The Small Business Owner’s Guide to the Family Business
According to Merriam Webster, stewardship is the conducting, supervising, or managing of something; especially: the careful and responsible management of something entrusted to one's care.
Stewardship is not a word that is often used in the business setting, but it has some obvious applications. Attitudes toward stewardship have very important ramifications for the ultimate success or failure of any business.
In a public company, stewardship applies to the management and governing board of the company who must provide a return for their shareholders. For example, business schools teach the difference between competing views of stewardship. Stewardship theory says that managers, left on their own, will act as responsible stewards of the assets they control, while agency theory says that managers should be expected to act in their own self-interests.
Private company owners can think less about stewardship when they are the sole owners of their company. They are not managing something entrusted to their care; what they manage is their own. Still, other issues of stewardship arise, such as the customers and employees who are “entrusted to their care.” Not to mention stewardship of the natural environment and other resources. And, for those private company owners who have outside investors, including commercial banks and lending institutions, there is a sense that they have a responsibility to their creditors for stewardship of the lender’s assets until they are returned.
For the family business however, stewardship becomes a central focus, if not the primary motivation for success. Similar to environmental stewardship, the family company always has future generations in mind. They undertake the careful management of present resources as something that is not their own, but something which is simply entrusted to their care to hand on to the next generation.
This paper will present several brief case studies to highlight different families’ approach to stewardship and end with a brief discussion of stewardship. The point of the paper is to spark a discussion of your family’s attitudes toward stewardship.
STEWARDSHIP CASE STUDIES
Here are five distinctly different situations that illustrate different attitudes toward the stewardship of a family company.
1.) A global private company, ABC Co. retained a firm to conduct due diligence on a potential acquisition. The acquisition presented significant economic returns to XYZ Co., but a large risk had been identified in the target company. In the due diligence debrief, the research team told the ABC Co. chairman that the risk was real and had the magnitude anticipated. The due diligence team began to explain how the risk could be managed, but the chairman interrupted with the comment, “This company was entrusted to me and I will leave it stronger for the next chairman. A risk like this will never be allowed in this company.” The meeting immediately ended and no transaction was undertaken.
2.) EFG Co. was a three to five million dollar private manufacturing company. The second generation runs the company. The third generation works in the company and is expected to take over in due course. The current generation has two brothers working in the company. One of the brothers desired to leave the company. In a meeting, the brother who was staying expressed the need to plan for the exit of the other brother. When asked if the other brother would be bought out, the president responded that one does not buy out family at EFG Co. The company was founded by their father and would be passed on to the third generation who would assume responsibility for operating EFG Co. for the fourth generation. Therefore, if a family member wanted funds from the company, they needed to work in the company and be paid a fair wage. Working in the company meant being productive and adding value. The company ownership provided little or no investment income.
3.) QRS Co. was founded by two brothers. The brothers were 50/50 partners and always split things evenly. The company grew to be very successful and very profitable over about a 40-year span. For the last ten years of that span of time, one of the brothers moved across country, stopped working directly in the business and became a passive owner but still received significant dividends from the company. When that brother passed, his estate immediately demanded that the company be sold and that 50% of the proceeds be given to the passive brother’s estate. This happened during a recession when the company had stopped producing dividends and a sale of even half the company would have meant the end of operations and a liquidation for a fraction of the company’s worth. The passive brother’s family sued to force a sale but the court decided against them. Arbitration was undertaken and the passive brother’s estate was bought out at a fraction of what 50% of the company is now worth a decade later.
4.) TUV Co. was small family owned and operated manufacturing company that experienced success and steady growth over many years. Seeing opportunity, they decided to bring in an outside CEO to help them scale. For the following decade the company experienced and maintained explosive growth. The first and second generation were fully engaged in the company. There were many third generation children who were not yet ready to join the company when the family was approached to sell for about $250,000,000. The family accepted the offer and sold the company. They began a family foundation with some of the proceeds and set up trusts for each of their children.
5.) XYZ Co. was founded thirty years ago. About 10 years ago, the founder saw substantial opportunities to grow the business and increase its value for a sale. A non-family president was brought in to run XYZ Co. both to increase its immediate performance and to pursue acquisitions to realize the benefits of the market. The new president implemented a series of very drastic and risky measures to maximize the profits of the company for a quick sale. The results were disastrous and almost drove the company into the ground. The outside president was dismissed, the ship was righted and over the course of the following 10 years the son worked his way up to be the president. The company is now run by the son and an outside board of directors. The company is prospering and growing at a healthy pace.
ATTITUDES TOWARD STEWARDSHIP
A steward has a position of trust and active responsibility to exercise productive control over those assets and resources on behalf of the owner, not on behalf of himself. Therefore, a steward requires an asset owner. Modern management theory has eliminated some of the distinction of steward and owner through equity based compensation. For the private company this relationship has meaningful consequences when the lines become blurred as to who is working for whom. For multi-generational family companies, the question of ownership and stewardship takes on generational overtones and becomes bound up with long time horizons of 20 to 50 years or more.
Deciding who the real owner of the company is can be seen differently depending upon your world view. Some see their primary role as stewards of creation, while Christians see themselves as stewards of God-given talents, gifts and resources.
However you define the owner, the steward is empowered to employ the assets, including the right to buy and sell the assets. So the contrast between passive and active oversight is an important component of a steward’s scope and responsibility. The steward has active oversight.
By contrast, a trustee or a custodian is a person or party to whom goods are delivered for safekeeping, without transfer of ownership. Safekeeping is a narrower, more passive role. The classic example of a custodian is that of giving a car to a valet for parking. The valet is expected to park the car and prevent it from being damaged. The valet is not to use the car for the valet’s purposes, whether driving it elsewhere or even listening to the car’s stereo.
Today, steward is not used to describe management in a company. Instead, there is much discussion of the self-interest dynamic of modern motivation theory. Stock options and other stock programs are recommended to create an alignment of interest between management and owners. This alignment of interest requirement of modern corporate compensation is a key distinctive of the definition of steward, who is a non-owner manager.
When there is some ownership awarded, such as stock options, to assure an alignment of the employee’s interests with the owners’ interests, it is usually designed to convert the employee into becoming a steward – one who takes care and responsibility over what they are entrusted. Ironically, when an employee becomes an owner it does not increase stewardship, but rather muddies the equation, making the employee both an owner and a steward.
The structure of a multi-generational family or legacy company has perhaps the clearest sense of stewardship and best allows the owner of a private company to establish this steward perspective. The multi-generational family view means the current owner is working to build the company for succeeding generations. The legacy view means the current owner is building the company for future benefit of designated beneficiaries or just to create a memorial of the owner’s accomplishments.
This brief exploration of the concept of stewardship in family businesses is designed to help you and your family gauge your own attitudes toward stewardship and create a family culture around the idea of succession, ownership and legacy.
Peter Giersch is the Managing Director of The Giersch Group, LLC. firstname.lastname@example.org
This paper was written for our “Small Business Guide to Management” series. This paper is based upon the Cathedral Consulting Group, LLC Family Run Business Topic “The Stewardship Principles for Family Companies.” By Liz Gonzalez, Luder Whitlock and Phil Clements and is used with permission.