Family Owned Businesses Pay Attention to Good Governance

The way corporations work in America, there are four roles that need to be filled:

  • Director
  • Officer
  • Shareholder
  • Employee

What are the responsibilities of these four roles? What happens when family members who own a business fulfill all four roles? Let’s dive in and find out.

Role Responsibilities

Each role in a corporation is an important one and its’ proper function in a corporation should be called-out and respected.

Shareholders

The role of a shareholder is that of the owner of the company (though legally, this is an incorrect assertion). When we assert they are an owner, what we’re really saying is that they provide funds for the business to use to conduct its’ affairs. Shareholders expect a return on their investment in the company. Collectively, the most important pro-active function of the shareholders is to appoint, or vote in a Board of Directors who will be responsible for the success of the business.

Note: there are only three ways that money can flow into a business: A) sales, B) borrowing or C) Investments. There are millions of ways money can flow out of a business, but only three ways it can come into a business. Shareholders are commonly thought to be in the latter group – investors in the business.

Board of Directors

The Board should act on behalf of the shareholders to run the day-to-day affairs of the business. The Board of Directors is directly responsible to the shareholders for the performance of the company and should render a report to them on an (at least) an annual basis about the performance of the company. The Board of Directors is also focused on mitigating risk, ensuring proper ethics are followed and adhering to proper corporate governance.

Corporate Officers

Corporate Officers are either appointed or hired to act on behalf of the Board of Directors to carry out their plans for the business. The most common role is that of Chief Executive Officer. Other roles include Treasurer and Secretary. These roles serve the Board of Directors to ensure the Board has the proper information to conduct its’ activities. Often, corporate officers also form the senior management team of the company and are directly responsible for the day-to-day operations and profitability of the organization.

Employee

Employees are individuals hired by the senior management team to perform specific duties relative to the functioning of the organization. Employees often serve and the pleasure of management, since most states are at-will employment states.

Overlapping Roles

In many family owned businesses, one or more individuals will fulfill all four roles. The family members will be owners (shareholders) who are elected as Directors and Officers of the company and who work in the business with titles such as President, Chief Executive Officer and so forth. One can see how quickly the boundaries around these four distinct roles can become fuzzy and muddled.

Especially when passing along the family owned business to the 2nd or 3rd generation, it becomes highly important to gain outside help and to have non-family individuals play key roles in the organization. In short, without outside help, it is highly likely that family members will end up fighting over power, control and spending, causing substantial and often fatal damage to the company. Families can be difficult to maintain as a happy unit without the stressors of a business. But add the four business roles to those of mom, dad, son, daughter, brother, sister and so forth, and one can quickly see how the stress of a business can be too much for most families to endure over successive generations.

I have personally witnessed a family member cutoff from the rest of the family over a non-payment of a $208K loan. I have personally witnessed a family member who was President of their business be summarily relieved of her duties by the other siblings because she had such power and control issues that the rest of the family couldn’t get information on the health of the business to which they were entitled. I’ve been there when one family member who is a Director openly question the ability of his brother-in-law who is the CEO in their business to run the business profitably.

Advice and Discussion

If I could give any advice, it would be in the form of the following bullet points:

  • Just because an individual has the family DNA doesn’t mean that individual is capable of managing the business
  • Family owned businesses will be more successful and endure longer by having non-family Directors (voting, of course) on their board
  • Family owned businesses should take time to hold shareholder meetings and Board of Director meetings and really meet, not just go through the motions

If your family can’t sit down for Thanksgiving or Christmas and have an enjoyable time because of the family business, then you need outside help to resolve the conflicts in your family and/or business and you need help in running your business (at least temporarily). Look for a good business consulting firm like the Platinum Group in Minneapolis. While expensive, a firm like this will guide you and your family through the legal and emotional mazes of turning around your company, making it profitable and resolving family conflict so that you can enjoy being a family while also having a business to support your family and the generations to come.

Bill English

What cannot be Delegated by Leaders?

There are many books and a myriad of articles on what Business Owners should focus on.  So i’ll toss my hat in the ring and give you my thinking on the things can never come off a leader’s plate:

1. Living out and enforcing Culture (Core values + Process)
2. Being the public ambassador for the organization
3. Originating  Vision – where are we going?
4. Holding Senior Management team accountable to achieve goals
5. Risk mitigation
6. Represent the organization to the Board of Directors
7. Developing new leaders in the organization
8. Doing Spiritual Warefare on behalf of the business or organization

Five Boring Issues that will have Profound Effects on Your Quality of Life in the Next 20 Years

You might think we’re kidding. We’re not. Let’s look at each one.

Federal Debt

Our Federal debt stands at over $19 trillion dollars. The interest we pay on our national debt is now larger than the entire Federal budgets under President Jimmy Carter less than 40 years ago. Yet we can’t recall one congressional or senate race in the 2014 mid-term elections or today’s election rhetoric where the Federal debt is a core issue. This debt is a real issue. It limits the agility of the Federal government to respond to a crisis. And it steals wealth from future generations, leaving them with a lower standard of living and quality of life than we are enjoying now. It is arrogance and selfishness to the highest degree. Yet few in our generation seem to care.

Interest Rates

Interest rates are at an historic low. At the time of this writing, Prime is at 3.25% with the Federal funds rate being 0% – .25%. This is great for borrowing – both for government and private borrowers. But what happens when the rate goes up two percentage points? How much more in interest will the Federal Government have to spend if prime moves to 5.25% (not an unreasonable interest rate by historic standards)? Either the government will be paying much more in interest or they may just decide to not pay all of the interest owed to the banks, which means that the banks may end up charging you to keep your money. They tried this Cyprus a couple years ago and, as you might expect, it didn’t work out well. A rise in interest rates may mean higher taxes for you. The Feds may decide to tax your 401K or other tax-deferred retirement instruments.

Unfunded Pension Plans

We have previously discussed the unfunded pension plans at the State and Federal levels. This adds an additional ~$6 trillion to our debt structures. What do you think will happen when the governments can’t send out the checks public employees are expecting? We predict social unrest on the scale of Greece or Ferguson, MO. Some will just take “justice” into their own hands, looting private citizens of their physical wealth or looting businesses. We don’t think we’re overstating how volatile this issue will be in the future.

Crumbling Infrastructure

Nearly a third of our roads and bridges are now structurally deficient – meaning that while they are safe, they are not reliable to meet the future needs of our economy. This includes roads, bridges, train tracks and airport/air safety components. It is estimated that to get all this fixed will cost another $1 trillion dollars. Our economy depends on the infrastructure that was built in the 50’s and 60’s. Where is the money going to come from? We’ve already spent it.

Lack of Retirement Savings

The average boomer has saved less than $50,000 toward retirement, while they will need $1M or more to sustain them. Where will this money come from? We predict the boomers – the most self-absorbed generation this planet has ever seen – will demand the government sustain them in their old age. We predict that the younger generations will note how their wealth has already been spent by the boomers and significant inter-generational conflicts will emerge.

Discussion

What happens when people don’t have enough to live on? They do whatever they can to sustain – to survive. Sometimes those actions are not pretty and can be illegal. But if a critical mass is committing illegal crimes, what is the government going to do about it? They won’t have the resources to arrest and prosecute everyone.

We have built such an entitlement ethos in this society that we fear the majority of Americans now feel they are entitled, by virtue of their existence, to have certain comforts and assurances economically. They really don’t care who else gets hurt in the process – they just want what they want when they want it. They want free stuff and have been told for decades that they are entitled to it. This can’t sustain. This system will implode. Maybe not today and maybe not tomorrow. But this system of deficit spending to keep free stuff flowing will implode and end someday. When it does, we will all pay the price in the form of wealth deflation, increased risk to our personal security, loss of jobs as businesses constrict and general societal unrest.

What can be done?

The first thing that needs to be done, in our opinion, is to stop the bleeding. The Federal government needs to balance its’ budget each year and not spend more than what it takes in.

After that, the second thing to do is to have the Federal government fully fund its’ pension obligations while building into the annual budgeting process debt service payments. At $19T+ of debt, it would take nearly 40 years to pay off all of the debt, assuming we made debt payments of $500B/year. But that amount represents 1/7th of our annual budget. No present-day politician will support this. Yet we can’t grow our way out of our debt and we can’t just continue to see our debt grow, so after stopping the bleeding, we need to start a process of paying the debt off.

What would we change in the Federal Budget? Unwinding the scope and influence of the Federal government will be nearly impossible, since so much of the spending and influence is on automatic pilot via hundreds of legislative acts having been passed and signed by both parties. But this is what would need to be done. A stronger commitment to Federalism and States rights over the next 100 years while future generations focus the Federal government on what is its core functions is what is needed. We’re not holding our breath.

Finally, the population needs to move away from wanting and needing free stuff from the Federal Government. Again, we doubt this will ever happen.

So, what will happen?

Eventually, our economy will implode and we’ll go bankrupt as a nation. When that happens, we don’t know what the outcomes will be. But we’ll guess that those outcomes can’t be good. We can hope, pray and work for the best, but unless these trajectories are reversed, we don’t see a bright future for this country.

Donald Trump Remains an Empty Promise: Still Better than Clinton

I wrote an article a while back titled “Evangelical Support of Donald Trump is an Empty Promise“. My thinking was pretty straight forward:

  1. It appeared to me to be hypocrisy on the part of Evangelicals to support a man whose life was so morally bankrupt when other options were available
  2. Evangelical support was based more on anger than anything else
  3. His Presidency on the national scale would likely be similar to Jesse Ventura’s Governorship in Minnesota: at times entertaining but largely ineffective

I remain unmoved in my thinking about Mr. Trump. But circumstances have changed. We’re down to two – maybe three – options when voting for President. While options can never tell you what you ought to do, they can sure tell you what you can and can’t do.

Now that he is the Republican nominee and Mrs. Clinton is the Democrat nominee, what should Evangelicals do? In my view, we should not vote for Mrs. Clinton. Support either Trump or Gary Johnson (Libertarian Candidate). Why? Three reasons:

  1. At a minimum, Trump will not work to make abortions more accessible. (See also) Abortion is America’s equivalent to the Holocaust and it is ongoing. It is first a moral issue and secondly, if at all, a civil rights issue. The Scriptures are clear that abortion is sin and murder. (Opposing View).
  2. Trump has given us the list of those he will appoint to the Supreme Court (here too). Given the ultimate importance and longevity of the Supreme Court, this is a core reason to support Trump if you have a deep concern for individual liberty. Mrs. Clinton will appoint pro-choice judges who will vote to minimize our individual freedoms in a myriad of different ways.
  3. Trump understands business. I don’t believe Mrs. Clinton does. On this sight, we are pro-business, seeing it as a ministry as much as pastoring or doing missionary work. Wouldn’t it be nice, for a change, to have a President who understands how business really works?

Trump is deeply flawed candidate. I did not support him in the primary. But I will support him now mainly to ensure that Mrs. Clinton is not elected. But mind you, I’m not holding my breath for a great Presidency from Mr. Trump. He is loud, arrogant and bombastic. He lacks nuance and often needs to walk back what he said. He’s not polished (something that is refreshing in one way) and he’s direct. I suspect his Presidency will be aimless and mostly ineffective, mired in controversy over his ever-bloviating mouth. Whatever level of “savior-ness” Evangelicals ascribe to Trump, I think they will find he is largely an empty promise.

But Mrs. Clinton isn’t just flawed – she is viscerally corrupt. And the really serious part of her corruption is that, in my opinion, she knows she’s corrupt and is using it to get the Presidency. She is associated with scandal after scandal – always skating by the law and getting off the hook (opposing view here). But when you look at the over-arching body of her corruption over the last 30+years coupled with her undying devotion to murdering unborn children, one wonders how any Disciple of Jesus Christ can support her without putting politics ahead of God Himself.

Yes, Trump remains an empty promise. But we know what Mrs. Clinton will bring to this nation. I’ll take my chances on Trump.

Bill English

Friday Five July 22 2016

Out of the gate is the news that the US Democrat National Committee’s email servers were compromised from January of 2015 until recently. Emails are being leaked that show the Dems rigged their primary system against Bernie Sanders – something the Sanders supports will just love to hear. The security of Electronically Stored Information (ESI) is well understood by nearly everyone, it seems, other than the Democrats. If the hackers can get into the Democrats’ servers, is there any legitimate question left as to whether or not hackers got into Mrs. Clinton’s servers that were sitting in her closet? And we want to entrust the country’s national secrets to these people?

HClintonOnce again, Hillary Clinton is associated with another scandal, but isn’t close enough to get the blame pinned on her. She skirts by with plausible deniability, but overall, the body of scandals that seem to appear wherever she goes cannot be denied. They touch her, but somehow, unlike the Peanuts cartoon character PigPen, who seemed to be constantly dirty because of the dirt and PigPendust that followed him, she isn’t soiled by the scandals. If you want a primer on the Clinton scandals, just read here, here and here.

Our national debt now stands at $19.4T. Last year, we paid $402B on interest for the national debt. This year, we’re already at $348B and it’s only July. By comparison, our first Federal budget that exceeded $400B was in 1979, a mere 37 years ago. We’re stealing the wealth of our next 5-10 generations in this country, paying for our safety net party and our lack of savings for old age. We are kidding ourselves if we think this won’t negatively impact our country’s ability to survive in the coming 100 years.

If we were to pay off the national debt using $500B/year, it would take over 40 years to complete the payment process.

Sheryl SandbergThirdly, Sheryl Sandberg’s loss of her husband teaches us all that walking in another’s shoes is essential if we are to fully understand their plight. In addition, significant, personal events do affect our work and there’s not much any employer can do about it.

Fourthly, if you’re leading a company and you need to make significant changes, take a look at this article from the Wall Street Journal. I like the idea of using a small changes as a wedge that leads to larger changes.

Lastly, corporate governance is a real issue, especially in privately held companies. While this article is focused on public companies, closely-held companies need competent Boards that can hold leadership accountable, even when the leadership is a brother, sister, mom or dad.

The Trump Campaign Did the Right Thing

After Melania Trump gave her speech at the Republican National Convention, it was soon learned that a portion of her speech had been lifted, word-for-word, from a speech that Michelle Obama gave at a prior Democrat National Convention. Soon the media was all a-buzz about the plagiarism with many wondering how much political damage it would cause the Trump campaign.

Meredith McIver took responsibility for writing Mrs. Trumps’ speech and offered her resignation to the Trump campaign. The Trump campaign refused her resignation, citing that it was an innocent mistake and that people often “learn and grow from these experiences”.

Mr. Trump was right to not have accepted McIver’s resignation. Based on the statement she put out, I can see how the mistake was made. But what I really like is that Ms. McIver took full responsibility and did the right thing by offering her resignation. It takes character and maturity to do this – especially when the entire country is watching.

Business is tough enough when employees minimize their mistakes, exaggerate their value and dodge taking responsibility for the outcomes of their work. Time and again, I have bumped into people in business who do not take responsibility for their words or actions, something that top performers never do. Ms. McIver is a top performer, in my book, not because she avoided making a mistake, but because she took responsibility for making her mistake. And she did it publically.

Right now, I’m working as an Interim CEO for a $23M distribution company here in the Twin Cities. Within my first week on the job, the Controller came to me and told me that she had made a mistake in the 4th quarter of last year and that meant that our year-end financials had to be restated. This mistake would negatively affect the company’s ability to secure financing. She was clearly shaken and embarrassed and she profusely apologized.

I told her to not worry about it. Why? Because I would be much more concerned if she didn’t take responsibility and didn’t consider it a big deal. What employers really want – at least the good ones – are employees who take responsibility for their words and actions and are willing to apologize when appropriate. It takes some humility and maturity to do this, but top performing employees usually have both.

So, if you want to be a top performer – a person with character, maturity and some humility – take a page out of Ms. McIver’s example or even our humble controller. Let your bosses know that you’ve made a mistake. Own it. Offer to participate in the appropriate remedy – even if it means offering your resignation. Then take your lumps and move on with your life. Don’t let it get you down. Remember that the *only* difference between those who are successful in business and those who fail at it is that the ones who succeed got up one more time.

If you’re an employer or Christian Business Owner when one of your employees screws up, respond with openness, graciousness and kindness. If it is a fire-able offense, then treat it as such. But if it is an innocent mistake – even if it costs you loads of cash – think twice before moving to terminate an employee. Remember what Christ has done for you and ask the Lord if you shouldn’t go ahead and extend some grace to your employee who was acting in good faith, but still made an innocent mistake.

Bill English

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