The shareholder in the family business

In family businesses the family own the majority of the equity therefore they can hold management to account, which may also be family members. Family members need to have the ability to do so. This is whether it is through the mindset of shareholder-managers being able to think at strategic and operational levels about their business or as family shareholders liaising with family members who are managers in the business.

At the shareholder level, it is important the values of the business are known and applied in the strategy of the business which they support. Management should be held accountable to that strategy and the values that underlie it. Corporate governance should be properly conducted, including where applicable any family governance that has been adopted to foster family interest in the business and effective decision making. To do this, the shareholders should also understand the financial metrics and operational structure of the business.

The values will be a unique combination that is reflective of that business in its business environment. A value statement is a touchstone that shareholders can return to in order to remind themselves of the key values of the business, which endures beyond the career and lifespan of key manager-shareholders like a business founder. With time they may be amended to reflect new products, markets and ways of working to refresh their relevance to contemporary business.

To make the values relevant operationally, the strategic goals of the business dervived from them provide more tangible targets around which initiatives can be launched and monitored. Again, these will need periodic review and adaptation. The strategic goals should cover product, market and financial goals.

Shareholders then hold the board accountable for these strategic goals. Therefore, the goals need to be realistic, but challenging. As a result, the management need to have input into designing the strategy as well as because of their more detailed knowledge of the business, product and market. The strategic goals will be the result of shareholder-manager dialogue.

By understanding the financial metrics, shareholders will have an understanding of the space for manoeuvre that the business has to orientate to achieve its strategic goals. It may be that the longer term financial ratios are the ones the shareholders particularly examine to align with their long term ownership horizons.

Active shareholders facilitate good governance. Good policies, articles of association, shareholder agreements and family charters will not do this by themselves. To be active and effective shareholders need to be alert and listen to sources of their information. In particular they need to be alert to how the information and conclusions relate to the blending and synergies of family and business. They also need to be alert to the complexity of business operations, have a long term perspective and be aware of what is an affordable loss on any particular matter to ensure there is no operational imbalance that jeopardises the business’ resilience. Finally, shareholders need to have a sense of responsibility to ensure only reasonable income, benefits and dividends are taken from the business to ensure its long term future.

Active, responsible and informed shareholders are important for the family business’ long term viability. They bring life to the values and strategic goals of the business by fostering them and holding management to account in line with them. My colleagues and I at nexa law can assist family businesses with corporate governance issues including such matters as family charters, shareholder agreements, articles of association, corporate policy drafting, and board functioning and coaching.

For more information please contact Henry Clarke using henry.clarke@nexa.law