Do private businesses need a second shareholders’ board to balance the interests of owners? Ahead of his appearances at AICD events in Sydney and Melbourne in February, Ludo Van der Heyden, INSEAD Chaired Professor of Corporate Governance, makes the case
The life of private businesses rarely runs smoothly, but as issues and ownership structures become increasingly complex, executives and boards ﬁnd themselves under increasing pressure to respond to and ﬁnd consensus amongst diverging interests.
Over and over, cases of strong value creation – Warren Buffet in Omaha, Nebraska; the Desmarais in Canada; the AB InBev owners in Belgium and Brazil; or the Mittal family in India – correspond to owners having a clear and strong longer-term vision for the ﬁrm they “owned”. Their boards of directors – made up of shareholder nominees and independents – is then ﬁrstly responsible for setting their company’s medium-term vision. If the ﬁrms’ owners can’t agree on long-term goals, boards and management can’t do their work – due to a lack of goal congruence – and the business is bound to suffer.
Whether it’s a family businesses moving into the third or fourth generation; a state owned enterprise run by two or more ministries; or – even more complicated – a joint venture formed between partners with evolving ideas about the shared company’s future; when owners disagree the board of directors typically ﬁnd themselves the “squeezed” meat in an increasingly unpalatable sandwich.
Sometimes tiffs between owners can be solved amicably through a particularly benevolent and competent board member, but at many other times they turn into out-and-out rows. Either way, like parents discussing a child’s future, no good can come from making decisions or settling disputes in front of the child.
‘We want owners to commit to a long-term vision – and then trust us to do the work’
An executive’s job can be stressful enough without having to please opposing masters. Executives want a long-term picture from the owners.
Firms with two or three major owners – or even more of them – should have a place to discuss long-term mission and basic terms about how to get there. This so-called “owners board” is also the place where things like ownership agreements and strategies, dividend pay-outs, succession plans, and new partners are discussed. A private place where owners can debate openly, without management and board members necessarily hearing all the ins and outs – many of them not being relevant to the business – and reach an agreement that they can then present to the board of directors and the management, with a united front.
A family shareholders board, distinct from family councils
Some ﬁrms have started working in this direction, setting up committees or boards comprising the major family shareholders. Such a board is separate from the board of directors, and helps the company, overseen by its board of directors, to pursue the chosen long-term strategy.
One of the essential decisions is to nominate shareholder representatives to the corporate board. Another is to discuss investment strategy: shall we continue to invest, shall we ally with other investment partners, shall we sell?
These decisions are truly owner decisions, and provide the ‘frame’ within which corporate boards fulﬁl their mandate. Such a formalised and more structured board made up of owners, or their representatives, and some close advisers are necessary to discuss complex issues of further investment or, alternatively, divestment – these owner boards truly take the owners’ perspective, whereas the corporate boards are typically obliged to take the organisation’s perspective.
In companies where there is no family council, these decisions are often made at the board of directors level. This is not the correct place, nor are directors appointed for that. There’s a ﬁne line between company problems and ownership problems. Business strategies differ from ownership strategies.
At the same time, an owners board is distinct from a family council, whose function is to contribute to the governance of the family. Family members appointed to the family council are appointed for their family wisdom and respectability, not necessarily for their investment IQ. Family councils contribute to the harmony of the family, owners boards contribute to the harmony of the investments.
Complementary roles in a sort of Russian Doll construction
It’s the job of directors to provide a short- to medium-term vision, to hire a competent executive team and to formulate and oversee the long-term vision of the ﬁrm.
It is the owners’ role to set out a steady, long-term vision – identify where they want the ﬁrm to be in the next 10-15 years – and ensure they maintain a set of shared values. This role may include setting policies that balance family and business and guide important business decisions. They should put these ideas to the board and then step aside and let the board and executive team carry out the mission.
The two boards have to be complementary – and in a family business, the family council will be a third board to work with, along with the corporate and owners’ boards.
Think of the biggest owner today, Warren Buffet. He has a strategy. He knows why he’s investing in Goldman Sachs but he doesn’t tell the Goldman Sachs executives what to do, he doesn’t even have a seat on the board of directors. In this case Warren Buffet is the owner board.
To work efﬁciently, an owners board should in normal conditions meet two or three times a year and ensure that all members are on track and are evolving in a common direction.
Right now many family companies are undergoing a seismic shift. They are moving away from the business they know and branching out into new industries. As this happens and as economies and large companies develop, it is increasingly important for owners to display investment competences.
The need for two separate boards responsible for two separate interests – corporate and owners – becomes increasingly crucial. It is out of that healthy tension that wisdom and commitment will emerge.
This is an edited version of an article that originally appeared on the website INSEAD Knowledge.
Ludo Van der Heyden is the INSEAD Chaired Professor of Corporate Governance and Academic Director of the INSEAD Corporate Governance Initiative. He co-directs the International Directors Programme, and the Value Creation for Owners and Directors Programme, two of INSEAD’s Board Development Programmes.
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