ILMA Compoundings August 2016 - 32

FAMILY BUSINESS

So in general, should small shareholder groups combine the
roles and large groups seriously consider splitting them? Maybe,
in general, but consider two counterintuitive examples:

Case No. 1:
The Team of Four Brothers
Atypically, the founder of a successful business built a board
with independent directors; more typically, he became chairman
while retaining the CEO role. Tradition continued when one of
his four children was identified as the successor leader and was
appointed president, and the founder retained the chairman/
CEO title. The four siblings were thoughtful and envisioned their
future board structure for the period after when their father
transferred to them his controlling interest. Would the president
adopt both the chairman and CEO roles? Surprising many
around them, the four brothers decided to transfer the chair
position from their father to a nonfamily, independent chair.
Why? The brothers reasoned that separating the CEO and
chair in their generation would lessen the status differences
already in place by one sibling owner as CEO, who would be the
only brother to have a board seat. Further, they concluded a
nonfamily, independent director chair of the board would make
CEO oversight by the board more formal and allow the four
brothers to be more equal as shareholders. Each brother owned
a considerable percentage of the business and felt pressure to
make it successful. They all benefited from CEO accountability
to a board led by an independent chair.
After several years, the brothers have not questioned their
decision. They have a "bundle of sticks" team strength as
shareholders and business operators. None is concerned
about the balance of the board's influence versus shareholder
influence, and they highly respect the value of independent
objectivity from their board.

The "operationally oriented" board configuration dominated
by family management members from the third generation
would no longer be supported by the younger shareholders
who desired more involvement. There was a strong movement
to place nonoperating shareholders on the board to oversee
the new leader. After a long process involving research,
communication and back and forth between the family
managers and nonoperating shareholders, they decided to keep
the combined CEO/chairman role in the fourth generation. It
was also decided to not include outside shareholders on their
board. Everyone was in full support.
Why? They reasoned that a small, operationally responsive
board had served them very well in the past with business
results exceeding all industry benchmarks. Instead of adding
shareholders to the board and encumbering management
with oversight-oriented directors, they opted for independent
directors instead for strategic purposes, who would also provide
sufficient oversight. Nonoperating shareholders would be
involved in the nominating and compensation committees of
the board but would not have seats. The CEO/chair would keep
the board and management aligned and retain their market
responsiveness competitive advantage.
After several years, business results are still leading the industry.
Over 40 shareholders personally know the three independent
directors currently serving on their board, and a very active
family council keeps increasing the variety and options for
shareholder engagement with the business.

Case No. 2:
Moving from Third- to Fourth-Generation Cousins
Three generations of decidedly passive shareholders reaped
strong dividends from great business results and a "trust
us" inference from management. When many of the fourth
generation emerged into their mid-30s, the business leadership
was being passed on to a fourth-generation member at the
same time. It became clear that the shareholders should not
and would not remain passive if they were to continue as a
unified and committed family-owned business.

Vol. 66 No. 8 * 32 * August 2016 Compoundings
ILMA Compoundings August 2016

Table of Contents for the Digital Edition of ILMA Compoundings August 2016
