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

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