By Rodney L. Goldstein
As the fourth-generation lead family member of a family-owned Midwestern business, I witnessed firsthand the complications that stem from "culture and business conflation"—the melding of a family-owned business's cultural and values requirements on the one hand, and the objectives of the business on the other. These complications are even more apparent as a result of my experience as lead director of several family- and founder-owned private companies. Cultural stewardship and business stewardship are distinct business imperatives, and each must be attended to carefully, particularly so as the leadership mantle passes through successive generations.
When a private company shareholder group proliferates from one founder to three shareholder children to nine adult grandchildren to 25+ great-grandchildren (plus spouses), the voices that matter proliferate in turn. Without the deliberate preservation of, and articulation of, a cultural point of view by that shareholder group, there is no way for a leader on the business side—whether a family member or not—to develop sorting criteria against which to evaluate a company's strategic options. These could include decisions about growth, customer interaction, employee reward systems, quality standards and risk management. The result is often a muddying of cultural and strategic goals that can lead to a degradation of a corporate value system and morale, and costly indecision by company management.
With size comes complexity
Predictable patterns emerge as family businesses evolve to materially greater size and scale. Generational leaders discuss with more frequency what happens to "cultural perpetuation" once their business has grown to what is clearly a "next phase," e.g., from $50 million in revenues to $200 million, or from $250 million to $500 million—but those conversations are often subordinated to broader business challenges. Increased size often adds new complexity and competitive intensity; it places a company in a more sophisticated and often global war for talent and for market share. In addition, if the company has taken on third-party debt, its lenders likely have inflexible expectations of consistent operating performance.
Such companies can continue for some time preoccupied with these business and growth matters, and often successfully so. There are times when business growth requires owners to make choices about incurring more debt, forgoing dividends to fund growth, slowing vs. speeding investments in innovation, making an acquisition or opening offices far from the company's headquarters—all of which expand management's oversight requirements. In short, such choices add material risk that may accompany opportunity. When such catalysts arise, owners can find themselves grappling with how to evaluate them. Such questions asked at such times rightfully include:
• How important is growth?
• How much debt is the right amount?
• How do we decide between reinvesting in the business and providing periodic liquidity?
• Who is going to run this larger business?
• If family members aren't the optimal choice(s) for executive roles, how does the family make sure growth parallels its values?
• Do we truly want to own the business forever, and if so, how do we accommodate individuals with different callings, liquidity appetites, or risk tolerances?
What I have learned as a family business owner, a board member and an investor is informed by my own disappointing personal experience. My maternal great-grandfather founded our retail business in 1879 and passed on leadership to my grandfather, who in turn passed it on to my father (my grandfather's son-in-law) and my uncle (my grandfather's son). As the business leader of "Gen 4," I served on our company's board, alongside one independent director, my father and our non-family CEO, also a material shareholder. I was in effect speaking for my six inactive shareholder siblings and cousins.
My grandfather—"Gen 2"—wanted my father and my uncle to run the business in tandem, but that proved impossible. The two spent 20 years fighting to the detriment of the business's growth, to say nothing of the mood at Thanksgiving dinner. Eventually, owing largely to the absence of shared and articulable aspirations and values among its owners, the company missed its window for real growth and sustainable scale, and we made the sad but proper decision to sell the business in pieces after 125 years of continued operations. This quite real, costly and unfortunate outcome of a dysfunctional family dynamic is all too common, and I've used the lessons of leadership and cultural collapse in many other family business settings.
The most salient lesson has been that the operating leader(s) of a family-owned business are likely not those best suited to drive the family's values into corporate priorities. Rather, one or more family members, often without business acumen as traditionally defined, are generally better choices to carry forward the cultural torch. As such, our advice to ownership groups is to avoid culture and business "conflation" by separating the roles of cultural stewardship and business stewardship. The best formula is bicameral: One governing body addresses the family's values and preferences and distills those into a coherent set of shareholder priorities; and another body, a traditional board of directors, is charged with overseeing the strategy and operation of the company consistent with the shareholders' guidelines. Put simply, a family council ranks and elucidates owners' cultural priorities, while a board of directors provides oversight in the context of those mandates, with one or more family council members serving on the board of directors for coordination.
To avoid the dangers of culture and business conflation, families must be prescriptive. Companies that don't work their hardest to sustain clear cultural priorities do their shareholders—and their competitive position—a disservice. Owners should:
• Understand their company's growth opportunities and related execution risks.
• Articulate and codify their approach to strategic boldness.
• Know how much business risk they are prepared to take—e.g., geographic expansion, acquisitions and outsourcing of key functions.
• Define success (intermediate and long-term) in measurable terms, both financial and non-financial—spanning competitiveness, quality and other matters.
• Ensure an appropriate capital structure—e.g., the right balance sheet, the right debt level and terms, and alignment of aspirations among equity owners.
• Make sure the balance sheet is appropriate both to owners' values and to company opportunity. This could involve seeking to diversify the family's estate—or the estates of individual family members—before reaching critical junctures of business expansion so shareholders can properly encourage business boldness while having sufficient diversification to feel financially safe.
• Communicate the resultant shareholder values and objectives clearly to those responsible for management of the business.
Take a deliberate approach
Family business stewardship in the face of ownership group proliferation and generational succession is complex and riddled with pitfalls. It's even trickier when shareholders fail to recognize the importance of a common set of values and cultural mores that should drive the behavior of the business leaders. Asking CEOs and other executives to act in a manner fully responsive to a set of vague and evolving shareholder priorities leads to uncertainty, and uncertainty is often devastating for business value.
A deliberate approach to defining cultural guidelines, governance structure and leadership roles can pave the way to stability and resolve, enhancing the chances for long-term business sustainability and success, and ultimately sparing businesses the fate of my own family's enterprise.
Rodney L. Goldstein is managing partner of Windhorse Capital Management, an independent investment advisory firm serving a select group of family and institutional clients, with offices in Boston, Charlottesville and Chicago (www.windhorsegroup.com). He has served as a director or lead director of many companies, including his own family's business.
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