ILMA Compoundings - April 2021 - 33

a 50% share when he passed the enterprise on to them, so from a voting
and equity standpoint, it was an easy
transition. Gina and Gloria each had
four children, so again, figuring out
the ownership shares for each family
member was simple. By the third
generation, each owner had 12.5% of
the business, and each had an equal
shareholder vote. But by the fourth
generation, things got complicated
as Bob's grandchildren had families
of their own. One had a single child,
another had four, yet another had
no kids, and so it went. Now each of
those third-generation family branches
had to divide their 12.5% into disparate amounts, ranging from 12% to
3.1%, creating a big shift in the value
of each person's ownership.
This complicated things: Although
the shareholders were notionally
committed to the idea of " one
person, one vote, " it was clear that the
disparities between how many shares
of ownership each family member
held made that rule harder to justify.
Not surprisingly, this created divisions
and squabbles. The family saw this
as an opportunity to work with a
consultant to facilitate discussions on
how ownership should affect voting
on Board members as well as other
shareholder decisions. Will they stick
with the one person, one vote rule, or

will votes be apportioned by how large
a percentage the family member holds,
shifting the balance of power in the
company's governance? From a Board
perspective, this is important because
it is the responsibility of shareholders
to vote family members and independents onto the Board.
As is so often the case, in working
with this family, it's clear that communication is critical to working
this out in a way that will prevent
warring factions and other issues
going forward. It's not an easy topic to
approach, but fortunately I've worked
with them for a number of years on
other issues of governance, so the trust
and solid communication is in place
to move things forward. Much of the
friction sprung from factionalism
in the family's several branches, and
part of the solution has been moving
them toward seeing the enterprise as
a whole, rather than as an aggregation
of conflicting family branches. As the
fourth generation moves forward, it's
critical that they do so as a united
family - and with that in mind, it
was decided by the family to stick
with the original one person, one vote.
Are all the owners happy with that
solution? Honestly, even a successful
negotiation won't leave everyone
involved completely satisfied, but
they've decided they can live with that

solution because they saw that it was
the right thing to do - not only for
the health of the Board and of the
business, but also for the family itself.
CONSULT WITH A PROFESSIONAL
Knowing what the purpose of your
Board is and making sure that it has
the right people on it are critical
to its success - as is listening to
the advice they offer. If your family
dynamics are such that you need help
either forming or fixing your Board,
bring in a professional to guide the
process - someone who can facilitate
the conversations you'll need to get
everyone moving in the right direction. That can make the difference
between watching your enterprise
be pulled apart or preserving and
growing your family business for the
next generation.
1. 2020 Private Company Board Compensation Survey report by Lodestone Global

Karofsky is a principal
consultant with The Family
Business Consulting Group.
This is an excerpt from an article
with the same title that was originally published on the The Family
Business Consulting Group's website. It has been trimmed and edited
according to Compoundings style.

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