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Pervin Family Business Advisors


Inactive Partners

Excerpt from The Accidental Partnership Series – Managing the Relationships that Bind or Bond – Pages 23 to 27

Those on the outside of the business do not wish to be left in the dark while those working in the business seldom enjoy backseat observers who may or may not have sufficient knowledge to be helpful. Addressing and balancing these concerns are critical elements of leadership.

From the vantage point of the Accidental Partnership model, it's clear that a family member who is an owner but not working in the business will be more concerned about remuneration or benefits than any other aspect to the business. Inactive partners therefore require clear policies regarding the philosophy of operation and compensation. There must also be room for outsiders to have some input where appropriate in certain non-operational decisions.

What makes an accidental partnership succeed?

The simple answer is: a Shared Future!

The recipe for success in an accidental partnership begins with systems and structures that are more formal in order for the members to be clear as to their roles and responsibilities, and how normal business transactions and transitions will unfold. Some of the areas that should be addressed are matters such as a shareholder agreement, which includes a clear understanding of the allowable transfer of shares, how the management and decision-making structure will work and the buy-sell mechanisms for all parties to the agreement.

There should also be a retirement and personal financial plan, an estate plan, a participation plan, an interaction plan for both family and non-family directors and managers and, finally, a family plan.

Furthermore, there should be an independent outside board. It is often the best forum to aid decision-making.

Some inter-generational partnerships find it helpful to establish a transition team made up of both insiders and outsiders whose mandate is to assist both generations through the transition.

Another useful tool is a code of conduct in the form of a partnership creed, which helps open up a dialogue and provides a means of working through misunderstandings and differing opinions.

Finally, a method to deal with remuneration such as salaries, bonuses, dividends and benefits is usually necessary. Resentments over money and perquisites often fester in people's minds, leading to feelings of injustice.

Care and Feeding of Inactive Shareholders

Here are some thoughts on how to embrace your family members who are owners but not working in the firm.

  1. Set up a family meeting process to communicate on all appropriate, timely and relevant business, ownership and family matters.
  2. Work out the obligations of ownership and those areas that require their input for either information gathering or decision-making. Based on this, encourage inactive shareholders to learn the basics of business if they do not already understand how to read a balance sheet and income statement, plus the concept of business planning and policy setting.
  3. Include your outside shareholders on committees and board activities if they have the skills and it is appropriate.
  4. Always look for ways to make your inactive shareholders shine. That means giving them leadership roles where they can make a contribution, so that they can take pride in their ownership. Depending on the nature of your wealth, many families use a Family Foundation or other charitable platforms for this purpose.
  5. Try to minimize the business chatter at family events so that the inactive members, and especially their spouses and families, do not feel isolated.
  6. If you have a Family Council, many businesses at the cousin partnership stage encourage the junior members to research and write a book describing the family and business history. These are often self-published and are very valuable in bringing the next generation into the family business tradition and its legacy.

Non-Family Members

Every family firm has trusted "outsiders" – either present from the start or adopted in the formative years. These are the early employees and outside managers who help the founder build a viable business. These people often become quite close to the founder – almost like family. The actual business family often is not in the picture at this point – and certainly is not relevant to managing the business. At any rate, the trusted outsiders establish their own relationship with the founder and ways of working. They may even advise the founder on policy and planning. They are heavily trusted.

Later, the founder's children join the firm – first in summer jobs, but later in training assignments. The old guard is asked to help with the mentoring and development of these young family members, usually for no extra compensation. They therefore form judgments as to whether the young scion shows much aptitude. If they feel there isn't much natural ability, they may doubt the future viability of the firm.

Meanwhile, the new generation may object to the special status of these outsiders. They may find their privileges incomprehensible, because they were not there during the company's early years, when living on the edge builds fierce loyalties between the founder and his managers and employees. In some cases, the children may simply see under-performers who are protected by their longevity in the company.

The position of non-family insiders comes to a head when the founder starts actively working on "continuity" of ownership – that is, the succession of the next generation. Non-family managers may become so concerned that they begin to consider other jobs. Much depends on the situation: the credibility of the new family member's preparation for succession, perceived competency, the inevitability of the succession plan, and so on. In families where it is clear from the time the children are teens that some of them will inherit the business – meaning management and ownership – the problems for non-family members on the actual succession are minimal. If, on the other hand, the son or daughter's succession seems to be based mostly on family loyalty without adequate planning or preparation, drastic consequences can occur. Key managers could consider early retirement or new positions.

Case Study: The complex allegiance of outsiders

In a large British company, only family members could move above general manager (to become vice-presidents or officers). This condition was maintained for thirty years with little trouble. Finally, the family-firm leadership decided that the next generation of family members did not have the resources necessary to direct the business. They decided that executive positions would be determined on merit alone, except for the CEO, who would still be a family member. One of the general managers was made a vice-president and business head. He was sent for advanced management courses at a business school.

To the amazement of the family, a revolution took place. Other non-family members were furious. They challenged the appointee's competence; some refused to work for him. They castigated the family for its terrible decision.

In trying to understand the cause of this uprising, the family launched a review. What emerged was the fact that the decision had disrupted the entire lives of the non-family members. Previously, they had known and accepted their place as senior "commoners" reporting directly to "royalty" – the family. They were at the top of their possible career ladders and enjoyed their privileges. Under the new rules, others could compete for more senior positions; they might be bypassed. Or they would have to compete for these senior jobs – which meant more work and energy. In short, their relationships with family and peers were upset, their stable world had turned topsy-turvy and their place in the organizational scheme was destroyed.

The lesson here is that relationships with long-standing non-family employees may be more complex than the family fully appreciates. Consider how new policies and procedures might affect them, and consider whether it is wise to mitigate their effect on key employees.

Dealing With Owner Value

Accidental partnerships work best when the partners reach some agreement on the real purpose of business ownership. How do they plan to manage the business, what is their view of the family legacy, what is an acceptable return on this investment and how do they see themselves contributing to these ideas? Partners' reluctance to decide on the fundamental reasons for their partnership creates a lack of communication that inevitably opens the door to selective decision-making and misunderstandings.

An intentional legacy plan gets around this problem. This document – it may be nothing more than a statement – sets out the future that the owners intend for the business: whether they will keep it, sell it, go public or establish an employee share ownership plan, for instance.

The idea of owner value touches the inner core of each of the accidental partners' philosophy of life and how they see their relationship to the business and other owners, as well as with the community at large (including their employees).

Case Study: Losing the legacy

The founder of a retail organization died suddenly, leaving the business to his widow, who had no experience. Two daughters were in the business. They were unable to handle strategic thinking, mainly because of their obsessive concern for power.

The executive vice-president, who had been chief operating officer and a trusted lieutenant for years, agreed to act as CEO for two years to direct the company and facilitate an appropriate succession. He had a sensible plan that included bringing in a competent CEO and developing some internal people including family members to take over after the new CEO had a few years to carry out the necessary growth and survival strategy.

The daughters fought him on every front. They worked on their mother until she was totally confused. The acting CEO became increasingly frustrated. He retired as soon as he could and sold his stock. The family appointed a leadership team. Within two years, the enterprise went from first to fourth in market share. Assets were sold and the firm never regained its old vitality.

While this is a situation where the trusted outsider was no longer working with the founder with whom he had established a lasting business relationship, it underlines the importance of protecting long-time employees' contribution to the company. It is also a fine argument for a clear succession plan in the event of the unexpected death of the owner.


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