GOVERNANCE AS LEADERSHIPIN FAMILY ENTERPRISES

Sam Davis IIIPrincipal, The Davis Group

VCU Family Business ForumOctober 15, 2014

PRESENTATION OUTLINE

• Intersecting Family, Business & Ownership Systems

• Family and Business Life Stages• Governance structures and their

applications• Outside board members? Advisory Boards?• Roles of outside advisors• Best practices of business-owning families

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FAMILY, BUSINESS & OWNERSHIP SYSTEMS

FAMILY SYSTEMS

BUSINESSSYSTEMS

OWNERSHIP SYSTEMS

TRAITS:Emotional FocusInward OrientationLittle Change

Unconditional Acceptance

TASKS:NurtureDevelop Self-EsteemGrow Adults

TRAITS:Balance emotional and data focusOnward/ Outward OrientationLittle ChangeConditional Acceptance

TASKS:Increase shareholder valueSustain the businessTransfer control and wealth

TRAITS:Data focusedOutward OrientationMuch ChangeConditional Acceptance

TASKS:Generate ProfitsDevelop SkillsTrain Leaders

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THE NUCLEAR FAMILY

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MULTI-GENERATIONAL FAMILY

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STAGES OF THE FAMILY BUSINESS

The Founder Generation

The Sibling Generation

FOUNDER

FOUNDER

SIBLINGS

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STAGES (cont.)Intergenerational Stage

SENIORS

SIBLINGS &SPOUSES

DESCENDENTS

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STAGES (cont.)Cousin Consortium Stage

SENIORS

FAMILY LEGACY

Family A Family B

Family C Family D

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NOW, TURN TO YOUR NEIGHBOR...

1.What generation is your family enterprise?2.What governance issues are you facing now or in the next generation?

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GOVERNANCE IN THE FOUR STAGES OF FAMILY OWNERSHIP

Hands On GovernanceManagement

FOUNDER

SIBLING

INTERGENERATIONAL

COUSIN

CONSORTIUM

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GOVERNANCE STRUCTURESAND THEIR APPLICATIONS

Role:FAMILY MANAGEMENT OWNER DIRECTOR

Focus:Relationships Operations Assets Fiduciary/

Legal

Structure:Family Sr. Mgt Team/ Shareholder Trustees/ Meeting Strategic Planning Meetings Board

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GUIDELINES FOR GOVERNANCE STRUCTURES

Family Meetings or Councils are regular assemblies of family members to (1) educate, (2) communicate, (3) reach consensus on the purposes and responsibilities of the family, (4) celebrate the family legacy; and (5) plan activities reflecting those purposes and responsibilities.

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GOVERNANCE STRUCTURES (CONT.)

Senior Management/Leadership Team meetings are attended by key executives in the company for the purpose of planning and reviewing operating performance.

Strategic Planning processes are conducted by senior management to clarify shareholder vision, set strategic business priorities, and provide for accountability in the implementation of plans.

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GOVERNANCE STRUCTURES (CONT.)

Shareholder Meetings should be separate from Senior Management Meetings or Family Councils; to affirm the Vision, Values and strategic direction of the family enterprise; to vote ownership shares on major issues; to ratify Buy-Sell Agreements; and to select directors of the company.

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GOVERNANCE STRUCTURES (CONT.)

Board of Directors meetings comply with legal and fiduciary requirements and assure the integrity of management’s strategic direction, financial accountability, and succession planning. Advisory Boards or the inclusion of non-voting volunteers may be used to supplement family members with voting rights who serve on the board.

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GOVERNANCE STRUCTURESAND MEASURABLE RESULTS

FAMILY MANAGEMENT OWNERS DIRECTORCommun- Strategic direction Estate & Succession ications tax plans planning

Vision Income Statements Shareholder CEO oversight& Balance Sheets Agreements

Togetherness Performance Profitability Balance Sheet

Love Compensation Dividends Board Fees;Promotions Asset Growth Other

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CASE STUDY

Hand-out

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SIX PRINCIPLES OFEFFECTIVE GOVERNANCE

Principle 1: First responsibility is to the Business

Principle 2: Heed the voice of the family

Principle 3: Create and maintain an open system

Principle 4: Continually clarify roles and boundaries

Principle 5: Plan for succession in family leadership

Principle 6: Respect non-family leadership

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PRIMARY DUTIES OF BOARDS OF DIRECTORS

1. Protect shareholder interests2. Establish strategic direction3. Provide supportive oversight of the CEO4. Plan for leadership succession5. Perform legal and fiduciary duties6. Promote the company name7. Act in a crisis

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OUTSIDE BOARD MEMBERSOR ADVISORY BOARDS

• Advisory vs Governance• The value of an outside perspective• Taking advantage of skills and experience

of business leaders• Family – Outsider balance favors family• Voting procedures; conduct of meetings• Don’t confuse the role of professional

advisors with board responsibilities21

TRAITS OF EFFECTIVE FAMILY BUSINESS BOARD MEMBERS

• Understanding and care for family and its legacy• High ethical standards and reputation• Willingness to say “no” to the CEO• Open-mindedness; objectivity• Interest in the company and enthusiasm for its

mission• Strategic thinking; analytical; problem solving• Keen sensitivity to conflicts of interest

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WHAT ABOUT YOU?

1. What governance structures are being used by your family enterprise?

2. What new structures or changes to existing governance structures might you consider?

3. What issues would the governance changes address?

4. What steps would you need to take to change your existing governance structure(s)?

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PROFESSIONAL ADVISORSTO FAMILY BUSINESSES

• Business Attorneys – corporate documents; by-laws; annual filings

• Tax & Estate Attorneys – estate plans; buy-sell agreements; trust documents

• Tax Accountants – tax planning and annual filings for corporate entities, individuals and trusts

• Investment Advisors; Financial Planners – financial planning; wealth management

• Philanthropy Advisors – strategic philanthropy• Family Business Consultants – family education;

family dynamics; succession planning; coaching24

COLLABORATION & THE 3 CIRCLE MODEL

Business AccountantBusiness Attorney

OWNER

Banker

Industry Expert & Others

Executive Coach

Estate Planning Attorney

Financial Planner

Financial Advisor

Family Business

ConsultantTax

Accountant25

BEST PRACTICES• Honor the Family Legacy• Values can be a Critical Success Factor• Strategic planning w/Accountability Measures• Family meetings and Family Governance• Advisory Boards or Independent Directors on

Governing Boards• Succession planning• Family Philanthropy

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THANK YOU!

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