EVERY BUSINESS OWNER SHOULD DEFINE WHAT SUCCESS LOOKS LIKE JOSH BARON Josh Baron looks into the purpose behind the business and how you can create a plan to accomplish what matters most to you. Josh Baron is a partner and co-founder of BanyanGlobal Family Business Advisors, and an adjunct professor at Columbia Business School. This article was first published on the Harvard Business Review (www.HBR.org) and has been reproduced with permission. www.banyan.global
37 PROFESSIONAL INSIGHT
“What do you mean we can’t pay dividends this year?” Elisa was incredulous. The board of the watch company she and her husband Mark had founded had just reviewed projected end-of-year performance. Usually this meeting was a celebration of another incremental step forward, with moderate growth, no debt, and significant dividends, which Elisa and Mark used to support their comfortable lifestyle and charitable donations. This year, however, revenue growth was way up, but profits were down, and the covenants on the debt taken out by the company to achieve that growth did not allow for any dividends. It was the first time that Elisa had felt out of control of the company she had co-founded. (Throughout this article, names and identifying details have been changed to protect confidentiality.) How could the founders and sole owners of a company find themselves surprised by its inability to pay them annual dividends? Elisa and Mark had done many things right in building their business, including eventually appointing an independent board and an outside CEO to help the company reach the next level. But they made one crucial mistake. They failed to clearly and concretely articulate their “owner strategy,” meaning the tangible outcomes that they wanted to achieve – and avoid – as owners. For widely-held public companies, the owner strategy is simple. They are owned primarily by institutions or investors who have no personal tie to the business. These owners expect the company to maximise the
growth in value of their shares, usually measured by hitting quarterly earnings targets. Indeed, most of what is taught in business schools and described in management literature is based on the assumption that companies exist to maximise shareholder value. But “that assumption ignores an equally obvious truth,” Bo Burlingham points out in Small Giants: “What’s in the interest of the shareholders depends on who the shareholders are.” For the vast majority of businesses in the world, controlling ownership is in the hands of people with a tie to the company, rather than outside investors. That includes companies owned by founders, families, foundations, partnerships, and employees. Family businesses alone account for approximately 70% of companies in the US, 79% in Germany, 85% in France, and over 90% in Asia, India, Latin America, and the Middle East. When these businesses are privately held, they provide owners the most freedom to define how they will measure success. They can choose to pursue certain outcomes and avoid others, even if they do not maximise the economic value of their business. We have found that very few of these owners would describe their sole objective as maximising shareholder value – and for many, it is not their primary objective. Yet, they are often not clear about what they do want, which can create missed opportunities for growth, a loss of talent due to frustration over the direction of the business, or a loss of control by the
