By: Ken McCracken, Founder of McCracken Family Business Consulting
In family business governance, structures like an owners’ council are of benefit as a family and their business become more complex over time. This begs the question, however, what should the council do?
The concept of Intention offers an innovative approach to answering this question, one that is firmly rooted in the realistic view that governance structures need to be designed in the image of the owning family.
What is Intention?
The concept of Intention pulls back, or zooms out, from what a family has or what they do in terms of their business activity and offers them an opportunity to reflect on the mind-set that they bring to what they have or what they do.
In this use of the term, Intention refers to a mind-set directed towards the family business, which shapes the family’s relationship with the business and keeps their attention fixed on it.
So far, we have identified four broad types of Intention.
Creating: The desire to use the resources in the family business to pursue entrepreneurial adventures, either through diversifying an existing business or investing in new ventures.
Managing: The desire to have one or more family member in hands-on control of running the business.
Governing: The desire to have family oversee and monitor those who run the business, who may or may not be their relatives.
Investing: The desire among a family to co-invest together in order to generate the best financial return.
Example of Intention
Family businesses A and B seem identical. When transitioning from being owned by two brothers and a sister in the second generation (G2) to a group of six cousins in G3, each family decided to divide ownership equally among the cousins and one of G3 became the CEO. Each family feels that they could benefit from an owners’ council to keep the owners as a group engaged with the business.
Family A are relieved that a family member will be in charge of running their business as they would feel uncomfortable appointing non-family to such a position of trust and responsibility. Indeed, if none of the family wanted to take on this leadership role the family would likely sell the business and reinvest in other types of business that they have an ability to manage. That is just how they see the world and if challenged they would answer, “it gives us peace of mind.”
Family A has a Managing Intention. For them the owner’s council is a forum where they can meet and stay in contact with each other, which is important. They also want to take practical steps through the owners’ council to develop the next generation’s interest in the business, so that they can learn what “ownership” means to this family. During meetings of the council those attending receive information from their relative who is CEO and in charge of running the business, but the owners’ council sees no need to be actively involved in decision-making because the family CEO is trusted to look after everyone’s interests.
In contrast, the six shareholders in family B want to be more actively involved in supervising their business without having to be involved in day-to-day operations. While they are happy to have one of their relatives in charge of running the business, for them peace of mind is knowing that the business is performing well, which includes the shareholders having some powers to oversee and monitor their investment.
Family B has a Governing Intention. Their owners’ council is where the shareholders can be present and effective in a governing role which includes making certain decisions rather than relying entirely on the family CEO.
While a family member is in overall charge of the businesses in examples A and B, the two families have different mind-sets – or Intentions – in relation to their business. Logically, the different Intention of each family shapes how the business needs to be governed, including the role of an owners’ council.
Family A - Managing
The owners’ council is a social forum for owners to keep in touch and receive some information about their business and an opportunity to educate the next generation of owners.
Family B - Governing
The owners’ council holds a social and educational purpose but is also the forum where owners meet the board and take control of some key decisions.
Intention is not developmental
Intention can exist in any of the ownership types that are regularly referred to in the family business world; controlling owner (CO), sibling partnership (SP) and cousins’ consortium (CC). This developmental model suggests that governance in a family business follows a predictable pathway as ownership and leadership passes down the generations, from CO to SP to CC.
Each type of Intention, however, can apply to each of these stages. For example, assume there are four identical sibling partnerships.
One group of siblings wants to focus on diversifying a business that was inherited by starting new ventures through which the siblings can explore the range of their own entrepreneurial talents (Creating Intention).
Another group desires to be hands on in control of managing and building on what they have inherited from the first generation (Managing Intention).
In the third case, the siblings want to oversee and monitor external managers rather than being actively involved in day-to-day management (Governing Intention).
And the final group of siblings want to co-invest, because they like doing this together, in order to seek the best financial return (Investing Intention).
Each of these sibling partnerships will need to be governed differently to reflect the different type of Intention that they have in relation to their business activities.
It is also worth mentioning that there is not an inevitable, developmental-type progression across the generations of a family business that must start with Creating and move through Managing, then Governing to eventually become Investing. For example, in one generation a family who started a business with the entrepreneurial desire that is core to the Creating Intention could shift straight to an Investing Intention after selling their business and setting up a family office to look after their new wealth.
Intention does not describe a business activity
In the above example of the family office the family, however, had a choice; they could easily have adopted either a Managing or Governing Intention.
The Managing Intention would have entailed a family member being in charge of running the family office, whereas the Governing Intention would have engaged the family in overseeing and monitoring whoever runs the family office on their behalf. Just because the family office is involved in the business of investing does not mean that the family inevitably has to have an Investing Intention in relation to this activity.
This illustrates that Intention is not a description of the type of business in which a family is involved; it is a description of the mind-set they bring to the business in which they are involved.
Intention and talent
Over generations Intention needs to be matched with the ability and interests of the owning family. For example, the wish to be a family with a Managing Intention depends on family members having the talent to fill the key executive roles in the business. If the family lack such ability, the following choices or trade-offs arise:
Stick with a Managing Intention and accept a diminished financial return because those running the business are not in some ways up to the job.
Sell and reinvest in another business that suits the family’s talents so that a Managing Intention can prevail without having to accept a sub-optimal return.
Continue the existing business by becoming a Governing or an Investing Family; in other words change the Intention and how the business is governed rather than changing the business.