Advising / Consulting / Family Business / Family Enterprise / Issues in the Family Enterprise

Representing Family Constituencies: The role of the family council

The PractitionerI am a fifth generation owner of a 165 year-old manufacturing business based in the Midwest. I have been involved in our family governance system since its founding 10 years ago, serving as the family council chair for the past four years. There are 135 family shareholders who own about 97% of the company stock, and the entire family, including non-shareholders numbers 220.

When I took on the task of creating a family governance system, my primary objective was to unify the family and give them a “voice.” While I knew it would be impossible for the 100 shareholders at the time to agree on anything, I had no idea how many constituencies I would have to consider when trying to understand the diversity of perspectives in my family.

Our first attempt to represent the views of the shareholders, while acknowledging the importance of various constituencies, was reflected in the configuration of the council itself. We recognized that there were six branches of the family that would expect to be represented on the council. This was especially important because the corporate board was reducing the number of family directors, which meant that all branches would not have representation on the board.

Recognizing the value of the married-in perspective, we also insisted on having at least one member from that constituency. Historically, married-ins have always played an important role in the business. In fact, when our founder faced a serious capital shortage 150 years ago, he decided to incorporate, and his father-in-law agreed to purchase 460 of the 500 shares issued at that time, giving 10 of those shares to his daughter. Other business colleagues bought the remaining 40 shares, but our founder had none. While he was able to buy the shares back 20 years later, the appreciation of married-ins as a critical resource was cemented in our family business culture going forward. Today, the successful president of one of our two businesses is a married-in.

We also wanted to make sure that women were well-represented on the family council. Once again, going back to the beginning, the women in our family have played an important role, owning shares during a time when it was unusual for women to do so. In one case, a sister owned more shares than her brothers. Because of an inheritance from a favorite aunt who had no children, my grandmother (G3) ended up with more shares than her two brothers, who were working in the business.

Another constituency that required consideration as we were envisioning the council was defined by generation. When we created the council, our 4th generation family leaders had retired and were not interested in serving on the council. However, in retrospect, it was a mistake not to insist that we have one representative from that generation. A lack of understanding of family governance in the family led to resistance from many, but especially in that generation. If there are representatives from all generations on the family council, the family benefits greatly from the wisdom of the older generation, the energy and time offered by the middle generation (especially when they are established in their careers or retired) and the new ideas of the next generation. For example, as we have expanded the number of next gen on our council, the way we communicate to the family has changed radically. We now use a multi-platform approach for communications which enables us to reach more family members, thereby improving our ability to develop programs, plan events, and provide nuanced feedback to management and the board.

While the family council doesn’t actually represent the family-members-on-the-board constituency, the views of that group are critically important to consider at all times. In our family this group of three family members, which includes the chairman of the board, requires special attention. At this time, one of our council members serves as a corporate director, but this is not a requirement for the council or the board. Nonetheless, alignment between the family council and the family board members is essential when setting priorities, developing family policies and programs, and working with management.

There are still other constituencies that must be recognized when dealing with family issues—those family members working in the business and those family members who have no ties to family working in the business. In other words, the “insiders” and “outsiders.” The council must evaluate comments from family members with a careful consideration of their insider/outsider status. There will always be some shareholders whose outsider status leads to feelings of discontent. While they will rarely admit that this is the reason for their discontent, the knowledge that they are part of this constituency will often help to understand and address their concerns.

Finally, it is important to ensure that both the “haves” and “have nots” have a voice. In so many instances, serious family conflicts are caused by minority shareholders who feel their views have been overlooked or dismissed in the family or business decision-making process. But those who own more shares also demand that their voice is considered in proportion to their share ownership. The board of directors, in particular, will often consider shareholdings when business-related issues are raised by family members. While the family council is more inclined to express the family’s views in terms of one vote per family member, this is not the case with the board. In our family, the number of shares owned by each individual is not information readily shared with family members, or the family council. So the way we have addressed this issue is to have regular formal shareholder surveys analyzed by the corporation or hired consultants based on number of shares. Since there are no shareholders who control large blocks of shares, we have found that this distinction is rarely determinative. However, in those families where there is a significant difference between haves and have nots, the use of formal surveys is particularly effective when business decisions require shareholder input.

In my experience working with my family over the past 10 years, I have learned to appreciate that there are multiple, overlapping constituencies to consider. When I evaluate the many informal surveys that the council initiates in an effort to plan events, develop policies and programs and set priorities, I now make sure that I consider each individual response from a “constituency perspective.” For example, in a recent survey we asked about the importance of the council’s role in facilitating communication between the family and the board. We had thought that there would be 100% agreement that this was a critical function of the council. However, we had five or six people who felt that this role was only moderately important. When we looked at who those people were, we discovered that they were all “insiders”—either working in the company, or family members of those working in the company, or serving on the board. In their view, it was the role of the corporation to ensure proper communication. But their insider status meant that they didn’t understand fully what the “outsiders” needed or desired. For this reason, I have found the anonymous surveys are less effective than surveys that include the names of the respondents.

In the end, we have found that by recognizing the overlapping constituencies that represent our family system, we are better able to understand each individual. And, ultimately, it is the personal response to the individuals in the family that will most likely lead to harmony in the family.

About the contributor:

Sylvia Shepard is a 5th generation owner of the Menasha Corporation and chair of the Smith Family Council. She will become an FFI Fellow at the Annual Global Conference, October 8-11 in Washington, DC. Sylvia can be reached at ssshepard@sbcglobal.net.

 

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