Developing effective governance: Persistence pays off

By Katy Wilder Schaaf, Erik B. Kesting

It took the Ritter family three tries and 10 years to establish a solid governance system that would be resilient enough to help the family business owners make a major business decision.

Our family business, E. Ritter & Company (ERC), was founded in the 1880s as a general merchandise store. ERC entered the communications business in 1906 when our founder, Ernest Ritter, installed a 10-line telephone switch in the back of his general merchandise store. Today Ritter Communications, a subsidiary of ERC, offers advanced internet, phone, video services and cloud solutions to wholesale, business and residential customers, primarily in Arkansas and Tennessee.

In August 2019, ERC entered into an agreement to sell a majority stake in Ritter Communications, a long-held family business. This difficult decision required over a year of business planning and family discussions, disagreements and feedback. Both family and business governance were leveraged to consider the sale from every angle.

Our governance structures helped our family grapple with this unprecedented sale. But it took years, and several variations on these structures, before we arrived at a system that would help us make such a big decision.
We are proud of our hard work and the progress we have made. We acknowledge, however, that during our governance journey we encountered some stumbling blocks. We’d like to share our experience to help others understand that the road to family governance often involves some bumps.

Trial and error: The evolution of Ritter family governance
The Ritter family culture is likely similar to many others in multigenerational businesses — patient, inquisitive and open to change but sometimes slow to execute. The Ritter Family Council, created almost 125 years after Ernest Ritter started his business, has served a number of functions. When it was formed, the family was converting ERC’s board of directors from an almost exclusively “family branch” board to a majority of independent directors. The family council offered a place and a voice for highly engaged family members who cared deeply about the business.

When the first non-family CEO was elected, the family wrestled with their identity, and the family council took on the responsibility for social and educational engagement. As it became apparent that the geographically dispersed fifth generation needed to be introduced to the business, the family council and management planned summits to build familiarity and unity for a group of somewhat disconnected cousins.

Since its inception over 10 years ago, the family council has achieved success in improving communication, leading structured family meetings and creating an engaged group of cousins who are educated and enthusiastic about our businesses. However, the family council struggled to deliver a clear message to the board of directors regarding owners’ expectations for the business. While the council excelled at the “business of the family” and management excelled at the “business of the business,” we lacked a very critical connection. As we confronted growth of the family, generational transition and changes in our industries, it was becoming increasingly difficult to maintain the status quo.

In 2011, the family council formed a task force to address this gap. This first iteration of an owners committee surveyed the family to create an owners’ plan, which would codify the family’s high-level vision and values for the enterprise. However, because of a lack of family consensus on topics including risk tolerance, return expectations and portfolio diversification, the plan failed to offer direction on any of these critical areas. Consequently, the requested response from the board of directors was limited.

With continued need for clearer shareholder financial expectations to drive enterprise strategy, the board pushed for more detail. In 2015-16, the family council again formed an owners committee to capture shareholder expectations. The committee again surveyed shareholders. This time, however, the questions were specific. Owners were asked about particular scenarios, such as reducing land holdings in order to invest in businesses with greater returns (but potentially more risk). The committee held webinars to answer questions and provide details prior to soliciting responses from each shareholder. Results again revealed significant diversity of personal financial needs and views on the future of the business.

While the results of the survey provided new insight on the family landscape, the absence of consensus stymied efforts to create a clarifying plan of action. Looking back on what was now five years of trying to solidify shareholder expectations, some were beginning to see the futility of seeking consensus among three generations with different financial needs and emotional expectations. Meanwhile, several related developments were under way.

First, family council members, board members and other family leaders were busy attending family business conferences, networking with other families and learning from family business experts and academics. Our mindset shifted as we explored new conceptualizations of varied family ownership landscapes. Ritter family members involved in family governance began to consider encouraging a continuum of engagement — inviting family members to assume roles that incorporated personal talents and accounted for time constraints and other life limitations.

Second, we began tacitly acknowledging that being a responsible business-owning family can require significant family time, even if the family is no longer working in operations, and that some form of compensation for that work is appropriate. In our case, direct compensation was instituted for those family members who contributed the most time and effort, and we began setting clearer, written expectations for leadership.

Third, the family and management were working toward portfolio diversification. We formed a task force made up of family members, independent and retired directors and non-family management focused on direct private investment in order to articulate goals for this new business. Although we relied heavily on management, this process served as a practice round for family leaders in articulating goals for growth, risk, profitability and liquidity, as well as other expectations for the business (see John L. Ward, and Craig E. Aronoff, Family Business Ownership: How to Be an Effective Shareholder, Family Enterprise Publishers, 2002, p. 28).

In 2018 the board of directors began to consider a big change for the long-held Ritter Communications company. In order to continue our successful growth trajectory, the board authorized management to seek out an infusion of growth capital from a minority equity partner. During the process, we received unsolicited interest in a majority or 100% sale opportunity at a notable premium. We needed a clear answer as to how such a transaction would be received by the family.

After years of mostly hypothetical discussion, we now had before us the most concrete and significant ownership question: Should we sell a business? Fortunately, the past decade of family education, relationship building, engagement and governance development would pay off: We finally had the capacity as a family to mount a timely and effective response.

Over several months, our family directors, family council leadership and non-family executives met over the phone and gathered in person to evaluate our options. From past family summits, we knew the family widely supported the fundamental goal of staying in business together as well as diversifying our businesses. Informed by these directives, our learnings at conferences and trainings, and our growing understanding of the family’s needs gleaned from past surveys and summits, the group established three broad ownership goals. Achieiving these goals would require bringing a majority partner into Ritter Communications to ensure the mutual success of both that business and our business-owning family enterprise.

In our largest family communication campaign to date, family leadership and management circulated the draft ownership goals to all family members and explained why we believed selling a majority of the communications business was in the best interest of both the family and the business. We followed this with individual calls by family board members to every shareholder. Based on those conversations, we distributed seven one-page “frequently asked questions” documents to all owners.

The transfer of control of a long-held, core business sparked mixed feelings from the family. There was broad support for the transaction, but also uncertainty, and we second-guessed ourselves along the way. Today we’re confident that the transaction will support the business and our employees’ future growth and will position us to remain a successful business-owning family for generations to come.

A key lesson learned from this experience was that active leadership by family members — even when the family does not work in the business — is required for success. In our case, this was provided primarily by family board members and family council leaders. Taking initiative and ownership over processes and outcomes is not unfamiliar to our family members — many of whom have had successful careers in other industries — but providing this level of leadership within the family was a new dynamic for many of us.

The sale process clarified that there would be an ongoing need for increased commitment. We considered assigning more responsibility to family board members or asking the family council to reinvigorate their work in this area. Our own experience and the advice of experts convinced us that a separate group would be best suited to tackle future ownership questions (see John A. Davis, Enduring Advantage: Collected Essays on Family Enterprise Success, Cambridge Institute for Family Enterprise, 2018, pp. 64-5).

Third time’s the charm: A stable owners committee emerges
The work required to address the question of selling our legacy communications business wiped away any remaining doubt that a new governance group was needed. Our newly formed, third-iteration owners committee is charged with leading family conversations around significant business decisions, articulating goals and policies around ownership topics (including dividends, risk tolerance and growth expectations) to discuss with the ERC board, and coordinating with the board and management to facilitate timely and appropriate business decisions aligned with owners’ goals.

Misunderstandings had to be overcome in establishing this new governance group. The most prevalent concern was that an “owners committee” would be duplicative of our existing “family council.” We were hesitant to create more bureaucracy and reduce efficiency. For some smaller families, a single family governance group might accomplish all that is necessary, but for us a separate group was appropriate. The interest level and skillsets for our owners committee are sufficiently different from those of the family council.

The second prevalent concern was that this group could subvert the authority of shareholders or the board. To address this, we set the composition of the committee to include a majority of family board members (a group elected by the shareholders) and made explicit in our charter that our work in no way supersedes the rights of shareholders and does not replace the authority and responsibility of the board of directors. The committee works closely with both groups to align goals. Giving the family council some oversight of the owners committee through periodic updates and reviews also helped create natural checks and balances.

A key difference in our current owners committee from previous iterations is the expectation for proactive leadership from the group. With five (approaching six) generations of adult shareholders, we cannot expect survey results to present clear guidance. We need a group of highly engaged and active owners to think critically about the family’s diverse needs and interests, the legacies of our family and our businesses and the needs of our communities and our world, and then to articulate an informed, fair and thoughtful set of guiding principles for our business enterprise. The results will not be perfect consensus, but will be needed, actionable directions for the board. Continual feedback from the family will help us to refine the guidelines over time.

The retrospective view
With each trial came important feedback for the Ritter Family Council. We saw how critically the business needs the voice of the owners, especially if family members do not work in the business. We explored the levels of education required for owners to provide an informed voice. Last, but not least, we expanded our understanding of the diverse spectrum of engagement levels and styles that is perfectly acceptable while acknowledging that the formal voice of the family is best articulated by a group of highly engaged family leaders.

We owe a huge debt of gratitude to the indispensable support and leadership of non-family board members and senior executives throughout our trials and errors, as well as to the larger community of business-owning families and family business experts. No family should struggle with family governance in a vacuum — there is a wealth of resources and many people available to help.

We gained new insights from our family governance evolution. We highlight several below and hope others will benefit from our case study in addressing ownership issues through family governance development.  

Second cousins Katy Wilder Schaaf and Erik B. Kesting are fifth-generation members of the Ritter family. Schaaf is chair of the Ritter Family Council. Kesting is a member of the E. Ritter & Company board of directors and chair of the Ritter Ownership Committee.

Lessons Learned

Here is some advice on developing a governance system that works best for your family business, based on the Ritter family’s experience.

Take responsibility. This isn’t about meddling in management of the business, it’s about taking responsibility as owners for your own needs and goals and articulating those in a useful way to the board. Active owners in family governance leadership positions must drive facilitation of the process.  

Get specific. In a diverse family group, specific questions and scenarios elicit the most specific and information-filled responses (even if they don’t directly answer the initial question). Survey your family members, asking them to state their specific personal financial goals and hopes for the business.

Involve your independent counterparts. Work groups that include both non-family management and family members are sometimes indicated — even when you’re working on a family culture issue. Find senior executives who are as committed as you are to perpetuating the family-held nature of the business and engage them anytime your family governance evolves.

Build trust in family leaders who represent the whole family. In a large family, don’t expect consensus. Most owners will need to make some compromises in their personal financial expectations or goals in order to remain owners. The trade-off is in emotional returns and community impact and the amazing relationships and opportunities that come with owning a family business. Help family members build wealth outside the family business. Other sources of capital can give family members the flexibility to weather modest changes in dividends or liquidity to meet the broader, long-term needs of the family enterprise.

Expect and acknowledge commitment. Maintaining cohesion in a business-owning family (in our case, with dozens of owners) requires time commitment and leadership. Invest in your family leaders and compensate them for their efforts.

Be patient and persistent. It took our family three tries and 10 years to establish what we now believe is a highly effective and resilient governance system. Family education, relationship building, leadership development and communication all work in parallel to create a robust family enterprise.

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Article categories: 
January/February 2020

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