Defining roles of managers and owners

By Charlotte Lamp

Paul Sr., a true entrepreneur, spotted a need in the marketplace for a well-made widget. Little did he envision the wild success of his enterprise. With this success, Paul Sr. realized he could provide employment for his offspring and that one day the business might be theirs. The eldest second-generation sibling became a physician; the other three joined the business and over the years became successful managers in their respective departments. All of the four siblings married and had their own offspring. The ten children of the family managers grew up in a close cousin environment because of their parents' work; hence, they spent a lot of time together. The three children of the eldest sibling, who was not part of the business, were less connected to their cousins.

At age 70, Paul Sr. began to think about retirement, what to do with the company and how to structure his estate. He quietly made the decision that since the eldest sibling had done well as a physician and had nothing to do with the company, a fourth of Paul Sr.'s outside investments would suffice as his inheritance. The three siblings who worked in the company would inherit their share of the outside investments and would also inherit the company itself. After all, they had helped make the company successful.

Upon Paul Sr.'s death, the second-generation siblings, in honor of their father's vision, developed a policy that only the family members who were managers in the company could own it. They did not foresee how this ownership policy would challenge the third generation, only one of whom was interested in working in the business. The policy also challenged the cohesion of the family, as the oldest of the four siblings and his children grew more distant from their relatives.

Eventually the three second-generation siblings chose to sell the business and split the proceeds among themselves. What went awry? Why did another successful family business end at the second generation? Is there an alternative way to meet the challenge faced by this family and their business?

Understanding the challenge

The above scenario presents some challenges to family business survival that are unwittingly set in place by well-meaning entrepreneurs. Family businesses are defined as enterprises influenced by an owning family. If that family becomes disengaged, the business might survive, but not as a family business. The desire to reward offspring with employment and ownership of a business must be balanced by good governance protocols and practices to meet some of the challenges to family business survival. More and more, family business research, looking at long-surviving family enterprises, is developing a set of best practices and sound advice that promote living legacies lasting into the fifth, sixth and seventh generation, and even more.

What happened in this case? Management and ownership became entangled, which challenges both the professionalism of the business and the legacy of the family. In some cases, family managers are hired and promoted on the basis of their genes rather than their professional competence.

Further, when ownership is limited to family employees or family managers, the other family members are cut off from the business and from the family legacy. These non-employee family members lose not only their connection to the family business, but also their connection to the family story. Research into family business best practices has shown that there is a better way-a way to enable the business to be professionalized and the family to stay together.

Clarifying the roles

Managers are employees of a business. Owners are investors in a business. In the world of family business, both roles are played by the same people. In fact, in the first generation the founder is the owner and often the only manager. However, as the business matures and the family expands, more family members enter the business. Several family members can then be playing both roles: manager and owner.

What about those family members not in the business? It is at this stage that each role must be clearly defined. The employee/manager role should be limited to those qualified in management. The owner role should be inclusive of all family members in order to maintain the legacy.

In successful businesses, the role of manager is held by professional employees chosen for their leadership role on the basis of their education and proven competence. In a family business, there should be restricted access into management ranks based on family members' qualifications. Manager compensation usually comes from a basic salary structure with bonuses for outstanding achievement that are funded from the excess of company profits over goals. Managers who are family members should be compensated on the same basis.

Just as all employees of a well-run company should be held accountable through professional development plans and annual reviews, family employees should be treated the same. Providing professional accountability for all employees, whether they are family or not, reassures non-family employees that promotions and compensation are based on merit, not on family genes.

The organizational structure for managers is the management team or executive committee, which focuses on the success of the business. In family businesses, such a team should include both family and non-family managers and executives. In larger organizations, the board of directors oversees management. Managers—even family managers—should not be voting members of their own board; rather, they should report to it. Oversight cannot be adequately provided when one is overseeing oneself! Professionalized boards also provide invaluable advice and insight to strengthen the company. A manager's responsibility is to receive this advice and use it in managerial decisions. Professionalizing the family manager's role strengthens the family enterprise.

Family businesses are usually closely held enterprises. That is, the owner or owners are family members. A formalized ownership structure usually is developed as the first-generation founder-owner gets ready to "pass the baton" to the second generation. At this point, it is important to consider the ramifications of the role of family owner as investor (shareholder). Unlike access to employment in the business, access to ownership of the family enterprise should be inclusive of all family members. Such an inclusive policy can serve as a way to keep the family members together and the family legacy alive.

In a family business, ownership most often occurs through inheritance because the shares are not openly traded. Compensation for being an investor comes through distributions of some of the company's profits and through increased share value from the company's growth and retained earnings. For a family investor, growing and developing into a responsible owner of the family's business requires education: education about financial matters, education about the business and education about the family legacy. Responsible owners should be held accountable for their role as investors in the family business. These family shareholders are educated and organized through an annual meeting. If the shareholder group is large enough, it might be represented by a shareholder council or committee.

Whatever the organizational structure, the annual meeting is a great time to have educational components focused on building sound shareholder knowledge. The family directors, the shareholder council or the family council can also serve as the oversight group for shareholder accountability.
As discussed above, the roles of manager and of owner are distinct and separate within any business environment. Family businesses are no different, even when some people fill each role at the same time. To aid this effort, two documents in particular are helpful: a family employment policy and a shareholder agreement.

Documenting the roles

Where to start in the process of writing these two documents is an individual decision; it will vary in each family business. Two things are most clearly needed for a successful process: supportive company family managers and transparent, open and honest communication. In all my research, including my study of my own family, it was a concerned family CEO who started the process. And after the CEO realized that help was needed, an early step in the process was to hire a good guide—a professional consultant/adviser. This does require expenditure of company funds, but as our third-generation CEO, James Warjone, clearly stated, "Investing in your investors is a wise business decision."

Change is never easy, and changing family culture can be challenging at best. Throughout the process, making sure all stakeholders are kept in the communication loop is vital. Good advisers can help the family members work their way through the difficult conversations.

Choosing which governance document to write first—the family employment policy or the shareholders' agreement—is another decision. What do you have? What is most needed? The most important thing is that the process of developing these documents through open discussions and many meetings will strengthen your business. Through the process, your family managers will strengthen their professional roles, and your shareholders will know and be proud of their inherited investment, the family legacy.

 

Charlotte Lamp, Ph.D., a family owner of Port Blakely Companies, is the principal of Rockwood Consulting LLC.

 



 

Comparing the Roles






 

  Manager Owner
Position Employee Investor
Status reason Professional competency Inheritance
Compensation Salary and bonus Dividends and increased share value
Accountability Professional development plans and annual reviews Shareholder rights and responsibilities
Governing document Family employment policy Shareholders' agreement


 



 

Suggested items to include in governance documents


 

Family employment policy

• Requirements for employment: education, age, experience

• Compensation

• Accountability standards

• Hiring and firing process
Shareholder agreement

• Corporate by-laws

• Definition of "family member"

• Transfer policies

• Inheritance

• Company right of first refusal (if necessary)

• Trust ownership

• Rights and responsibilities

• Dividend and redemption policies


 


 

Copyright 2014 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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Issue: 
March/April 2014

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