognizant of framing your questions and offering your support in motivating ways.

Once your family ownership group reaches a larger size, usually by the second or third generation, it can be helpful to establish an Owners Council. 

This is a smaller representative group of active owners with a deep understanding of the business that can help lead and organize the broader group of family owners. 

The Owners Council can also act as a go-between for the larger group of owners to communicate with the board and vice versa. 

Typically, an Owners Council meets more regularly than the owners—monthly or quarterly. They might be authorized to make decisions on behalf of the owners or to investigate/research options and make recommendations to be voted on by the owners.

As a supportive owner, if your family has an Owners Council, you should look to them for leadership and guidance.

They are there to represent you, so learn the proper communication channels available to you, and use them to ask helpful questions and voice your point of view. 

If your family does not have an Owners Council, consider whether your ownership group is large enough to need one—and if it is, whether owner trust, unity, and decision-making could be improved by creating one.

Depending on the specific legal structure of your family’s business, the primary governance document containing the rules and policies for owners might be either a Shareholders’ Agreement, Partnership Agreement, Operating Agreement, or Trust Document. 

There might also be secondary agreements or standalone policies related to owners’ issues. These documents are usually legally binding for successor owners, meaning if your parents transfer their shares to you, you will be bound by these agreements/policies as soon as you become an owner.

Some key topics that might be addressed include:

• Board of Directors – How many seats? What is the composition mix (e.g. how many independents)? How will the board makes decisions? 

• Ownership Group – Who has the right to own shares in the company? What are the qualifications that next gen owners need to meet before becoming an owner (e.g. Age, education/training, etc.)? What threshold of ownership is required to make certain owner-level decisions?

• Transfer/Sale of Shares – When can family owners transfer shares? How will we coordinate estate planning across family branches to maintain control and consistency? How does our “internal capital market” of “buyback/redemption process” work to allow us to sell and buy shares among family members? By what formula do we value shares?

• Dividends – What approach do the owners want the board to take when determining how to allocate profits (issuing dividends v. reinvesting in the company)?

• Confidentiality and Conflict of interest– How do we expect owners to treat the private/proprietary information they receive from the company? What are the limits on owners when it comes to engaging in or investing in competing businesses that could hurt the enterprise?

Sometimes these documents can be long and complex. It can be easy to get lost in the technical details and legal jargon. 

Zooming out, however, the overall purpose is clear: in order to maintain multigenerational success of a family enterprise, you need unified and decisive owners. In order to promote unity and decisiveness, you need transparency, trust, and some rules. 

Clear, written agreements help you get there.

As a supportive owner, you should familiarize yourself with the main tenets of these agreements. Going about this requires sensitivity and appreciation for the confidential nature of these documents, so inquire respectfully, through proper channels, and don’t be surprised if you are not given access to them until close to the time you become an owner.

As a supportive owner, you should be a vocal advocate of your family enterprise’s governance. You can do this in these ways:

• Be familiar with your governance system, particularly the forums and documents related to ownership topics

• Participate productively in the forums of which you are a member (most likely this will be the Owners Assembly)

• Support and abide by the owners’ rules, policies, and procedures

• Vocally support the governance in your family enterprise, express appreciation to its members, and be a unifier in your family

• If you notice that your family ownership group is struggling to discuss challenging topics or make decisions, that there are low levels of trust or understanding about decisions that are made which impact the owners, or if you notice a lack of engagement, consider whether more robust governance might help, and raise the idea with leaders in your enterprise.