How Successful Family Businesses Turn Decision-making into a Competitive Advantage
George Ambrose gently shook his head. It had been six hours since the firestorm erupted at his family’s annual shareholder meeting of Ambrose Apparel. George as the CEO, his executive team, and his Board of Directors had been lambasted by enraged 5th and 6th generation family shareholders. A family business consultant who had been facilitating their family retreat/annual shareholder meeting, was giving the shareholders a “primer” on how to read financial statements. He had asked if shareholders understood the risks of the family business borrowing money from the regional bank (with whom the family business had done business for generations) to fund dividends. The immediate and obvious questions that the 121 non-active shareholders asked was, “What do you mean, we’ve never heard about this before. We thought the business was doing well. George, what is going on?”
What was going on is a long story, but it is also a cautionary tale about the importance of getting the structures and processes of family business governance right. It is an objective lesson in the traps that family business leaders can easily fall into when they havent been transparent about how decisions will be made in their family business systems, how various constituencies or groups will be involved and how those decisions will be communicated.
George Ambrose is a 5th generation CEO of a 100+ year old textile and apparel manufacturing business based in North Carolina. The business had been run by direct male descendants of the firm’s founder for all five generations. For 4 generations the business did extremely well. Company leadership had grown the business, invested wisely in equipment, process innovation, and a talented workforce. What George and his board had not fully anticipated was the speed at which globalization and increasing foreign competition were going to impact the family business. The Ambrose Apparel was slow to respond, and financial results faltered. The Board, and the regional bank which had financed growth for generations, were both confident that George and his team would rise to this challenge as they had before.
However, George and the Board were faced with a dilemma. Family shareholders expected annual dividend distributions. For years, the non-active family shareholders had come to expect an annual dividend which was within a certain range. Their own immediate family financial planning depended on that predictability. George and his executive team made a compelling case to the Board that they had a turnaround plan, but that they shouldn’t have to be distracted by disgruntled and angry shareholders. George and his team convinced the Board that to move full speed ahead they needed to be able to use Ambrose Apparel’s line of credit to fund part of the shareholder expected dividend payout that year.
When shareholders received their annual dividend distributions, they were delighted. Six months later when they fully understood the competitive and financial crisis their company was facing, they were enraged.
The (Decision-making) Opportunities in Disguise
How did decision-making go wrong and what can we learn from this family business situation? Based on our work with over 170 successful multi-generational family enterprises, there are four proven practices related to communication and decision-making:
- There is a Structured Plan for Communication with Family Shareholders: Successful family business leaders understand that transparency and regular communication are essential in building trust and having healthy shareholder relations. What happened in George Ambrose’s situation began years before George became CEO. As a 5th generation family business leader George inherited an approach to sharing information about the business and its performance from his Great-Grandfather, which was information about the businesses was to be confided to those members of the family active in the business. Family businesses with structured communication plans develop a clear communication plan, which defines what information is shared and the frequency of communication to family shareholders and the broader family.
- There are Differentiated Governance Structures and Processes: One of the secrets to successful multi-generational family businesses is that they invest in establishing formal governance structures and processes for shareholder, corporate, and family governance. That often means that there is a need for more sophisticated governance, decision-making, and coordination to address family, ownership, and business matters. The most successful family businesses establish an Owner Council to represent the interests of the shareholders, a Holding Company Board to oversee the strategic direction of the enterprise, and a Family Council to engage the broader family, which focuses on family unity and next generation development. The key to having differentiated structures and processes is to be intentional about how these structures are going to communicate and coordinate with each other.
- Decision-making Authority is Delineated Between the Shareholders, The Board, and Management: Family businesses that have well established decision-making structures and processes, also take the time to define a decision-authority matrix. This clarifies what decisions must be brought to the shareholders for approval and what decisions can reside with the board and management. Defining decision-authority also helps to clarify where shareholders have a ‘voice’ on a decision to provide input vs. a ‘vote’ to decide on a matter.
- Information Technology is Used: Business-owning families with differentiated governance structures for shareholder, family and corporate governance also invest in an information system to ensure information is accessible to the different governance entities and so they can communicate efficiently and use the information on the platform to make decisions quickly. Families find that centralizing information in one place leads to a greater feeling of transparency among stakeholders. The information technology platform also serves as a tool for members of different governance groups to collaborate asynchronously, which helps to maintain momentum between major meetings.