Case Study: Renewing the family council of a 5th generation business family
How do you keep an enterprising family comprised of dozens, even hundreds of shareholders united and aligned? Many families rely on family governance mechanisms – such as a family council - to counteract the growing family’s tendencies to grow apart over time. However, as a family and its needs, wants, and objectives evolve – so should the family council that supports it.
Case Study: The Sloan Family
Founded in the 1920’s, Sloan & Sons, Inc. today is fifth generation, billion-dollar, highly diversified family enterprise with over 200 family shareholders across the four family branches. With a significant leadership change in sight – the family CEO and the family Chair stepping down around the same time – the family council thought it timely to assess the shareholder’s perception of the family council as well as the overall alignment across the shareholder group.
The Sloan Family Council: Purpose and Challenges
When the Family Council was formed in the early 2000’s, its sole purpose was to relay information from the board to the shareholders – and vice versa – and to that end, to organize an annual shareholder meeting, which until then had not even happened. Over the years, the council gradually expanded its scope of responsibilities and began organizing educational events and the occasional social event for the family as well.
With the sixth generation coming of age, the impending double leadership transition, and the family being increasingly spread out across the country and beyond, a growing number of family shareholders had been voicing their concerns and frustrations about the future of the family and the enterprise to the family council president. This led the family council to engage outside support to review the current council structure and processes and identify areas of improvement.
We conducted an online survey with the full family shareholder group (over age 18, response rate: 73%) as well as roughly 20 individual interviews with family council members and others who volunteered to be interviewed. These are some of the challenges we observed:
Branch Mentality: The family thinks and is organized in branches, which is also reflected in how family members are selected and elected for roles in governance and leadership both in the family and the business. This branch mentality goes back to the founding years, and the rivalry between the four brothers that founded the business together: The family could never agree on one founding story, since each branch believed that their branch had been instrumental in laying the foundation for today’s successes.
Anxiety Around Leadership Transition: The current family CEO and family Chair – both in place for 20+ years – are revered across the four branches. Many family members are concerned about the next phase of family leadership, if there should be a family member at the helm of the company and/or the board, and how this individual would best be selected.
Next Generation Engagement: There was broad agreement that the next generation had grown distant both from the business and from one another, and concerns that future owners and stewards knew – and therefore cared – little about the business.
Family/Business Interface: Many processes and structures bridging family and business evolved organically over time and now put a burden on non-family associates in the business. For example, associates in the finance department currently support family shareholders with tax statements, philanthropic giving, and other services. While initially not a tremendous burden, as the ownership group grew into the hundreds this is causing annoyance.
Council Responsibilities: The scope of responsibilities of the council evolved as well, and today includes relaying information from the board to shareholders, organizing the annual shareholder meeting, arranging educational sessions, and dealing with any shareholder concerns addressed to the council. Despite the increase in responsibilities, the council has not increased in size, and most of the work is shouldered by the family council president, with the other members offering marginal support.
Shareholder Inequality: Depending on the shareholders’ ownership stake and their personal relationships with family leaders in the business, individuals have different access to information and resources, which creates a sense of non-transparency and nepotism, thus fueling conflict.
Strained Relationship with Board: On the business side, there is a high-functioning board of directors with a majority of independent directors who share a negative view of family ownership and involvement, and view the family shareholders as a nuisance, stating that “the shareholders should be happy with the dividend they’re getting.”
Proposed Process and Next Steps
The results of the evaluation were shared at the annual shareholder meeting, and we broke up the group of 120+ shareholders into groups of 10+ to have facilitated conversations around some of the key issues we identified. For example, discussions revolved around questions such as “What services would I expect from a family office” and “What should a competent and engaged steward know about our family and our family enterprise”.
We then summarized the findings from the survey, interviews and small-group discussion sections into a comprehensive report which was shared with the family shareholders. In the report, we outlined five recommendations for actions, ranging from the redesign of the family council – in terms of structure, process, purpose, and scope of responsibilities – to the development of an intentional educational curriculum for family shareholders of different ages, and in different family or business governance and leadership roles. We are currently in the process of setting up the different workstreams, which will be led by family members.
Learnings and Take-Aways
“Best practices” are tempting, but rarely helpful. While there is best practice in terms of how the family is engaged, there is no best practice in terms of how family governance is designed – this needs to be in alignment with the family’s values, needs, and objectives, and in way that it recognizes family dynamics as well as communication and conflict patterns. Two ways in which we acknowledged this are outlined below:
Overcoming Branch Mentality: Many multigenerational families have grown accustomed to functioning in branch silos – they have always done it that way. Over time, this leads to the creation of problematic branch narratives and competing objectives. Transitioning from a branch mentality to a ‘one family’ approach, e.g, in terms of selecting family members for governance and leadership roles, requires education and family work to understand and overcome the branch conflict.
Reconnecting Family and Business: Since the family had been kept at arm’s length from the business for decades, many family members – particularly minority shareholders without personal ties to family leaders in the business – had become disenfranchised. Engaging them in the process and assigning them clear roles in the various workstreams of their choice made them heard and valued by the family business system.
Background: How Does Your Family Council Change Over Time?
A family council can provide an organised forum for family members to participate in governing their ownership of, and involvement in, the family business (Leach, 2011, p. 64). What is more, the family council channels the voice of the family to business leadership, allowing it to send a clear and unified message to those running the business (Aronoff, Astrachan, & Ward, 2011). Much like the family, a family council goes through stages as it matures and fulfills different functions, areas of responsibilities and associated tasks over time.
Family councils are often triggered by change events, such as generational transitions. Many times, this happens during the second or third generation of family ownership and involvement, which means that the family ownership group comprises 20 shareholders or less, many of whom live in somewhat close geographical and relational proximity. There is still a large overlap between the family and the business, with many family members working in the company, and the family feeling strongly connected to one another through the business. At an initial, basic level, a family council focuses on developing structures to coordinate the growing family, facilitate decision-making, and manage the family-business interface (e.g., code of conduct).
While some family councils grow more advanced over time, others begin at a more advanced level, particularly if they are larger and more geographically dispersed. At a more advanced level, structures are supplemented with systematic processes that help with aligning and managing the family and the family-business interface (e.g., employment policy). At this stage of development, the family and/or business have typically reached a level of complexity where structures (individuals) alone can no longer assure the effective governance of the family and/or business and need to be supplemented with processes that enable decisions and actions to be taken independently of individuals.
Enterprising families beyond the third generation of family ownership tend to view themselves as an enterprising family connected by a shared desire to remain engaged in business activities together – regardless of the actual business(es) they are currently engaged in. At the expert level, the family council no longer solely focuses on structures and processes but begins to recognize the importance of nurturing and protecting relationships between family members, and between the family and the business (e.g., family educational program). Expert family councils seek to align the family and business strategy, and they dedicate significant efforts towards overcoming branch mentality in lieu of a one-family approach. Nurturing relationships is a top priority. Expert family councils also recognize the importance of managing planned family exits, and they develop sustainable mechanisms for family members to leave the ownership group; they recognize that family membership is not tied to ownership.
Table 1: Stages of Family Councils
How Effective is Your Family Council?
As enterprising families evolve over time, and their needs and objectives change, so must the family councils put in place to serve them. Periodic evaluations of a council’s purpose, scope of responsibilities, and the effectiveness of their actions for the family group and the business are necessary to ensure that the council effectively performs their role at their respective stage, and that the activities the council pursues support the achievement of the objectives that are aligned with its function.
One problem we often see with the family governance structures and processes is that they were designed for the family they used to be, but are rarely designed to suit the needs of the family as it grows and changes over the next 10, 20, or 50 years. Rigid and inflexible, the family governance structures of today become a corset that keeps the family in its current form, rather than helping it flourish into something else that aligns better with the vision of current and future generations of family stewards.
In our governance work with multigenerational families, this is what we focus on: We are here to help the family collectively identify where they want to go, we guide them in operationalizing these objectives, and designing a plan that aligns with their resources, their needs, their style, and their abilities. If you’d like to discuss your current family council challenges with us, please reach out to schedule a call – no strings attached.
About Our Governance Evaluation Process
At Generation6, we balance rigorous research methods with the need to generate applicable insights. We evaluate governance structures and processes both on the family and business side. Our family council, shareholder group, and board evaluations typically take three to four months from onboarding to completion. Board assessments provide the board with a set of actionable recommendations to improve overall board effectiveness, and a thorough assessment of key aspects of board performance such as boardroom culture, director competences, board leadership, and more. Family council assessments focus on aspects such as council purpose and scope of responsibilities, relationship with shareholders, and effectiveness of services offered.
Contact us if you would like to learn more about our governance offering.