At Burke Engineering, a fourth-generation company in a low-growth
industry, shareholders were obsessed with creating liquidity and stoking the
stock value against the day when a birth, a wedding or college bills might
require them to cash out. In between shareholder annual meetings, they would
harass the company's managers about liquidity and divert managers' time and
energy away from productively managing the company. While managers invested
much time investigating a potential recapitalization in order to fund
short-term liquidity needs, they missed real business opportunities that
might have yielded more long-term benefits. Not surprisingly, the company's
sales and profits continued to slide.
Burke Engineering (not its real name) is hardly alone. Over the last
decade, pressure to produce short-term financial returns and stock
appreciation has diverted the attention of many CEOs away from long-term
strategy and value growth. That's the compelling message that Bill George,
retired leader of Medtronic, makes in his recent book, Authentic
Leadership: Rediscovering the Secrets to Creating Lasting Value (John
Wiley & Sons, 2003).
At firms like Enron and WorldCom, chasing short-term gains has tempted
some top managers to enhance their personal wealth, leaving their companies
and shareholders vulnerable to scandals. Just as dangerous, such misplaced
focus can distract managers from the company's strategic and operational
needs and ultimately shortchange shareholders, employees, customers and other
"Contrary to what the advocates of maximizing short-term shareholder value
would have us believe," Bill George contends, "the best-kept secret in
business is that mission-driven companies create far more shareholder value
than do financially driven firms." He's exactly right.
George goes on to say that a company's mission must be supported by a
strong culture of values that extends beyond its four walls and radiates
outside the company-with customers, suppliers and the community. The
combination of a clear mission and strong values is what ultimately drives
the company's long-term performance.
Of course, this message is nothing new. Tom Peters, Peter Drucker and
other management gurus have espoused this theme for decades. But business
leaders, at public and private companies alike, have forgotten. They were too
busy salivating over the stock-market bubble and stock-option packages during
the 1990s. Even family shareholders caught the bug, nagging management about
when their shares would show that kind of appreciation and opportunities for
What's the solution? "The only way to deal with shareholders," Bill George
contends, "is to manage them and not let them manage you."
But how, specifically, can a family CEO manage shareholders? With mission,
values and performance goals that everyone can adhere to. By veering away
from chasing short-term gains and, instead, getting back on the track of
long-term, sustainable growth.
Family firms are the perfect audience for Bill George's message. They're
close to the entrepreneurial mission of their founders. With a family
company, you don't have to create a whole "mission mindset"; the message simply
draws family and employees back to their roots.
The door to long-term, sustainable, profitable growth hinges on three
1. A strong family organizational structure, such as a family office,
family council or holding company, to be the steward of family values. With
this in place, the shareholders will still enjoy a wide variety of opinions
and liquidity needs, but they'll no longer distract management with their
demands. The family organizational structure will be the focal point of discussions
on family mission, family values and wealth-related concerns, such as
liquidity and diversification.
2. Strong and effective programs for the liquidity needs of shareholders.
Ongoing liquidity programs, developed by the family-structure organization
(described above), should include mechanisms for shareholders who want to
cash out, for whatever reason. That will release significant pent-up pressure
in the family and the business.
In addition to continuing liquidity programs, the business should plan and
provide for capital needs resulting from significant liquidity events for
family shareholders like weddings, births and college tuitions. That enables
managers to pursue long-term strategies without intermittent interruptions by
sudden large capital demands for shareholder liquidity. For instance, one of
my family business clients formally polls shareholders each year about their
expected forthcoming liquidity needs.
3. A strong financial structure with ample resources to allow capital to
grow, and to plan the future exit of capital sources, whether in the family
or outside. The family must be open to ideas that may involve outside capital
to give management the means to pursue growth.
So how did Burke Engineering's managers regain the upper hand over their
shareholders? Basically, some fourth-generation leaders convinced the rest of
the family of the need to create a strong governance structure. They created
a family council, which explored shareholders' diverse needs and
expectations, educated the family about realistic financial options, and
created liquidity programs based on their needs and the company's financial
In the process, family council meetings recognized that not all
shareholders bought into those values. To prevent different groups of
shareholders from further pulling managers in different directions, the
council ultimately decided to hook up with an outside partner to jointly
acquire a competitor.
This acquisition would, over time, create enough value to help finance the
exit of the restless shareholders and enable the rest of the family to rally
around a unified message to management: Pursue your mission as a company and
focus your attention on sustainable, profitable growth.
Now Burke's managers can do their job again. They're no longer pressured
to pursue shareholder value for its own sake. The newly liberated management
began looking at new growth opportunities-including an acquisition, which
they just completed-to provide the capital for both future liquidity needs
and future growth opportunities. Two years later, the value of the company
has more than tripled.
Even Wall Street analysts seem to be heeding the wisdom of focusing on
sustainable, profitable growth, instead of chasing quarter-to-quarter paper
gains. The analyst reports that cross my desk seem to base their buy, sell or
hold recommendations less on the latest financial maneuvers that inflate
shareholder value, and more on whether companies are pursuing sound
strategies that will enhance long-term growth.
Family business owners would be wise to do the same.