Yazar: Burak Koçer

Leaving Your Comfort Zone: Adding Independent Directors to your Board

Leaving Your Comfort Zone:

Adding Independent Directors to your Board

The Board of Directors is where the will of owners turns into action. It is also one of the most challenging steps to take for a business owner as they may be advised to do things differently. To be more specific, in almost all family business governance assignments that I have been involved globally, the top of actionable items list has been to add independent directors to the board. Yet only a small portion of business owners easily adopt this idea to change the board composition.

In general terms, an independent director is someone who has no other roles, which might potentially pose a conflict of interest with their duties towards your company. In my experience, inviting independent directors to join the board has always been the number one subject that stands clearly outside the comfort zone of the owner.

Why to take this difficult step

We often tell our clients that adding independent directors to the board is the best way to bring objectivity to their business. In the words of our senior partner Joe Paul, “if we could recommend one action to all our clients regardless of the presented problem, it would be for them to engage three strong independent directors. They would bring the wisdom and knowledge required to manage the necessary changes in the family and/or business.” In fact, our theoretical knowledge and practical expertise confirm that sharing the decision-making authority with qualified people around the table is in the best interest of the owner. Then what is it that keeps the owner from developing a strong independent board? How can a business owner prepare to leave his/her comfort zone?

A business owner who is reluctant to change the board composition:

  • is not convinced that it is in their best interest; or
  • even if they are convinced to the benefit, they suspect that they cannot manage the process successfully; or
  • even if they have no issue with a) and b) above, the outcome is not important to them, i.e., they are not motivated by the benefit offered.

Is it in Your Best Interest?

You may start thinking about what exactly the ultimate duty of a board of directors is. The board exists to increase shareholder value, in other words, to make your company worth more. This is where you think about the future of your business and this strategic thinking allows you to move your focus from daily operations to the roadmap that will lead your business to its full potential.

Independent directors will help you define what you want your business to become in the future and the path that will take you there from where you are today. The best independent directors bring the ability to think about your business as an enterprise in the business environment in which you operate, rather than diving into the day-to-day operations. They can bring a context of how other businesses develop and what are best practices.

A strong board will also contribute to your succession plan by creating a platform for your successors to learn how to lead a business. It constitutes an invaluable resource as part of a transition plan for the development of the next generation, which usually takes a minimum of 10 years until you would comfortably delegate and finally handover the authority to your heir. Many times, independent directors can provide advice and coaching to potential successors and help to make the difficult decision of what leadership is needed by the company and who has the potential to provide that type of leadership.

Can You Plan an Effective Selection and Induction?

As the first step, think about the profile of people that would complement your skills. You can develop a Board Skills Matrix and list the qualities, qualifications, and talents which are needed to implement your strategic roadmap. People that you know and trust within your business community are a great resource. You can first look there to identify ideal candidates. You can also work with an executive search firm to propose people who will add value to your business.

While working on identifying candidates, it is also wise to consider what information they need to know about your business to be able to add real value in your board process. The position of your business as of today, competition, and future trends in the market are key information to help them understand your company and where you are heading. Creating a Board Prospectus is a useful tool to collect the information, which you can share with prospective board members or those who may share candidates with you.

Is it Important for You?

A strong board of directors can help guide the direction your business should go and what actions should be taken to get there. This is indispensable regardless if you would like to sell your business or transfer it to the next generation. If the mechanism that knows how to keep your business profitable is “you” instead of a board of directors, then you are also limiting the value proposition of your business — anyone who is interested in buying your business, should actually buy “you” and not the business. However, your board of directors will help your business incorporate your valuable competitive knowledge, which is the key to sustainability of the distinguishing performance that you have achieved.

Conclusion

In summary, many family business owners hesitate to build a board of directors with independent members because of their fear of outside control or advice that conflicts with their way of operating. We have found, however, that the voices of independent directors supplement those close to the business and provide an objectivity that typically no one in the family or in the business can provide. In addition, the presence of a board increases the value of the business both of current owners and for potential buyers should that be the ultimate goal.

For more information on developing your board please click here to see a previous posting by Leslie Dashew called “Steps to Setting up a Fiduciary Board”.

Etik ve Uyum Yöneticiliği Sertifika Programı – 12 Kasım 2016

Koçer Consult, Etik ve İtibar Derneği ve İstanbul Bilgi Üniversitesi’nin işbirliği ile hayata geçirilen Etik ve Uyum Yöneticiliği Sertifika Programı’nda kurumsal yönetim modülüne katkıda bulunuyor.

Hem iş dünyasndan hem de akademik dünyadan eğitmenlerle Etik ve Uyum Yöneticisinin günlük hayattaki gereksinimlerine ve şirketlerin bu pozisyondaki yöneticilerinden beklentilerine göre tasarlanan program, yurtdışındaki başlıca sertifika programı örneklerinden esinlenerek ve hem ülkemizde hem de yurtdışında çalışabilecek bir Etik ve Uyum Yöneticisi’ni eğitmek amacıyla tasarlanmıştır.

Burak Koçer Etik ve Uyum Yöneticiliği Sertifika Programı’na Kurumsal Yönetim İlkelerine Etik Penceresi’nden bakış konulu semineriyle destek olmaktadır.

5 Kasım 2016 tarihinde İstanbul Bilgi Üniversite’sinde başlayan program cumartesi günleri olmak üzere 7 hafta sürdü. Program hakkında daha fazla bilgi TEİD Akademi internet sitesinde yer almaktadır.

Hangi Sorulara Cevap Bulacaksınız?

– Kurumsal Etik Risk Haritası Nasıl Çıkartılır?
– Şirket İçi Etik İhlallerinde İş Hukuku Ve Ceza Hukuku Uygulamaları Nelerdir?
– Etik Kültürü Nasıl Oluşturulur? Etik Liderlik Nedir?
– Etik ve Uyum Programı Nasıl Oluşturulmalı?
– Etik Kodu Yazım Süreci Nasıl Yönetilir? İlke, Politika ve Prosedürleri İlişkisinde Nelere Dikkat Edilmeli?
– Etik Programının İç ve Dış İletişimi Nasıl Yapılır?
– Etik Eğitim Programları Nasıl Kurgulanır ve Nasıl Değerlendirilir?
– Etik ve Uyum Programının Başarım Ölçütleri Nelerdir?
– İhbar Mekanizmaları Nelerdir? Misilleme Nasıl Engellenir? İç Soruşturmalar Nasıl Yürütülür?
– Beyaz Yaka Suçları Nedir?
– Çıkar Çatışmaları Nedir? Nasıl Engellenir
– Kamu İlişkilerinde Etik Riskler Yönetiminde Nelere Dikkat Edilmeli?

IMPLICATIONS OF A TRANSITION PLAN ON TODAY’S OPERATIONS

IMPLICATIONS OF A TRANSITION PLAN ON TODAY’S OPERATIONS:

Redefining the Role of the Leader

As we work with family business leaders to plan the transition of a company, one of the main topics becomes redefining the way decisions are made and carried out. In fact, a family business leader’s transition plan would be a void letter if it had no implications on how the company is run today.  Alas, this is a change that is easier said than done and a true test of sincerity for the owner. Quoting Morpheus of the film The Matrix, “There is a difference between knowing the path and walking the path.”

The most explicit impact of the transition plan on the way the company is run today concerns delegation. The mere fact that the founders grew a small startup operation to what it is today gives them every legitimate right to undertake all critical decisions. As the operations expand, the founders hire managers with specific executive responsibilities, yet in many cases, they work so closely with those managers that you would not necessarily call it a “delegation.”

In this article, I would like to discuss three main problems that stem from a lack of proper delegation. Subsequently, I will suggest various ways on how to expand delegation.

In the absence of an effective delegation:

The owner becomes a part of the decision.

When the owners work closely with the managers, i.e., make decisions together, they eventually become a part of those decisions, which leaves no room for the development of accountability.

There remains no space to grow talented managers.

A founder, who undertakes all decisions regarding the creation of new systems, eventually leaves behind an organization that is incapable of creating anything new in his/her absence. However, this is exactly what is expected from a leader—to not only run a system effectively, but to be also capable of creating new ones.

A leader dealing with numerous key performance indicators (KPIs) cannot see the forest for the trees.

Unlike the number of different horizontal responsibilities that a manager assumes, the number of KPIs that he/she should focus on should decrease with the level of  increasing hierarchy. When a founder strives to manage operational responsibilities, he/she ends up focusing on a vast range of KPIs, which obscure his/her appreciation of the overall situation.

Redefining the Founder’s Involvement in Business

A transition plan should eventually redefine the way in which the founder is involved in business processes today. Here are some suggestions to facilitate this most challenging task for a founder:

1. The best way to emphasize delegation is, to the extent it is possible, limit the cooperation between the founder and a manager to formally defined meetings, rather than informal discussions ad hoc.

2. Changing the meeting frequency from weekly to biweekly or even monthly can help implement the expansion of delegation incrementally.

3. In order to make delegation properly work, a sound control system should be provided. When redefining the leader’s involvement in the operations, you need to make sure that internal controls are up and running. An internal control checklist is a critical instrument that requires periodic review.

4. Although valuable as time savers, abbreviations sometimes make us forget the real meaning of the concept. For example, KPI stands for key performance indicator and has value in limited numbers. A priority matrix can be utilized to outline monthly, quarterly, and annual review periods for each KPI in order to keep the meeting agenda more concise.

5. Tolerance intervals should be defined for the KPIs not included in the predefined review schedule and should be reported if and when there is a deviation greater than the accepted level. For example, this can be 1% for an indicator and 3% for another.

THE HOLY TRINITY OF CORPORATE GOVERNANCE

THE HOLY TRINITY OF CORPORATE GOVERNANCE:

Direction, Representation, and Accountability

This past April, I spent three creative days in our Aspen Family Business Group 2016 Spring Salon with Joe Paul, Leslie Dashew, Bill Roberts and Donnel Nunes. These annual meetings provide a great opportunity to catch up and contribute to each other’s work by learning from each others’ experiences and perspectives. This year, we also hosted Dr. Manulani Aluli-Meyer of University of Hawaii, with her brilliant wisdom introducing to us the concept of “epistemology” and how we can apply it in our work.

For my part, I have greatly benefited from the Spring Salon, in terms of clarifying my mind and focusing on my role more effectively as a family business advisor. This column is one of the most immediate outcomes of our Spring Salon on my behalf. Since I wrote my October column on “The Art and Science of Governance,” I have been working on developing a more organized and clear model. Well, one does not need to look far for inspiration to further develop this model with these wonderful people around me. Hence, this small piece is devoted to the leading experts of the Aspen Family, Donnel, and Dr. Meyer.

Decision-Making Power

Defining how decisions are made and controlled is central to our work with families. This involves designing mutual roles of three main governance bodies in family businesses: the family council, the board of directors, and the executive team. Of course, from a legal point of view, this list should have started with the shareholders’ meeting, but for the purpose of this paper, I will not do so for the following reason:

As Joe contends, “Power in a family business is often independent of ownership or management position.” And this is exactly where we want to influence for a quality decision-making function.

The role of governing bodies is to create a healthy environment for quality discussion and ultimately form a common decision in favor of the company’s interest, not that of an individual shareholder. On the other hand, save for exceptions, a shareholders’ meeting is where individuals come with premade decisions. They either approve or disapprove an agenda item based on the position they took before they even entered the meeting. In these meetings, it is legitimate for each shareholder to protect his/her own interest and, in general, it is a process of “legalizing” the decisions that were made before.

In a family council, we prioritize creating open channels for communication among the shareholders, and between shareholders and other members of the family, ultimately developing a culture of collective decision-making. Hence, this is one of the platforms where a family can achieve “collective transformation through individual excellence” in Dr. Meyer’s words.

In fact, the three governance bodies represent stages of a process, in which multiple interests of different stakeholders are transformed into a single direction.

From Multiple Interests to a Single Voice

It is quite fair for shareholders to have different strategic preferences, risk appetites, or management styles. But these are all discussions at the ownership level and must be melted into a single voice that will set the direction for the business. Keeping this plurality at the executive level will turn into incompatible managerial actions that could potentially lead to a business disaster.

The board of directors is where different alternatives are evaluated and the direction is set.  The head of execution holds the steer as the captain to lead the business in the manner designated by the board. Depending on the complexity of the business, the appropriate mechanism may change, but the need is same: You need to develop a process for evaluation of different alternatives in a way that all shareholders feel legitimized and heard, with a single voice to guide the entire organization accordingly.

This chart depicts the strategic flow of the governance body from multiple interests to a single voice.

Once you start designing the three main governance bodies—the family council, the board of directors, and the executive team—you will face the following questions:

  1. Who should be involved?
  2. What is the ideal size?
  3. What are the respective authorities?

The Holy Trinity


There is an unlimited number of answers to those questions. Choosing the right combination is the art of governance, which should be decided in relation to the specific needs of the family and the business. However, we also have a formula for this process, which I call the holy trinity of corporate governance:

  1. Direction
  2. Representation
  3. Accountability

Whatever governance model you create, it should satisfy these three needs. You have to make sure that governance bodies:

  1. provide a clear direction to the organization,
  2. allow for representation of stakeholders and
  3. hold those who are authorized to act on behalf of the others accountable
At this point, I would like to recall the second axiom in Joe Paul’s book, The Emotional Ledger, “It is not a question of whether a family business is governed or not. A more salient question is what is the business and the family being governed by.” The right answer to this question lies in the way a family business approaches the aforementioned three needs.

Direction


“If there is no goal to achieve, there is no progress to be secured.”

When the company is not operating in line with the predefined and approved objectives, the performance of executive managers will be questionable. In a family business, the cost of this suspicion is usually higher. It is good practice to have a system in place that allows for setting the objectives accurately. To do so is inevitable to define, which requires a combination of skills and experience to ensure the quality of decision-making.  This analysis will help families focus on the qualifications instead of individuals and differentiates between ownership and management roles, which come with different rights and responsibilities.

Representation

“Rewards of inclusiveness outweigh perceived risks.”

Families need a shared vision, which is carried out to the future owners of the business throughout the years. This requires gradually involving family members who do not work in the business with the governance system. Representation also allows family members to be confident that they are able to exercise their legitimate rights on the business despite limited involvement in operations, while differentiating between ownership and management.

Accountability

“If both questions and answers come from the same person, you cannot be sure about the accuracy of either one.”

The depth of separation will depend on the complexity of the business, but any organization requires some sort of border between execution and control. This also allows for a division of work between the decision makers in terms of their time horizon. The focus of those who undertake the daily operations is on the specific work they do, while those who exercise the control function must apply a broader perspective to ensure long-term stability.

Matching the Holy Trinity with Governance Bodies

This Governance Priorities Matrix can be used as a guideline when seeking the right answers for designing governance bodies.

At the family council, the primary concern is representation, followed by direction. First, anyone with legitimate interest in the business must be present. Only with their involvement can the direction for the business be mutually agreed upon and accepted.

In the board of directors, the primary concern is giving a clear direction to the executive team and accountability for the formulation and execution of this direction. Representation is of least concern, as we cannot give up the qualifications we need to set an accurate direction for the sake of an individual member’s needs. This is where different interests are melted into a single voice, requiring a combination of diverse skills. A good practice is to define the required qualifications and let people nominate the appropriate candidates according to their right of representation.

At the executive level, representation is not one of the needs to be satisfied at all. In fact, the entire chain of governance is built upon this objective: To ensure that the business is run by competent hands. These competent hands will be accountable to the board for results, and must cooperate with them in setting the direction and providing feedback.

When evaluating the governance bodies, you may want to check The Governance Priorities Matrix to understand the potential consequences of your existing composition.

THE ART AND SCIENCE OF GOVERNANCE

THE ART AND SCIENCE OF GOVERNANCE: 6 RULES APPLICABLE TO ANY BUSINESS ORGANIZATION

“If I was unsure about the timing, I would rather be wrong because of doing something too early than doing something too late.” 

I like how Joe Paul, our visionary leader in the family business field, had articulated this while discussing the development of a strong and functional board of directors with a chairman of a company. The question pertained to deciding on the appropriate governance structure for his individual businesses at different stages of development.

This is a very legitimate and valid question. In fact, legally binding governance principles for public companies have produced inefficient results in many jurisdictions when they are regarded as a goal rather than a means to an end. This end is the desired outcome of a fair, transparent, accountable and responsible management system.

The art of leadership is to develop the principles that would lead the company successfully under different circumstances. Yet, luckily enough, there is a set of rules that we can rely on. Here, I would like to set forth these rules that are applicable to any business organization regardless of its stage of development.

Rule #1: Rewards of inclusiveness outweigh perceived risks.

Not all lights in a house are as “important” and as “fancy” as the expensive luminaire in your living room. But a short circuit in one of the ordinary bulbs in the small storeroom will black the entire house out, including the living room. Just like wiring, the family business system consists of different elements, some more central than others, but the “right to be heard” goes for all of them. Participation in the communication process and decision-making are different roles that must be distinguished in the governance mechanisms.

Rule #2: Each ship has only one captain.    

It is quite fair for shareholders to have different strategic preferences, risk appetites, or management styles. But these are all discussions at the ownership level and must be melted into a single voice that will set the direction for the business. Keeping this plurality at the executive level will turn into incompatible managerial actions that could potentially lead to a business disaster. The board of directors is where different alternatives are evaluated and the direction is set.  The head of execution holds the steer as the captain to lead the business in the manner designated by the board. Depending on the complexity of the business, the appropriate mechanism may change, but the need is same: You need to develop a process for evaluation of different alternatives in a way that all shareholders feel legitimized and heard, with a single voice to guide the entire organization, accordingly.

Rule #3: No ship owner holds the steer of their own ship if they are not qualified for it.

This principle emphasizes that ownership and management are different roles associated with different rights and responsibilities. A business will produce excellent results under qualified leadership. Therefore, a sound governance system must be able to differentiate between what is expected from an owner and what is expected from a manager, including facilitating the appointment of a qualified manager. Of course, ownership and management roles can be combined under an owner/manager, but not when the person is qualified to be one and not the other.

Rule #4: If both questions and answers come from the same person, you cannot be sure about the accuracy of either one.

This rule relates to the principle of accountability. Referring to the analogy in rule #2 and #3, it is the ship owner’s responsibility to ask the right questions and the captain’s responsibility to provide the right answers. The depth of separation will depend on the complexity of the business, but any business requires some sort of borders between execution and control.

Rule #5: Trust is good. Informed trust is better.

According to Lenin, “Trust is good, but control is better.” In a family business environment, on the other hand, things are slightly different. Power, hierarchy, and social relationships are much more interlaced than a bureaucratic organization. Many family members refrain from controlling their relatives in business due to fear of creating the perception that they do not trust them. In a social setting of interlaced relationships, trust is more productive than any contract or mechanism to maintain a healthy relationship. Adequately informed about the state of the business, non-active owners will feel more comfortable with their relationships in the family business. Thus, carefully designed communication will support the level of trust, while helping the family to grow responsible business owners.

Rule #6: If there is no goal to achieve, there is no progress to be secured.

When the company is not operating in line with the pre-defined and approved goals, the performance of executive managers may be questionable. In a family business, the cost of this suspicion is usually higher. It is good practice to have a system in place that allows for setting goals objectively and agreeing upon them. Some families commit to the principle of reporting to a non-family manager or an executive from the other branch of the family to mitigate challenges of the performance management process.

The art of governance

In my view, the aforementioned six rules represent a fair summary of what a business organization needs to endure regardless of its development stage. These rules represent the “science” aspect of the process. The “art” is to decide its level of sophistication.

TRANSITION OF LEADERSHIP

TRANSITION OF LEADERSHIP: WHERE THE RUBBER MEETS THE ROAD IN SUCCESSION

A wise father posed three questions to the son selected as his successor:

  1. Are we in the right business?
  2. Are we able to find the right people to run this business?
  3. Do we have effective controls in place to monitor them?

This founder of a very successful 50-year-old business had long ago discovered that the knowledge required to answer these three questions was critical to his success.  He was convinced that his successor must also have the relevant knowledge to answer these questions in order for his business to thrive beyond the succession process.

The continuity of a family business refers to its ability to survive across generations. Succession is perceived as complete when the ownership and authority to make the ultimate decisions have been passed to the members of the next generation.  However, transfer of leadership, the final stage in succession, requires more than a mere transfer of shares or leaving board seats and/or executive positions to the successors. Indeed, answers to the father’s three questions, especially the first two, require strong leadership qualities, including intuitive decision-making ability.

Succession as a Mutual Role Adjustment Process

While discussing succession planning, in most cases the focus is on a leader’s willingness to pass on the business or the successor’s readiness to take over the business. It is thought that in the event that any or both of these factors are missing, the ability for a family business to overcome the challenge of succession is limited. While this perception points out two major impediments of effective succession planning, it fails to concentrate on the interrelatedness of the two. Indeed, Wendy Handler defines the succession process as a mutual role adjustment between predecessor and next-generation family members.* This approach aptly shows the parallel stages that face both the leader and successor. The leader moves from sole operator to monarch (having preeminent power over others) to overseer-delegator, from where they finally transition to consultant (who is disengaged from the organization). At the same time, the next-generation family member progresses from no role to helper (to the monarch), manager (under the monitoring of the overseer-delegator) and finally, leader/chief decision-maker (when the owner is disengaged). Thus, in a carefully planned succession process, both the leader and successor advance through these stages simultaneously to maintain a healthy climate that promotes trust and personal development.

Aside from focusing on the interactivity of the processes that the leader and successor embark upon, Handler’s approach places the leadership role at the final stage of the succession, which I find particularly powerful and accurate. This is also where the rubber meets the road. Continuity of many family businesses often unravels. This is not due to a lack of developed shareowners or managers from the members of the next generation, but rather a lack of leaders among them.

Inevitable Leadership Tasks Awaiting the Successor

Following disengagement of the former leader, the next generation family member needs to capitalize on value drivers (i.e., factors that provide competitive advantages to the company) and reinventing the most appropriate governance structure to ensure preservation within the organization. Indeed the father’s first question—are we in the right business?–was implicitly pointing out the value drivers. Products or services that the company offers may not necessarily be the appropriate business case for the family in the future. Puzzling over the right business avenue while taking the value drivers into account helps the next generation family member fulfill their leadership responsibility of creating wealth. Limiting the new leader to a “wealth user role” might put the continuity of the family business at risk.

Similarly, as the business evolves, the roles of the family members evolve, too.  A family member’s current position may not be the most efficient role anymore considering various factors such as size of the business, diversity of initiatives or the next generation’s past operational involvement. This refers to the father’s second and third questions—finding the right people and putting effective controls in place. Overcoming these critical tasks requires a well-prepared leader, who knows what to maintain and what to change. Differentiating between these requires a type of knowledge, which is only developed by effective leaders. Thusly, this is why leadership development is the most critical and often overseen element in a well-prepared succession planning. Preparing heirs for the top of the organization through a career path in lower levels does not usually address this need on its own. While this planning approach trains the successor in learning the rules to run the business, it fails to help them develop the wisdom, which is most needed to identify when to apply rules and when to change them.

Therefore, a carefully planned leadership development program with internal and external elements should be the integral part of an effective succession planning. Internal elements can involve periodic strategic discussions led by the successor with a specific agenda and method to unleash the tacit knowledge possessed by the leader and key executives. External elements of leadership development can be established by creating advisory groups, where successors meet regularly with their counterparts, who develop themselves from each other’s experiences.

Concluding Remarks

To ensure that the rubber meets the road safely, the succession process must be managed as a two-dimensional process, the phases of which are to be adapted according to the other. The merit-based promotion as a career path may allow successors to become well-trained managers, yet this will not be sufficient to develop strong leaders. Additional platforms must be created where successors–beyond their formal managerial role definition–regularly meet with the leader, key executives, as well as their counterparts in other organizations. The knowledge and intuitive decision-making ability accumulated throughout this process will present its next leader to the family business.
*Handler, W.C. “Succession in Family Business: A Mutual Role Adjustment Between Entrepreuner and Next-Generation Family Members” Entrepreneurship: Theory and Practice, 1990, 15 (1), 37-51.

KEEPING COMMITMENT ALIVE ON THE ROAD

KEEPING COMMITMENT ALIVE ON THE ROAD

Having explained the expectations of developing a family constitution to all three members of a second generation, I asked them to introduce me to their family leader, who was also the Chairman of the company, as I wanted to understand his perspective, expectations and concerns. On our first meeting, the Chairman explained that his first priority was making the right decision in terms of nominating the person who will succeed him. He was concerned with merely relying on a document that outlined a set of rules, which would be archived in a drawer without any practical value. Therefore, drafting a family constitution was not on his agenda. His mind was busy with people rather than rules. Although his priority for nominating the right successor was a rational concern, I felt I had to explain that the absence of his personality could never be replaced by another personality. None of his potential successors could establish a similar leader-follower relationship in the way he did among the second generation, who were essentially the same age and level of experience. 

The strongest successor he could leave behind would be the principles inspired and developed from his personality.

In order to do this, he had to work in cooperation with his family in drafting the rules to guide them in his absence. When he challenged me by asking if I can guarantee that his children would care about these principles and treat them as a living document, I reflected on the factors that are necessary to keep commitment alive. I mulled over which factors influence the implementation of a family constitution once it is signed off, especially at the early stages, and which supporting instruments are useful to maintain members’ commitment throughout the years. This is how I decided on the topic for this month’s newsletter. Here is a summary of some key points from my perspective to help enhance a family’s ability to cope with formal rules during the time of transition:

Division of Responsibilities for a Shared Purpose

One of the main indicators of a well-governed company is its differentiated components, each of which contributes to a shared purpose by undertaking specific responsibilities. This involves establishing and maintaining a vertical and horizontal division of roles among the members of an organization. However, this is where many families have trouble: switching to a new governance style of delegation and accountability from the former “everyone involved in everything” management style.

When adopting this new structure, one of the most challenging aspects for families is the inconvenience of switching to a more formalized work environment. Formalization involves a predetermined set of rules concerning two essential business functions, information flow and decision-making (e.g., a family constitution), which are normally handled through occasional social interactions in the family. While many factors cause inconvenience during this period, the most common ones include discontent with losing the warmth in human relationship, reluctance to commit to a standard reporting procedure and a more precisely defined span of control.

Reminding yourself of the outcomes you want to achieve and shortcomings you want to avoid will help keep your commitment alive during the early stages of formalization.

Keep the Ball Rolling

A family member’s commitment to work together under a predefined set of rules ultimately pays off by increasing their ability to work with other members of the family. Fortunately, the most critical factor here is not determining where to start, but how to keep the ball rolling. The study of attitude–behavior consistency (A-B Consistency) sheds light on this situation. A-B consistency concerns the degree to which people’s attitudes (opinions) predict their behaviors (actions). A–B consistency exists when there is a strong relationship between opinions and actions. For example, a person with a positive attitude toward protecting the environment and who also chooses to recycle shows high A-B consistency.[1] On the other hand, you do not need to wait until others develop a high degree of environmental awareness (opinion) to motivate them to recycle. Merely encouraging the act of recycling (behavior) by placing corresponding recycling receptacles by homes would also create awareness on protecting the environment and eventually cultivate the same opinion.  In this case, the behavior fostered the opinion.

Governance of a business is not much different in terms of A-B consistency. Family members with negative attitudes towards a formalized work environment will be the least cooperative, however, you do not have enough time to wait until each person is on board. By keeping the ball rolling through board/committee meetings with promptly announced agendas or periodic reports on KPIs, you may have the chance to develop a more positive attitude towards a new governance style.

As Much As Needed

While keeping the ball rolling has the potential to foster positive attitude, too much sophistication is counterproductive. Depending on the needs of the family, your governance framework may involve an independent board, sub-committees within the board, a family investment committee, additional family committees dedicated to various needs such as training/development/recruitment, a family office—the list goes on. Yet, A-B consistency from B to A will not work if these sophisticated governance bodies do not satisfy a strongly felt need, as recognized by the family as a whole.

In its simplest form, your new governance structure will involve a separation between decision-management and decision-control.  This is achieved by building a Board of Directors, which has a judgmental ability independent from those who run the company. However, in regards to the Board of Directors, there is also no limit to the level of sophistication you can implement through increasing the size, adding independent directors, establishing sub-committees or work groups, and meeting more frequently.

Building and Activating Your First Board

In order to define an appropriate composition for your board, it is worth reviewing what you want to achieve with a functional board. The Board of Directors is a “common mind” formed by a group of people representing different interests. For example, starting from the second generation onward, there will be multiple elementary family branches with different levels of involvement in day-to-day management.  This multi-generational perspective could eventually lead to discrepancies in information concerning company matters. Therefore, one of the most critical duties of a functional board is to ensure adequate representation of all branches on the board.

Additionally, the presence of outsiders with no ownership, employment, family or commercial ties with the company is essential in bringing the independent judgment of managerial decisions to the board level. Some argue a qualified board member who is connected to the family, but acts independently could also precipitate the expected contributions of such a position. Although this might be true to a certain extent, independent judgment is not the sole expectation from independent board members—confidence in that director from the stakeholders (different family branches) he/she represents is equally important. In the case of a Board of Directors, the term independence also involves impartiality, and this can only be provided by an outsider.  Thus, by giving confidence to all stakeholders with different interests, the board fulfills the keystone role of governance. Without the keystone, you will not be able to keep the commitment of the family as a whole alive. If your family members are not convinced of the value in having a strong and functional board, their future commitment to a cohesive governance style could deteriorate.

A Committed Leader

A fundamental part of a predefined set of rules of governance involves the organization of meetings. The ability to extract the most from each member of a team is a different sort of art, and essentially a trait of a strong leader. In the transition from one governance style to another, the role of family leaders must evolve, too. In most cases, the leaders of the family assume the roles of Board of Directors and/or CEO to navigate the company through its strategic priorities by making the critical decisions with or without consulting others. On the other hand, the role of the Chairman, the person who leads the board, is to extract the common sense of members who collectively lead the company.  Switching a leader’s mindset from managing the company to managing the board is a challenging task, which requires preparation in advance. Without a prepared Chairman, the change in a company’s governance style will not resonate, further risking the future commitment of the family.

Family or the Business?

Once you have the governing bodies up and running, you expect them to generate good decisions. In the case of a family business, a “good “ decision is not only economically accurate for the company, but also satisfactory for the family. At the end of the day, this is a family company and will remain so as long as the family maintains control of ownership.

In that sense, rational decisions that overlook the needs of the family will undermine commitment and eventually hinder the functionality of governing bodies. For example, while being a well-governed company necessitates hiring qualified managers, being a well-governed family necessitates guiding and supporting its members to develop the required qualifications. Thus, a family recruitment policy should not only define job specifications, but also a development plan for enthusiastic family members. Similarly, a dividend policy should seek a balance between cash flow needs of the company and liquidity expectations of different family members. This can be achieved by offering alternative solutions through additional policies to annex the dividend policy, such as a share purchase or family loan programs.

Take-Aways

  • One’s attitude towards a new governance style will evolve as she/he observes its components functioning. Do not postpone establishing the key governing bodies and main reporting functions until the family develops a mutual understanding on each and every detail.
  • Do not complicate your governance structure with dysfunctional components such as additional committees or meetings. Just because other families govern in this style does not mean it is right for you.
  • Keep in mind that you will not end up where you want to be unless you have a real Board of Directors.
  • Make sure that the leader is prepared to acquire additional skills separately, while shaping the overall governance framework.
  • Do not sacrifice the requirements of your company at the expense of the needs of your family. Likewise, do not sacrifice the requirements of your family at the expense of the needs of your company. If not anything else, governing a family business is a continuous effort to seek a balance between the two.

 


[1] Roy F. Baummeister and Kathleen D. Vohs (2007), Encyclopedia of Social Psychology, SAGE Publications, Inc.

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WHICH VALUES DO YOU ATTACH TO YOUR BUSINESS?

WHICH VALUES DO YOU ATTACH TO YOUR BUSINESS?

Motivation for Sustainability in a Family Business

Fuat and Metin Ayhan, brothers and founders of a successful manufacturing business in Izmir, Turkey, started transitioning their company into a new period under the management of their children. In some 35 years, the two brothers had brought the company to a reputable position in the market place with long-established customer relationships. Yet two of their four children have started to complain about the way they manage the company. Ahmet and his younger cousin, Efe, have recently failed to show up to work, often times without an excuse. In due time, Ahmet told his father that he is no longer sure about pursuing a career in the company. On the other hand, Ahmet’s frequent absenteeism and lack of commitment concerned Fuat about his readiness for leadership. Furthermore, Efe’s lack of attachment to the company was equally concerning. Relying on revenues from the business, he had not developed an alternative career, yet he simply refused to take responsibility in the company. 
When we are talking about sustainability, to which the discipline of family business itself owes its recognition, we are most aptly referring to people’s motivation to stay together. During times of transition, multi-generational collaboration is fundamental to ensure that the younger generation is ready and qualified to assume more critical responsibilities. However, it is equally important to create an atmosphere in which the potential successors feel that their voice is being heard and recognized.

Having worked with the company for 8 years now, Ahmet has been complaining to his sister, Leyla, that he has virtually no control over managerial decisions. Additionally, despite all his hard work and “know-how” he has accumulated since joining the company, Ahmet’s salary is nearly equal to his cousin Cem’s salary, who joined the company 3 years ago following his college graduation. The most recent controversy occurred over a bank loan, which fueled Ahmet’s resentment toward his father and uncle. Essentially, Ahmet secured an international order from a reputable French company that required an extension to the production line. He planned to finance this additional investment with a bank loan, which would only equal a minimal portion of their balance sheet. However, Fuat and Metin refused this financing and missed the export opportunity, undermining all of Ahmet’s work.
The problem faced by the first and second generations of the Ayhan family is not unusual. The transfer of managerial control from senior to younger generations is the most critical phase in securing the sustainability of a family business. Many financially successful family businesses do not survive simply due to the lack of people’s motivation to stay together. Most likely, the sustainability of the Ayhan family business will depend on Ahmet’s decision to stay with the company. Understanding the precedents of his motivation will help us identify possible arrangements and practices that favor sustainability.
Psychology scholars have developed various theories to analyze why individuals choose to follow certain courses of action. Particularly, the Expectancy Theory, popularized in the 1960s by distinguished Yale professor, Victor Vroom, has a great deal of practical value with its three-level approach:
1. Expectancy: Our own perception that our effort will result in performance
2. Instrumentality: Our own perception that performance will result in a certain outcome
3. Valence: The value we attach to that outcome
What this three-level approach implies is that we do not bother putting effort in something, if we know there will be no performance at the end. Even if we anticipate the performance, we again are not motivated to put effort in something if we know that the performance will not bring achievement. Finally, achievement itself is not sufficient for motivation if we do not value that achievement.

1. Expectancy:

The perceived relationship between effort and performance for Ahmet was most likely the opportunities made available to him where he could possibly make an impact on the company’s future (e.g. achievement). The business must grow to keep pace with the expanding family. Despite all those years he spent preparing for a managerial position, Ahmet still had no control over making a meaningful difference in the company. What was perceived by Ahmet as being “over-protective” was actually his father and uncle continuing the business practices with which they founded the company, including avoiding risks with rapid growth and external financing. Throughout the years, Fuat and Metin have adopted a well-known Turkish idiom as a principle: “Roast with your own oil,” which roughly translates to “Stand on your own feet.” To make sure that the company was run properly, they have tried to actively manage the company along with their children until they felt that their children were ready.
Nevertheless, the failure to differentiate between monitoring and executing has the potential to risk the sustainability of the business rather than creating a healthy environment for control. Combining these two functions also delays the finalization of transition. Corporate governance offers a useful tool to manage this issue—a board of directors. Equipped with the necessary experience, boards are there to provide guidance and monitor the performance of the employees. By identifying certain matters reserved for a board of directors according to the level of risk involved with a certain business decisions, the company could provide a clearly defined space for the members of the younger generation.

2. Instrumentality:

Ahmet was also asking himself, “What is the difference if I could make an impact on where we are going?” The perceived link between performance and achievement disappears in the absence of policies and practices that make family members feel recognized and rewarded accordingly. In Ahmet’s case, the family recognized their children as future and equal share owners of the company. Yet the problem lies in the fact that these people were not only the future share owners, but more importantly for the moment, also employees (or managers) of the company. As such, employees are compensated with salary, but not dividends. Dividends are equal for the holders of the same class of shares, while salaries are much more complicated to shape. The consequences of this failure to differentiate the rights and responsibilities of an employee from those of a share owner may be intolerable in terms of the sustainability of a business.

3. Valence:

Of the three prerequisites for motivation to stay together, valence is the most crucial in fostering sustainability. The Ayhan family can create structural arrangements and policies, such as a functional board or an effective compensation policy, so that two generations are able to cooperate effectively in managing the company. These arrangements could secure Ahmet’s motivation to stay with the company up to a certain level. Even in the presence of an environment where his efforts would bring high performance (e.g. increased sales) and in turn, successful results (e.g. growth of the business), he should value this achievement to be motivated enough to accomplish it. In the case of the Ayhan family, Ahmet’s de-motivation was caused by factors related to the first two prerequisites, expectancy and instrumentality, whereas the problem with Efe pertained to the third prerequisite, valence.
To a large extent, sustainability is related to what a family’s business means to them. Is it merely a career alternative that provides good living standards? In that case, sustainability stems from the family members’ reluctance or inability to seek/maintain the same standards elsewhere. In most cases, the most powerful valence is the attachment to a family’s most valuable asset: its legacy. Carrying out a business that is perceived as a “tradition” or “defining role in society” serves as the strongest factor leading to sustainability. Furthermore, this sense of ownership is fostered by governance mechanisms in the family, such as family council meetings, which help younger generations truly internalize the meaning of what they own.