Governance issues for jointly owned or family run businesses

Many financially sound businesses cease to exist or fail to reach their full potential solely due the lack of good corporate governance. This is mismanagement to the extreme that is not recognised by the business owners. Often it is caused by lack of knowledge but generally it is caused by a lack of concern on the part of the owners until something goes horribly wrong. There are some simple techniques available to businesses which will minimise the risk of business failure and create an environment of good corporate governance.

Independent Chairman or Mentor
A simple way of avoiding conflict between business owners is to employ the services of an independent chairman or mentor. This person’s role is to give guidance, provide an independent view and to mediate disputes between business owners who have their own agendas or who have different views on how a business should be operated.

The independent person will give stability to the management of the business which is often lacking in businesses run by a group of individuals. So often one or more of those individuals try to impose their views on all owners of the business without consideration of any alternative views. When the view of the minority is not being considered, disputes generally arise and those disputes are destructive to the business.

Shareholder [Unitholder] Agreement
It is essential that all businesses that are jointly owned have a fair and equitable Shareholder [Unitholder] Agreement to govern the Shareholders [Unitholders]. This agreement should be in place at the outset and deal with matters including:
(i) Does any minority Shareholder [Unitholder] have a right to equal say and equal voting rights?
(ii) How will Shares [Units] be dealt with if one party:
(a) wishes to retire;
(b) becomes disabled;
(c) dies; or,
(d) is unable or unwilling to work or is dismissed due to poor work performance.
(iii) How will any buyout be funded?
(iv) What is the value of the Shares [Units] for any transfer? How will those Shares [Units] be valued in the future?
(v) Does any Shareholder [Unitholder] have a guarantee of work or position on the Board?
(vi) Who will manage the Company’s business?
(vii) Indemnity to persons giving guarantees or security on behalf of the Company.
(viii) Confidentiality issues for any intellectual property.
(ix) Is there any requirement for a Shareholder [Unitholder] to provide funding or services to the Company now or in the future?
(x) Restraints on key persons or Shareholder [Unitholder] whilst a Shareholder [Unitholder] or after.
(xi) Dividend distribution policy.
(xii) Terms and conditions of any Shareholder [Unitholder] loans and right to payment of interest and right to security (i.e. debenture).
(xiii) How will any disagreement or stalemate be resolved?
(xiv) Who will be the Company’s accountant, banker and lawyer?

Independent Board Members
Businesses often established a Board of Directors as part of their corporate governance strategy.

Why have a Board with independent Board members?

1. Some or all of the directors may have their own agenda which affects their decision making. Having independent Board members increase the likelihood that decisions will be made in the interests of all shareholders.

2. Often the business owners lack the skills to manage and guide the business. For example, if the business is design and construction of Water Treatment Plants and all of the owners are plumbers by trade, how will the Board be adequately skilled to deal with all of the management issues that arise without independent members? The company can bring in people with the required skills in areas of financial management, risk management, IT, legal, marketing etc.

3. A Board is less likely to attempt to micro manage the business if the Board has independent members. The day to day issues of the business will not be the focus at a Board meeting. The meetings are more likely to focus on “the bigger picture” and not get “bogged down” in minor day to day issues. Therefore, the business is run efficiently and effectively.

4. The more diverse the Board, the wider the ideas that are thrown up for discussion. New strategies and markets might be considered due to the diversity of ideas.

5. A properly selected Board will substantially increase the level of management experience.

For more information, contact Peter Guy at Kennedy Guy