Defining Ownership Roles is Key to Family Business Success
“You don’t know what you don’t know.” This adage resonates deeply within the realm of family businesses, where the roles of owners are often fluid, vague, and assumed rather than clearly defined. Unlike in other professions where roles come with well-established responsibilities and boundaries, family business ownership is more complex, leading to potential tension, confusion, and even conflict if not properly managed.
The Critical Importance of Defining Ownership Roles
Ownership in a family business is not just about holding shares; it’s about understanding the responsibilities and expectations that come with that ownership. However, many family businesses fall into the trap of assuming that all family members will naturally want to engage with the business in the same way. This assumption can have disastrous consequences, particularly during transitions in ownership.
Consider the case of a family we worked with in the building materials industry. The founder, who served as CEO, had built the company from the ground up and had a professional management team in place, including a non-family President, CFO, and COO. Despite these professional managers, there was no thoughtful ownership succession plan. The founder’s wife and two young adult sons were passive owners and had no clear understanding of what it meant to “own” a business in the manufacturing sector. When the founder suddenly passed away in his early sixties, the family found themselves in control of a company they were unprepared to govern. This lack of preparedness led to significant challenges in the company’s management and governance.
This example underscores the importance of having open, intentional conversations about ownership roles well before transitions occur. Not every family member will have the same level of interest or commitment to the business, and recognizing and accommodating these differences is crucial to maintaining both family harmony and business success.
The Four Types of Ownership Roles
To navigate the complexities of family business ownership, it’s essential to understand that there are different types of ownership roles, each with its own set of responsibilities and expectations.
- Passive Owners: These individuals are equity holders in the business but are not involved in decision-making or business strategy. They receive income as beneficiaries but have no formal role in the company’s operations. Passive owners often defer decisions to other owners or trustees and may struggle with understanding their obligations as owners.
- Informed Owners: These owners understand the business model and industry. They typically attend annual shareholder meetings and focus on key strategic decisions, such as voting on board appointments and major deals. This category can also include future owners, or the Rising Gen, who may observe board meetings and engage in learning opportunities to prepare for future roles in the business. Whether seasoned or in training, informed owners play a critical role in ensuring that the company remains aligned with its core objectives and transitions smoothly across generations.
- Board Directors: These owners are deeply engaged in the business, but not as operators. They add strategic value by serving on the board, attending all meetings, and advising management in critical situations. Board directors must have a deep understanding of the business and be equipped to handle emergencies. They focus on long-term strategy, capital allocation, and CEO selection, contributing to the company’s success from a governance perspective.
- Owner-Operators: These individuals are fully immersed in the business, often holding leadership roles and making day-to-day decisions. They are responsible for the business’s operations and strategic direction and may also serve in a board capacity. Owner-operators are central to the company’s success, but their intense involvement can sometimes lead to burnout or conflicts with other family members who are less engaged.
Navigating Role Evolution and Transition
Ownership roles in a family business are not static; they evolve over time as the business grows and family dynamics change. For example, founders may gradually step back from daily operations as they approach retirement, transitioning into advisory or board chair positions where they can continue to offer guidance without directly managing the business. At the same time, the Rising Gen may move from being informed owners to board directors or active owner-operators, or both, taking on greater responsibility for the company’s strategic direction.
Without intentional conversations and planning, however, these transitions can lead to resentment and dysfunction or even worse. The family in the building materials industry could have avoided many challenges after the founder’s death if they had engaged in these conversations earlier, and if the widow and her sons had been prepared as informed owners.
Steps to Define and Align Ownership Roles
To avoid the pitfalls of unclear ownership roles, families should engage in regular, open discussions that address key questions, such as:
- Strengths and Interests: What are the competencies and interests of the current owners? How do these align with the needs of the business?
- Value Contribution: How does each owner add value to the company? What are the definitions and expectations for each role?
- Time Commitment: What time and capacity can each owner realistically dedicate to the business? Are they willing to take on more responsibilities, or would they prefer a more passive role?
- Rising Generation: Does the family have a Rising Generation that is interested and capable of operating and/or owning the business? What changes might be necessary to accommodate future family members?
- Emergency Plan: Does the family have an emergency succession plan in place? Are all owners informed and properly resourced to enact the plan if necessary?
By addressing these questions, families can ensure that each member is informed enough to define their ownership role and understand how it fits into the larger family enterprise. This process also helps to prevent resentment and confusion, as everyone is clear about their responsibilities and the expectations placed upon them.
The Need for Ongoing Communication and Education
Clear communication and ongoing education are essential to maintaining healthy family and business dynamics. Even well-intentioned family members can struggle to contribute meaningfully if they don’t fully understand their roles or the expectations that come with them. Facilitating ongoing conversations and keeping communication channels open will help family members stay aligned and ensure that the business continues to thrive across generations.
Whether you are an informed owner, a board director, or an owner-operator, it’s crucial to be well-educated about your role and its expectations. If you’re not, now is the time to start that conversation. By doing so, you’ll help ensure the long-term success of both your family and your business.
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Madeline Tolsdorf collaborated in the writing of this article.
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