An­nette Ra­hael

In my last ar­ti­cle ( Au­gust, 23, 2012), I in­vit­ed feed­back about how to split the share­hold­ings be­tween those who work in the busi­ness and those who do not; what the fam­i­ly busi­ness (FB) lit­er­a­ture terms ac­tive and pas­sive share­hold­ers.

There are those who sup­port the view that the ac­tive share­hold­ers should al­ways get more shares for a num­ber of rea­sons. The most com­mon ra­tio­nales were that they helped build the busi­ness; they need to have con­trol over the des­tiny of the busi­ness if they are in the trench­es; and pas­sive share­hold­ers on­ly care about div­i­dends, not rein­vest­ment.

On the oth­er side of the ar­gu­ment are those who main­tain that next gen­er­a­tion ac­tive share­hold­ers may have grown the busi­ness, but they did not es­tab­lish it, and the rights to the lega­cy be­longs to all off­spring of the se­nior gen­er­a­tion.

As to build­ing the busi­ness, pas­sive share­hold­ers of­ten con­tend that the ac­tive share­hold­ers were paid for their labour and are not en­ti­tled to a big­ger piece of the pie.

Pas­sive share­hold­ers say they are will­ing to cede con­trol in dai­ly op­er­a­tions to ac­tive share­hold­ers, but wish to re­tain rights over cer­tain board lev­el de­ci­sions. And as to the al­le­ga­tion that they care on­ly about div­i­dends, pas­sive share­hold­ers re­tort that they would be stu­pid and crazy to kill the goose that is lay­ing the gold­en egg.

Does fair mean equal?

Se­nior gen­er­a­tion mem­bers who pon­der how to dis­trib­ute the busi­ness shares wres­tle with the ques­tions: is equal al­ways fair and does fair mean equal?

The an­swers to these ques­tions are in­flu­enced by each fam­i­ly's val­ues and their fam­i­ly busi­ness prac­tices. One of the mud­dy­ing as­pects is that fam­i­ly mem­bers work­ing in the busi­ness are fre­quent­ly not com­pen­sat­ed prop­er­ly. They are usu­al­ly not sub­ject to any kind of per­for­mance sys­tems to de­ter­mine salaries and bonus­es.

Or if there is a sys­tem, it is not trans­par­ent to pas­sive share­hold­ers. Ex­pert ad­vice can eas­i­ly ad­dress that sit­u­a­tion and there are com­pen­sa­tion sur­veys and oth­er re­sources to sup­port the res­o­lu­tion of those ques­tions.

I have seen fam­i­lies is­sue back­pay to ac­tive share­hold­ers to cor­rect anom­alies in com­pen­sa­tion, as they in­sti­tute de­fined com­pen­sa­tion prac­tices through­out the com­pa­ny and es­pe­cial­ly among fam­i­ly mem­bers. This is im­ple­ment­ed at the same time that a div­i­dend pol­i­cy is de­ter­mined and a Fam­i­ly Coun­cil set up to li­aise with the di­rec­tors in the busi­ness.

The hard­er cir­cum­stance to deal with is where sib­lings bring emo­tion­al bag­gage from their child­hood in­to the fray by link­ing their views of parental love to share dis­tri­b­u­tion. In these fam­i­lies there are deep-seat­ed re­sent­ments and oth­er strong feel­ings that need to be re­solved by an­oth­er kind of in­ter­ven­tion be­fore the fam­i­ly can move for­ward with good fam­i­ly and busi­ness gov­er­nance.

In my ex­pe­ri­ence, if these emo­tion­al bar­ri­ers are not ac­knowl­edged and ad­dressed, then seem­ing­ly fair and prac­ti­cal so­lu­tions do not work. It may just take the par­ents to ac­knowl­edge the per­cep­tion of in­equal­i­ties among their chil­dren, and apol­o­gise for their un­wit­ting con­tri­bu­tion to the prob­lem. Me­di­at­ed fam­i­ly meet­ings may be a way for­ward here as well, and in­di­vid­u­als need to take re­spon­si­bil­i­ty for their emo­tion­al and spir­i­tu­al health.

My most de­light­ful ex­pe­ri­ence of share dis­tri­b­u­tion was in a fam­i­ly that had a strong spir­i­tu­al base and where the love and con­sid­er­a­tion was pal­pa­ble among fam­i­ly mem­bers. Val­ues like kind­ness, hu­mil­i­ty, to­geth­er­ness, gen­eros­i­ty, trust, non-os­ten­ta­tious liv­ing and a healthy at­ti­tude to­wards mon­ey were com­mon in the fam­i­ly.

Mon­ey is im­por­tant and as my fa­ther taught us, if you put mon­ey be­neath your feet and stand on it, it makes you tall, but if you put it above your head, it will push you down and short­en your stature. These folks put mon­ey in its right place. The ac­tive share­hold­ers said the par­ents should give equal shares to all the sib­lings, whether they work in the busi­ness or not, and the pas­sive share­hold­ers said the ac­tive share­hold­ers should get more shares since they are dri­ving the busi­ness on a dai­ly ba­sis. How sweet is that!

Quan­do, quan­do, quan­do?

The oth­er ques­tion that keeps se­nior gen­er­a­tion mem­bers awake is when to dis­trib­ute the shares. Some want to wait to see how the chil­dren get along or who has the most in­ter­est in the busi­ness or more of­ten than not, their choice of spous­es. Oth­ers want to hold the reins and the purse strings till death do they part. Then there are those who dis­trib­ute all the shares when they are alive and still at­tempt to­tal con­trol.

Late­ly, I have en­coun­tered more fam­i­lies where the par­ents dis­trib­ute some of the shares, usu­al­ly equal­ly, but hold the ma­jor­i­ty for dis­tri­b­u­tion at a lat­er time, dead or alive. And there are the con­fi­dent or is it brave busi­ness own­ers who se­cure their own re­tire­ment fund­ing out­side of the busi­ness and hand over every­thing: shares, board com­po­si­tion, their cor­ner of­fice, op­er­a­tional con­trol to their chil­dren.

There are many routes to fol­low and the choice of the road tak­en is de­pen­dent on the stur­di­ness of the ve­hi­cle and the will­ing­ness of the dri­ver to ne­go­ti­ate around pot­holes.

My sin­gle ad­vo­ca­cy here is trans­paren­cy. Some busi­ness own­ers sur­rep­ti­tious­ly slip an en­ve­lope with share cer­tifi­cates un­der­neath doors; oth­ers pro­tect their wills as though they lit­er­al­ly con­tain their for­tune; and still oth­ers labour with lawyers for hours as they seek to rule from the grave.

In some fam­i­lies, my oft re­peat­ed ad­vice of hold­ing a pub­lic read­ing of the will while the tes­ta­tor is alive is cause for trep­i­da­tion.

The par­ents do not want to face the dark side of their chil­dren; as if they do not al­ready know at some lev­el that their off­spring do not all share the same val­ues or, worse yet, the val­ues the par­ents thought they in­cul­cat­ed.

Sure­ly, it is worth ex­pos­ing, ex­plor­ing and ex­plain­ing while you are alive than to have your lega­cy be a bit­ter and pub­lic fam­i­ly fight that em­ploys more lawyers and sells news­pa­pers. That is the most trag­ic of out­comes.

Dr An­nette Ra­hael is a fam­i­ly busi­ness ad­vis­er. De­tails on her up­com­ing fam­i­ly busi­ness sem­i­nar are in to­day's pa­per.