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Who rules?

“Who rules?”

Governance planning is critical to your company's future success.

Governance planning may not be the hottest issue on your desk right now, but it will pay off later, says Barry Forman, former president of Forman Brothers Inc., a wine and beer distributor in the Washington, D.C. area.

At a TEI Presidents' Forum, Forman shared insights gleaned from his 35 years in a family-owned business, including a 17-year tenure as president. (Founded in 1946, Forman Brothers was acquired by National Distributing Co. in 1999.) "I was a third-generation leader in a family whose owners declined to designate a leader — so I had some challenges in terms of organizing others around me," says Forman.

Sole owners usually don't give much thought to governance. But as you seek financing and add stakeholders, governance planning — deciding who speaks or acts on which issues — will become increasingly more important. For one thing, it helps define the mutual obligations and expectations of stakeholders. More important, it can defuse some potentially explosive issues. Consider:

  • Who decides whether and when to make new investments or borrow money? If you and your senior managers want to invest in an opportunity, one that could separate you from the competition, will your uncle's widow be able to stop you?
  • Who has a voice in deciding when it's time to develop an exit strategy?
  • What are the rules and expectations for heirs who want to be part of the family business? Similarly, what are the rules and expectations if they don't wish to join?
  • If something catastrophic happens, what are the rules for managing the business?

Here are some of Forman's tips for addressing these challenges:

Think it through. Governance planning begins by assessing your thoughts and beliefs — and those of partners or boards, if you have them.

The No. 1 guideline in governance planning: Consider what is in the best interests of the business. "Though not a cure-all, protecting the health and well-being of the business will do wonders in solving a host of individual issues," Forman says.

Once your thoughts begin to take shape, talk to legal and tax advisers. They can tailor governance plans to match the goals and needs of a particular situation — and uncover any bombshells.

Divvy up responsibility. Decide which decisions rest with management and which belong to owners. Management and ownership issues are different subjects, even though some people may wear both hats.

Issues within management's domain typically include the current complexion of the business: planning, selling, hiring, human resources and use of existing financing commitments.

Ownership issues are tougher to pin down, but usually involve ones that risk wealth or assets, such as selling the business or taking on significant debt.

Distributing rights. Traditional governance equates voting rights and shareholder voice with an individual's ownership position. It's unlikely that all shareholders have equal capability to make critical business decisions.

Forman recommends using different classes of stock and voting rights to designate who has a voice in which issues. "Too often, equality leads to gridlock," he explains.

This issue is especially problematic in family businesses. Parents tend to empower their children equally, believing that their offspring have similar talents and will do the right thing.

Even if the next generation has good intentions, it's unlikely those individuals will bring the same dynamics to the business. Different branches of a family possess different skills and interests, which is why it's critical to have appropriate governance in place and well understood before the succession process begins.

For example, Forman's company established guidelines for next-generation family members who wanted to join the business, and those guidelines were laid out before heirs entered college. "We didn't want someone coming out of college with an unrelated degree or discipline and lining up at the door of the family bank," he explains.

Share your plan. A governance plan not only affects how decisions are made on a day-to-day basis, but also helps stakeholders — including non-owners — understand your vision for the company.

Especially when multiple owners or generations are involved in a business, senior managers need to know about the plan. "Informed managers can be very helpful in achieving your goals and can help ensure success for yoru heirs," Forman observes. "Uninformed managers can be harmful or needlessly concerned about their own future."

There are also outsiders who have an interest in your success, such as customers, suppliers, banks, or other investors. Having a governance plan can significantly raise your profile and stature with these groups.

Governance planning may not be an easy process, but it's too important to leave to chance, Forman stresses. "The earlier you start and the earlier you share, the easier it gets to make it acceptable to everyone."

Writer: T.J. Becker