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  • Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 7/2/2014

This is not a democracy!… or is it? 

This is not a democracy
Have you ever been tempted to say: “This is not a democracy!” For example, when your 30 year-old nephew, armed with his newly-acquired MBA from a top business school started to ask questions at the shareholders Annual General Meeting? Or when your 75 year-old aunt asked why her dividend hadn’t increased this year?

However, the expression “shareholders’ democracy” actually exists and it relates to the empowerment of owners to ask questions during shareholders’ assemblies – and to put forward candidates for directorships. So, in your family business, does such “democracy” mean anything? Is it applicable and useful – and if so, under what circumstances?

When the family business is NOT a democracy

Contrary to presidential political regimes, a business is not managed by someone elected by the owners or the employees. In the past, the family business was often managed by the eldest son – rather like a monarchy. This is giving way, more often nowadays, to the notion of meritocracy: the best person for the job; whether it be an elder son, a younger niece, or an executive with no family ties to the owners.

While the person in charge must adhere to the core values of the family business, and be accepted by the family, owners do not elect their CEO. The Board appoints the CEO, usually after a long process.

When democracy comes into play

However, owners do have rights, and they vote proportionally to their share of stock (or voting rights if these differ). Every owner may vote, regardless of who they are and what they do. Two of the most important votes concern the level of dividends and the appointment of Directors to sit on the Board. In both cases, recommendations are made by the Board, but the formal decision rests with the shareholders’ assembly. The shareholders can’t just be ignored.

Looking at owners as resources

You may think that owners know nothing about the business, and that they should have no say in affairs. But let’s take a different viewpoint. They may well have “fresh” views on the business, gained by looking at it from the outside. KPMG member firms have witnessed several cases where “external” owners saw the strategic issues faced by the business much more clearly than its leaders. Unfortunately in one instance the leaders preferred to disregard their cousins’ comments… until the issues became so serious that the survival of the business was at stake.

Instead of considering non-executive owners as a burden, we invite you to consider them as resources. They provide capital, a source of talent, act as ambassadors for the business, contribute through social connections… and they vote on the important decisions. More and more families are embarking on training programmes for their owners, reasoning that if they better understand the business, they’ll be better able to take rapid decisions when needed.

Dialogue is more fruitful when shareholders are given the necessary knowledge about the business. I’d like to leave you with the example of a European family business that had five owners. Two worked in the business and three did not. Those who didn’t work in the business started to ask for higher dividends. Their cousins complained that they “only ever thought about money”. Around that time, all five cousins began to talk more about the business and one of the formerly “passive” owners was appointed to one of the Boards. The conversation took on a new tone: the non-executive owners now had a much clearer perception of the business and took a broader approach to issues. What’s more, their cousins had learnt to listen to them.

Christine Blondel

Christine Blondel
Christine Blondel is adjunct professor of Entrepreneurship and Family Enterprise at the Wendel International Centre for Family Enterprise at INSEAD.
 

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