A large number of family owned businesses are choosing to keep their company in family control, while electing to be “Employee Owned.”  Many of these firms have founding family relatives peppered throughout the company in various management roles.  In some cases, the family owned business no longer has a family member in the key executive positions, yet their family values inspire and embrace the true ownership culture we all read about.  There are others who choose not to embrace the ownership culture but to keep it as a financial transaction and retain tight control.  All of these approaches have demonstrated ESOP success.  However, there are certain best practices that could be used to enhance the long term returns both desire.  The goal is to have “Loyal Shareholders.”

As you view the venn diagram, you will see 4 “stakeholder,” not “Shareholder” circles: the family, employees, management and owners.  Whenever we deal with ownership or governance conflicts, the issue stems from confusion about these stakeholders in relationship to the trust, the trustee, the board, as well as ownership control and everyone’s role.  In many cases, the ESOP Trust controls only 30% of the outstanding stock of the company.  Therefore, the remaining shares are usually under the family’s or founder’s control.  Or, in a recent transaction to 100%, the founder/family personally guarantees the debt, with the stock as a pledge, thus control issues continue.  We have found that good governance systems allow all stakeholders to enjoy high levels of satisfaction by improving their roles and relationships, and reducing conflicts.  Each stakeholder has their own, and separate, governance processes to allow these stakeholders to work together effectively.

The first governance structure we use involves the “Family Council.”  This group meets quarterly or semi-annually, to allow the non managerial family members to learn about the company’s performance, as well as to provide input to management through the board.  This group is elected from the family, representing each sibling’s, or “per sterpes,” viewpoints.  They organize annual family reunions, develop communication processes and educate the family on how the business works.  Depending on the structure, they may also vote their shares at annual shareholder meetings.  Members are selected, not by popularity, but by their contribution to the board and management.  The best councils elect the best people who can communicate well to all groups.  The key is to provide advocacy without creating conflicts.  Doesn’t this sound like an ESOP committee?

The second structure is the ESOP committee.  This group meets monthly or quarterly, and like the family council, they educate the employees on employee ownership, how the trusts work, how to develop better communication, and to speak on behalf of the employees to the trustee, not management.  And like the family council, it usually has no legal or structural role, but evolves into a very important structure due to its ability to help communicate their concerns well.

The ownership structure involves the board of directors.  By Law, they are responsible for the performance of the company, therefore they have a fiduciary responsibility to the shareholders.  The Trustee is also a fiduciary, and votes the shares of the trust on behalf of the beneficiaries of the trust, the employees.  It is very important that the board have an open and effective relationship with the Trustee and other shareholders.  It is at this area, we find confusion, miscommunication, and conflicts.  Depending on the life cycle stage of the company and its board, the board will meet weekly, monthly, quarterly or whenever to deal with key issues.

The final structure is the management team.  The board is responsible for hiring officers of the corporation, with particular interest in the CEO position, to manage the day to day affairs, while the board focuses on long-term and strategic issues.  Management should be focusing on the company’s operating performance, people development, and attracting and allocating resources.  There are lots of books, tapes and web sites to learn more about being effective in this circle.  The key here is to have great leaders as well as managers.  We see self-directed, empowered work teams as an effective way to develop people and to improve operational effectiveness.

We also believe business is about facing and managing risk.  Risk is about responding to the unknown.  Good management usually faces risk effectively through good planning, forecasting, and self-improvement.  It also requires courage. What sets successful family owned businesses apart from those who can’t pass to the next generation, is the fact that they change the strategy, and employ good governance practices to support the board and management, which improves shareholder value.  With an ESOP and a family business, it is important to understand that like family businesses, it is not about selling the company to harvest the money, but to be stewards for future generations of leaders and employees.  It is also about developing “loyal shareholders!”  We see companies struggling with difficult market conditions, requiring faster actions, decisions and results.  The more the stakeholders know, the more loyal the shareholders become.  We believe ESOP’s are an effective tool for employing good succession planning in a family business; not just an estate planning technique, but a sound way to pass leadership to the next generation.