Family Communication and the Board’s Risk-Management Strategy Role

Family Communication and the Board’s Risk-Management Strategy Role

Good governance helps resolve shareholder issues that could affect the business. 

In multigenerational family businesses, family members’ differing interests and values may create conflict around issues such as dividends, business strategy or family employment policies. Unresolved family conflict can cause a family ownership group to splinter, which could threaten the sustainability of the enterprise.

Creating a strong governance structure can go a long way toward mitigating such threats.

“Having a place where differences can be worked out is a great risk-management strategy,” says Doug Baumoel, founder of Continuity LLC, a family business consulting firm.

Baumoel moderated a panel during the Private Company Governance Summit, presented by Private Company Director, Family Business and Directors & Boards magazines, featuring panelists Ronda Ritter Ray, lead family director at E. Ritter & Co.; Andrew Pitcairn, chair of the Pitcairn Family Council and a board member at Pitcairn; and Rebecca Peterson, a board member and family council member at Sasser Family Holdings.

The panelists offered their perspectives on creating effective interactions between the family owners and the board. Although all three panelists are fourth-generation family members, their companies’ governance journeys have varied widely.

E. Ritter & Co.: Building generational bonds

E. Ritter & Co., founded in Marked Tree, Ark., in 1886, has interests in agriculture and communications.

The company’s board, started in the 1960s with family members only, now consists of five independent directors (including a lead independent director), four family directors (including Ray, the lead family director) and the company’s non-family CEO.

The Ritter Family Council, formally established in 2008, comprises three branch representatives (elected by their branch of the family) and four at-large members (elected by the family shareholders). In addition, as many as three family members may serve as non-voting council members.

Dan Hatzenbuehler, a married-in fourth-generation member who is the chairman and retired CEO, recognized that the company’s governance structures needed to evolve in response to two events: the naming of Chip Dickinson as the first non-family CEO and the need for more engagement with the extended family.

In order to support Dickinson and to help the family and the board accommodate to the separation of the chairman and CEO positions, E. Ritter & Co. developed its current framework. The CEO, lead family director and lead independent director participate in a conference call with the board committee chairs two weeks before each quarterly board meeting to discuss and edit the agenda for the meeting. The week after the meeting, the CEO, family council president, lead family director and lead independent director participate in a “board meeting reflection” call.

As lead family director, Ray attends all family council meetings to present a summary of the board meeting. She also presents a family council report at each meeting of the board of directors. In addition, Ray participates in bimonthly family council leadership conference calls.

All family members may attend family council and board meetings (except for executive sessions).

The Ritter family recognized that its fifth generation, now primarily in their 30s, needed to bond as a unit to ensure continuity of the business as a family enterprise. Fifth-generation gatherings, held in fun locations, have been created, combining social activities with the opportunity to learn more about the business.

At one of their gatherings, the fifth generation discussed the idea of adding a part-time, paid position to facilitate the needs of the family council. That idea became a reality; fifth-generation member Katy Wilder Schaaf today holds the title of director of education and engagement. Recently, the family has been working on ways to educate its sixth generation.

The lead family director position is also a paid position. In addition, family council members are paid a stipend and reimbursed for travel expenses.

“We wanted them to be contributing members,” Ray says. “Sometimes you get people who maybe don’t attend every meeting, maybe don’t make every conference call, that kind of thing. We really started to stress the importance of participation. And once we were asking more of people, then we felt like we should pay them a small stipend.”

Pitcairn: From family council to owners’ council

Pitcairn, now a multi-family office based in Jenkintown, Pa., traces its history back to 1883, when John Pitcairn Jr. founded Pittsburgh Plate Glass (PPG). Patriarchs representing three lines of the family pooled their assets to form the Pitcairn family office in 1923. The family sold its remaining stake in PPG in 1986.

Pitcairn added the first independent directors to its board in the early 1950s, under the leadership of its first married-in president. Over the years, the board has been slimmed down from 16 members to 11. Today the board consists of three independent directors, three non-management family directors, four family directors in management positions, and the non-family CEO, who serves ex officio.

The Pitcairn Family Council was established in 1980. Before that time, there was no formal process for governing the family.

 “We had what I call the ‘four uncles’ — out of a Martin Scorsese movie — making all the decisions, because they had all the voting power,” Pitcairn says.

According to Pitcairn, the third-generation uncles wanted to know why the fourth generation seemed to have no interest in the family enterprise. Meanwhile, the fourth-generation cousins were waiting for the uncles to step aside and make room for the next generation. The family council was created to resolve these issues.

The extended Pitcairn family now includes more than 800 bloodline members in its three branches. The family’s fourth generation spans 50 years; some G4s are in their 40s and some are in their 90s. Pitcairn has narrowed its family governance, however, to include only those family members who retain a personal ownership stake in the family office. That group numbers about 125.

The family council’s original goals were succession planning, identifying family talent with potential to work in the business, developing better-informed shareholders and organizing reunions and meetings.

Currently, the Pitcairn Family Council has 13 members, who serve three-year terms. The minimum age is being lowered from 21 to 18. While board meetings are restricted to board members only, family council meetings are open to all owners. A small stipend is paid for meeting attendance, and travel expenses are reimbursed.

Family business governance insights

Following are some key takeaways from the panel discussion:

•          A family council is a means of informing the board about what the family is thinking, therefore mitigating risk to the operating company.

•          Paying for family council work fosters accountability and professionalizes family council roles.

•          Think of your family council as a training ground for future directors. Consider a board observer position as the next step in family director development.

•          If just one family member (or a small subset of the family) is making all the decisions, the broader family will become disengaged. If disengagement continues over time, while the family grows, eventually family members will be less committed to continuing as owners of the business.

•          Family members will generally be appreciative if those in leadership roles take the time to ask their opinions.

•          Review your family council charter and other documents to assess whether they are still relevant, given changes in the family, advances in technology and other developments.

•          Don’t just be transparent — be transparent and inclusive. This means including family members in decision-making, rather than telling them what has already been decided.

•          Family council leaders might want to keep a list of the family’s “elephants in the room” — major issues that prevent the family from being fully transparent. Before each family council meeting, review the list to consider whether the timing might be right to address any of these issues. Would a consultant be able to help with some of them?

•          Be proactive about forming a communication platform such as a family council or owners’ council. The best time to do so is before a major family issue arises. It’s best to have a means to learn what family members are thinking before an argument “goes viral.”

 

There are several avenues for family members who wish to raise issues. These family members can call on any family council member; Pitcairn, the family council chair; or a major trustee of the family office who’s been designated as the family ombudsman.

The Pitcairn Family Council is currently in the midst of an overhaul, Pitcairn says.

“We’re turning into an owners’ family council, if you will,” Pitcairn says. “We’re looking at how the charter needs to change to address that.” The focus of the revamped council will be to create value for the shareholder base, he says.

Several years ago, Pitcairn and two cousins who also work in the family business formed a shareholder relations task force. They first spent a year working with outside consultants to receive training in active listening and to develop a strategy for reaching out to the family.

After the training, the task force members traveled the country, meeting in person with about 75% of the 125 family shareholders. They posed the following questions to the family members: “What do you want as an owner? How do you feel about being an owner? How do you want to be communicated to? How do you want to be connected to the broader family, and what role should the family office play in that connection?”

After these conversations, a follow-up survey was sent to the family. Nearly all expressed appreciation that the task force members took the time to meet with them and ask how they felt, Pitcairn says. Their responses will help guide the restructuring of the family council.

As part of the restructuring process, the family council charter will be revised, with an eye toward making it more relevant to the younger generation. “We’re going to keep what’s working and throw out what’s not working,” Pitcairn says.

Sasser Family Holdings: An evolving board

Sasser Family Holdings, based in Schaumburg, Ill., and founded in 1928, operates in transportation asset leasing and management. There are a total of 17 people in the third and fourth generations. The fifth generation ranges in age from 16 to 1.

The family enterprise started on the road to governance about a dozen years ago, when Peterson’s father, Fred Sasser, who is now the executive chairman and served 36 years as CEO, attended a conference on the subject and got excited about the concept.

“When we decided to go in, we went all in,” Peterson says. “We brought the consultants in, and very quickly we had the constitution, we had the employment policy, we had every document that you’re supposed to have,” including a family council charter. A family council was established, and the family enterprise transformed its all-family board into a fiduciary board, including independent directors, about 10 years ago.

Today, Sasser Family Holdings’ board is made up of three independent directors, three family directors (known as non-independents), the company’s non-family CEO and Fred Sasser, the executive chairman. There is also a non-voting associate director position, a training role for family members. The independent directors have 10-year service limits; the non-independent directors are not subject to term limits.

Potential changes in the board composition in 2019 are under consideration, including the possibility of moving Fred Sasser to a chair emeritus role and adding another independent director to create a majority-independent board.

Board meetings are open to all family members, including those who are not shareholders. “The idea is transparency and inclusion,” Peterson says. All family owners receive board documents.

Family members are also invited to dinner with directors the evening before each board meeting, as well as to social events such as an annual companywide summer picnic.

Sasser’s family council chair, originally a volunteer role, is now a paid position. The family council chair attends all board meetings and serves as the main conduit for information between the family and the board and vice versa.

The mission of the family council is to develop a deep bench of family members willing and able to serve as directors in the future.

The family council has prevented issues on the family side from interfering with the business, Peterson says. “The council was the place to talk about it, so it didn’t spread out into the rest of the world or into the business,” Peterson says. “And that was just crucial.”