Rights and rewards of a supportive owner

Company ownership is a two-way street. 

Owners have responsibilities to their company. They have certain duties and obligations they owe their family business, such as defining clear direction for the company. 

Owners also have certain rights that allow them to receive benefits from their company, like financial rewards. 

Understanding owners’ responsibilities and their rights is necessary to be able to perform well in the supportive owner job. The previous article explores owners’ responsibilities to the family business they own. 

Now let’s focus on owners’ rights, specifically three categories that accompany ownership of a family business: 1) financial gain; 2) access to information; and 3) control of key decisions. 

Owners can, and should, receive an adequate financial return based on their stake in the company. 

As an owner, you have a right to receive your portion of any dividends declared, according to your percentage of ownership. 

For example, if a company issues a dividend of $10/share and you own 10 shares, you deserve a $100 dividend. 

You also have a right to receive fair market value proceeds from any sale of your shares.

But, it is not solely up to the owners to determine exactly how and when they receive economic rewards.

In the case of dividends, it is the board that determines whether to declare dividends and at what amount. 

Boards are not required to issue dividends at all. Some companies issue dividends rarely or never. Others do it regularly. 

And, just because a company has issued an annual dividend at a certain level does not mean it must continue doing so. In periods of crisis, a flexible dividend level is typical. Dividends may be abruptly stopped to keep the company solvent through the downturn, and when certain performance metrics are met, the dividend level may rise incrementally.

Why does the board have this power? Why not simply pass along any and all profits to the shareholders? 

There are multiple factors to consider but the primary one is the need to reinvest at least some profits back into the business for growth. 

The board, on the recommendation of management, needs to determine how much of the profits should remain in the company to keep the business healthy and growing according to the business strategy. 

Maybe the company is developing a new product, expanding into a new market, or eyeing a new acquisition---all of these activities seek to increase the value of the company for owners in the long-term, but require capital in the near-term and therefore may influence dividend levels. 

In a family business context, it is best practice to develop a written Dividend Policy. This is a statement that guides the board in making this decision (i.e. how to balance dividends and reinvestment) in a way that feels fair, prudent, and transparent to all involved. 

In the case of economic gain from a sale of shares — whether individually or upon a sale of the company — the owners have a right to their proceeds from the sale (after creditors and taxes are paid). However, this does not mean that you can sell your shares whenever you need the liquidity. 

A key point to understand is this: it is unlikely that you will have the freedom to sell your shares to whomever you want whenever you want. 

You might own your shares through a trust or a holding company and/or be bound by a Shareholders Agreement or other similar legal contract that details the conditions under which owners can (and cannot) sell shares and what exactly will happen upon a company sale. 

These agreements and corporate structures are adopted in many family ownership groups for the important purpose of maintaining family majority control of ownership.

What are some of the mechanisms a family business uses to maintain family ownership control? You should familiarize yourself with these common types and ask your family if any are used in your family company.

• Trusts – A trust is a legal entity that holds and makes decisions about shares in a company, to preserve the value of that equity stake for the benefit of the beneficiary/ies who receive its economic benefits.

• Ownership blocks – Some owners may combine their ownership stakes together to create a larger “block” that has greater voting power. Typically, in exchange for this, certain rights are sacrificed, at least for a period of time. For example, a family ownership group may agree to tie together their ownership for 10 years to gain greater voting power, but also agree they will not sell their shares for that decade.

• “Restrictions on transfer” – These provisions will, for example, limit the pool of people to whom shares can be sold, gifted, or otherwise transferred. This is common to avoid family owners selling or gifting shares to unrelated individuals or other entities that will become partners with the rest of the family. Limitations could include family relation status, age, or compliance with owner policies.

• “Buy back” or “redemption” processes – These provisions lay out the process for valuing and selling shares back to the company. For example, if an owner wants to exit ownership or needs more liquidity, the company or the owners’ holding company may buy back those shares using an agreed-upon method described in the policy.

What should supportive owners do when exercising their right to financial gains? 

• Understand and support your family company’s dividend policy and shareholders agreement

• Have realistic expectations when it comes to dividends and sale proceeds

• Recognize that the value of your shares does not necessarily mean you will have access to that amount of cash whenever you want it

• Do not rely solely on dividends from the family company for your own financial security

• Understand your company’s ownership structure and shareholder agreement so you are aware of the restrictions and processes surrounding sales, transfers, gifts, and liquidity.

Owners can, and should, receive quality information from the company and board in a timely manner so that they can monitor high-level performance and uphold their responsibility to provide oversight. 

This is typically conveyed during annual shareholder meetings, presentations by the family council and owners council, formal company communications to the owners, and quarterly or annual reports. 

Such information would include: corporate organizational documents, minutes of board meetings, and financial statements or summaries. Typically, it is provided as part of a packet of information prior to the Annual Shareholder Meeting. As an owner, you have a right to this information.

Now, to be clear, this does not mean the owners can have any and all information they desire from the company, nor does it give the owners license to interfere in day-to-day operations of the business. 

You should not stride into the office and start opening file cabinets. Or, in this day and age, you should not demand access to the company’s entire database. 

Owners don’t need to be privy to all aspects of company operations. But they do have a right to review the items in the previous paragraph. Some family companies provide information beyond this, such as timely information on company strategy, upcoming changes, and the impact of turbulent external events and trends

What should supportive owners do when exercising their right to company information?

• Review the information sent to you prior to shareholders meetings. Take the time to analyze and understand what the charts, spreadsheets, and other documents are saying. Get help if you need it, but respect the company’s confidentiality policy.

• Consider developing an Owners Dashboard to highlight key data points and trends for owners, rather than simply providing dense financial statements. This can help the owners have a more robust and informed conversation at the “right level” of 30,000 feet.

Owners can, and should, exercise their voice by constructively expressing their views in appropriate settings and making three key decisions. These are the ways in which owners keep their hands “on the steering wheel” to guide the business at a high level. 

It is likely that a small group of active owners are accountable for raising these decisions, facilitating discussions, collecting owners’ views, and putting formal votes on shareholder meeting agendas at the appropriate time. 

As a supportive owner, your job is to participate actively in these discussions, ensure that the owners are appropriately consulted, and that these big decisions are in fact put to the voting shareholders. 

Unless otherwise stated in ownership agreements, voting is based on the equity share that an owner holds. Different issues may have different voting thresholds, which would be spelled out in the Shareholder Agreement or other ownership agreements.

a) Elect board members 

Owners do not hire/fire C-suite executives or set high level business strategy, but they do appoint/dismiss the board members who do. 

As an owner, if you have questions or concerns about how the company is being run, your primary lever to pull is determining who gets elected to the board.

As a supportive owner, you should know the elections process and be familiar with each director on the proposed “slate,” their background, and the value they add to the board. 

If you are a voting owner, you should vote to elect board members who you believe are most aligned with your family’s values and goals, who are competent at board service and proficient in relevant business and industry skills, and who look out for the best interest of the company and all owners.

b) Approve major transactions or fundamental changes to the business, including new growth areas. 

Owners do not typically propose transactions or business deals, but they do approve major ones, such as a large acquisition, a substantially new business area, significant borrowing, or a sale, among others. 

Typically, it is the active owners (a small group of highly involved owners, usually family members who also sit on the board or serve as company executives) who help communicate potential changes to the owners. They explain the thinking of management/the board, and ensure important owner questions are answered. 

As a supportive owner, you should look to the active owners for leadership, and be an engaged member in this process. Make sure you receive and understand their analysis of the potential benefits and risks of any proposed major transaction or fundamental change. In these moments of transition, transparency and unity among owners is key.

c) Amend the corporate charter/bylaws 

These are the core documents that set the boundaries for internal operations and management of a corporation. 

For example, these are the documents that include: information about the types and numbers of shares issued, who can sit on the board of directors, what their powers are, and how they make decisions, and rules to prevent conflicts of interests among directors, executives or owners. 

On occasion, these documents may need to be altered, but too many or too frequent changes can be disruptive and costly. 

As a supportive owner, make sure you have the latest version of all key documents. If an amendment is up for a vote at an owners meeting, make sure you understand (in plain language) the reasons behind the proposed changes, the impact they will have, and why they are important enough to warrant an amendment.