MON 25TH MAY 2020


Bringing the family business community together

A Values-Based Approach To Cultivating Shareholder Value

3rd May 2017 Greg McCann & Nancy Barber

An holistic version of 'shareholder value' creates a different culture and 'value' for the owners.

Executive Summary
Experts agree that we live in a time of exponential change. How can enterprising families adapt to the ever-increasing rates of change and the related stress? In order to utilize family enterprises’ core characteristics to a competitive advantage, owning families need to clarify their values as a way to proactively manage change (as opposed to reacting to or just resisting change). A more cohesive family can then translate their family values into business values that can be operationalized, including measurement, reward, and management accountability. This holistic version of “shareholder value,” which is more mindful of both shareholders and stakeholders, creates a different culture, but more effectively creates “value” for the owners.  The result is a more intentional culture.
Introduction: Shareholder Value & Values
As the economy rapidly changes, many family businesses are responding to the accompanying increased risks by diversifying. The FFI/Goodman Longevity Study (December 2010) indicates that almost 90% of family businesses in the U.S. own more than one business.  Consequently, when it comes to wealth sustainability, the emerging trends in the field suggest a shift in emphasis from focusing on any one company towards greater focus on the family. We see the effects of the culture’s exponential change daily: consider, for example, Kodak film, Blockbuster, or entire industries like newspapers, florists, or travel agencies. Author Richard Morris suggests that the old business model told us that one good idea could last for three generations.  Now, he says, one generation might need three good ideas to make a go of it. 
Initially, the founder’s values tend to permeate ownership and management naturally without structures, formality, or much reflection because the business is relatively small. When families and their enterprises expand, the necessity of intentionally cultivating a core culture that reflects the family’s values becomes more important than ever. The values shouldn’t change even though the business might. Values-driven family businesses can create a strategic advantage that’s much harder to generate and maintain in large publically traded nonfamily businesses. 
These core values have the potential to become the rudder to navigate the stormy seas of today’s economy.  They also have the potential to strengthen what top scholars in the field, Torsten Pieper and Joe Astrachan call the four elements of family cohesion: financial returns from the business, financial returns from the family, emotional returns from the business, and emotional returns from the family.  A successful enterprising family is one that has considered their values, worked on their cohesion, and is moving their money, talent, and relationships efficiently among a number of businesses.
Predictably, owners can more effectively manifest their values in the expanding operations if those values are made explicit and incorporated into the company’s strategic planning. To maximize effectiveness, the process is at least as important as the outcome (i.e., how it is done can often trump what is done, especially when long-term relationships are at stake). 
The goal then is to create and sustain a business culture that aligns with the family’s values in order to create shareholder value. This values-based approach necessarily requires that the owning family and management have a greater connection, deeper communication, and more authentic accountability. The foundation for this effort is an owning family that has clarified their values, has integrated them into both the family and the enterprise, and has committed resources accordingly. 
The 3-Phase Process of Creating Shareholder Value
Phase 1: Family Values Clarification
First, the family must do the work to clarify what they stand for and what they won’t stand for (i.e., their values). Our experience is that this often starts with the mantra “hard work and honesty.”  These are great values, but it’s important to deepen them to include where the family puts its emphasis, both in terms of process (e.g., innovation, tradition, employee relations, environmental consciousness) and in terms of outcomes (e.g., family security, social recognition, a sense of accomplishment, philanthropy). The clarified values become the foundation for decisions, prioritization, and accountability (i.e., the culture), so they are vitally important to capture and convey. 
We also find it fundamentally important to have the family address two specific “core questions,” ideally revisited by each generation:

1.How does your family benefit from owning this enterprise?
2.How does this enterprise benefit from this family’s involvement?
In each individual case, the decision about who can speak for the family varies.  Is it an all-inclusive approach involving everyone, or is it limited to just owners or just owners who work in the business?  A discussion of what is expected in order to have a voice can be part of the process: is it given right or a privilege to be earned?  Is there a minimum level of education, involvement, or experience necessary to participate? Each family needs to have these initial discussions before getting to the values. (A note to family executives: these conversations are important and often require reflection, discussion, and time, so don’t expect the same pace that you might anticipate in a strategy meeting with your management team.)
In some cases, each individual or couple or branch will have to do some work before the entire family comes together. Stories, life experiences, and recollections of when these values were put to the test should be shared. What has the family stood for even at personal, financial, or other cost? What has the family refused to stand for (e.g., not selling at a premium if it meant greater job losses for employees)? The family’s values are what create meaning, what create value. If they are only platitudes, then they risk merely being etched in a plaque on a wall.   The point is to give them significance by first grounding them in past stories and behavior, then move towards making them operational.
Phase 2: Translation into Enterprise Values
Next, the key is to translate and integrate these values in order to make them operational for the board of directors who are typically charged with carrying out the shareholders’ intentions and holding management accountable. This assumes that the firm has a functioning board of directors, or at least advisors, which may be true in only a minority of cases. Even if a family business does not have a functioning board of directors, then either the owners or management (who may well consist of overlapping groups), need to fulfill this governance role
In our experience, there are four fundamental questions that lead the owning family to guide the board of directors. Once the questions are explored, the board, as the legal representatives of the owning family, will be empowered to hold management accountable for creating “shareholder value,” which can be framed as how the family shareholders, building on the core questions above, would answer the following:
  • Risk tolerance: Given each owning family member’s life stage, lifestyle, values, and other related factors, what is their risk tolerance for any enterprise they engage in?

  • Commitment to business: What is each owner ready, willing, and able to contribute in terms of what family-business expert James E. Hughes calls financial, human, and intellectual capital?

  • Process-outcome values: Can the family articulate how their values, in terms of the way they act and the goals they seek, manifest in the business?

  • Intentional culture: As the business and family grow, how can the values, character, and culture of the family be explicitly implemented into the business? 
This then creates the framework to interface with the management of multiple enterprises, whether for profit or charitable. The next step is to make these values operational. 
Phase 3: Design & Operationalize for Management
The broad-based values discussion culminates in a written operational plan that will empower management and hold it accountable for fulfillment of the family’s values through the operation of the enterprise.  This document includes:
  • Business values: How do the owning family’s values translate into business values?
  • Metrics/reporting: How can we measure the relative success of these business values?
  • Cultural expectations: What will success in creating shareholder value look like, not just quantitatively but qualitatively as well?
This three-phase process can help the owning family’s values become cornerstones that guide management’s decisions, reporting, and assessment of performance, even as the composition of the family enterprise changes.  Incorporating the family’s values into the design of the company not only allows management and employees to work toward a higher purpose, but it also acknowledges the principle of interdependency, both within the company and between the company and its environment.  Thus it prevents a company (or its owning family) from becoming attached to a narrowly focused identity, for example, as a company that just makes film and resists the transition into digital photography. It dovetails the family’s long-term commitment to values with the necessity for rapid adaptation in times of exponential change. 
Take, for example, a family who particularly values employee relationships and innovation.  Management would be charged with reporting not just on financial performance, but also on three or four metrics for each of these values.  For instance, to measure employee relationships, the company might compare turnover rates to industry standards or monitor “regrettable turnovers” (how many people did the company lose that it wished it hadn’t?).  It might also track per-employee investment in training, employee job satisfaction surveys, or employee benefits vs. industry standards.
When measuring innovation, the company might follow the annual investment in research and development, the average time from idea to market, the success rate for new products, or even the percentage of profits each year that came from a prior year’s innovation.
Our experience shows that families who have taken the time to identify and measure values such as these necessarily create more intentional cultures that align with the family’s core ideals, and those cultures permeate more effectively through diverse and changing businesses.
In today’s exponentially changing economy, successful family enterprises must be able to adapt and deal more proactively than ever before to change, transitions, and stress. The key is to be grounded in who you are and what you want—i.e., your values—while being flexible to opportunities and challenges. Clarifying the family values is the foundation for looking at the core reasons why the family owns this particular enterprise and why this particular enterprise benefits from the family’s involvement. 
The second step in this process is to translate the family values into business values. This requires coordination among the owners, the board of directors, and the management. The third step is to implement these values into the enterprise, i.e.,  not only hold management accountable for creating value or success as the family defines it, but also create a similarly aligned culture. There is a wise saying: culture will eat strategy for breakfast every time. This values-based approach offers a clear process to intentionally cultivate the power of culture.


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