Tuesday, August 9, 2011

Family Businesses Need to Care for their Ownership Group to Stay On Top

by Mike McGrann, Executive Director, The S. Dale High Center for Family Business

Family meetings can have enormous impact
on the long-term success of a family business

Leaders of publicly traded companies spend up to 50% of their time dealing with Wall Street analysts and market expectations in order to please their shareholders. This often leads to a short-term perspective and over-emphasis on quarterly vs. long-term results. One of the advantages family businesses have over publicly traded firms is that they don't face this kind of short-term pressure.

However, I can tell you from experience that one of the weaknesses of family firms is that they often don’t spend enough time focused on their shareholder groups.

Things couldn't be simpler when the founding entrepreneur is also the Chairman of the Board and the sole shareholder. Yet when family firms become multi-generational, the leadership model of the founding entrepreneur no longer works. A shareholder group comprised of multiple family members, multiple family branches, even multiple generations requires proactive management… if the family wishes to remain a family business. Ultimately, it is the unity of the family shareholder group that determines the long-term success of a family firm.

One of the most powerful tools for building this ownership unity is a family meeting. In fact, the simple act of holding a family meeting in which information is shared and ideas are considered has an enormous impact on the family. Our research shows that family meetings lead to higher levels of trust and satisfaction, a sense that we share beliefs, overall perceptions of agreement, more positive views of the future, and lower perceptions of risk.

This last impact can be particularly powerful – when a shareholder’s views their stock as less risky, they implicitly require a lower return on capital… thus the firms cost of capital declines... and the opportunity for higher overall return on equity exists.

If the prospect of a family meeting is a little daunting, consider that you really only need focus on these big picture issues:

a) what are the goals of the family and what are the values that should be reflected in the business;
b) how are we creating accountability for our management team;
c) what kind of performance do we expect from this business (at a big picture level…);
d) how should the family interact with the business (is working in the business an entitlement or an opportunity?)

Mike's Bottom Line: Your family business may be the furthest thing from a publicly traded company. But if you treat your ownership group with equal or greater regard than CEO's, you'll gain the dividends of a stronger company.

No comments:

Post a Comment


Related Posts Plugin for WordPress, Blogger...