The scenario is familiar to anyone who’s watched Succession on TV or followed the real-world drama of the Murdoch family, owners of the Fox media empire. The family business that grew successfully under a founder’s leadership and maybe even survived the transition to a second generation risks being torn apart in a vicious fight over who will run it next.
Doug Baumoel lived it as his own family’s company was driven to a court-ordered sale due to internal conflict. Now he runs Continuity Family Business Consulting, a Boston- area firm that advises closely held companies on how to manage the tricky process of succession and maintaining family control.
“Family businesses have the highest potential for conflict,” Baumoel says. “Any change to the system destablizes the system, and instability can lead to conflict.”
FAMILY AFFAIRS
The bad news is there is no legal silver bullet to make it easier for directors caught in the middle of a family fight. At best, there are corporate bylaws and employment policies spelling out everything from dividend policy to the necessary qualifications for company leaders. (The latter can be helpful if a business owner decides to hand over the reins to a romantic partner with a background in landscape architecture rather than the engineer heir who was widely expected to take the role.)
Before a board of directors can do anything, however, controlling shareholders must agree to share management with outside directors. To minimize conflict, the governance and nominating and comp committees should be run by independent directors, he says. The family should alsoagree to listen to those committees, even if that means advancing a non-family candidate for a key leadership position.
“It is not the board’s job to prepare the company for good governance,” Baumoel says. “You can’t outsource the job to the board.”
To defuse tension in the boardroom, he advises clients to form an “owner’s council,” a safe space for family members to hash out their differences among themselves. Directors, meanwhile, must respect the fact that family owners may have different goals than the shareholders in a public company. Baumoel cites the example of a closely held biotech firm that fired outside directors who valued selling the company over the founder’s long-term goal of curing cancer.
Doreen Lilienfeld agrees directors can serve as the brake on out-of-control family owners. The U.S. co-managing partner of international law firm A&O Shearman, Lilienfeld says closely held companies usually have bylaws and other legal measures in place, “but in the main we are relying upon fiduciary duties.”
For directors, that means closely monitoring the succession process to ensure the company has identified qualified candidates to manage the enterprise after the current generation retires. Succession planning should be a regular agenda item for the nom/gov committees, if not the entire board, she says.
SKILLS AND SCIONS
If a candidate’s chief qualification is being a family member, they must be mentored and trained to meet the company’s employment requirements. It can be hard to tell a founder his son simply doesn’t make the grade, but it is a director’s duty to do so, Lilienfeld says.
“All conversations about closely controlled companies are difficult conversations,” Lilienfeld says. “It’s very sensitive, but that’s what boards do.”
An owner, of course, can fire the entire board if he disagrees. But most directors of large, closely held companies serve on more than one board and have their own reputations to protect, she says. A headstrong owner should keep that in mind before threatening to fire meddling directors.
“Sure they can get fired, but they can also walk,” Lilienfeld says.
