GOVERNANCE AS LEADERSHIP IN FAMILY ENTERPRISES Sam Davis III Principal, The Davis Group VCU Family Business Forum October 15, 2014

PRESENTATION OUTLINE Intersecting Family, Business & Ownership Systems Family and Business Life Stages Governance structures and their applications Outside board members? Advisory Boards? Roles of outside advisors Best practices of business-owning families 2

FAMILY, BUSINESS & OWNERSHIP SYSTEMS FAMILY SYSTEMS BUSINESS SYSTEMS OWNERSHIP SYSTEMS TRAITS: Emotional Focus Inward Orientation Little Change Unconditional Acceptance TASKS: Nurture Develop Self-Esteem Grow Adults TRAITS: Balance emotional and data focus Onward/ Outward Orientation Little Change Conditional Acceptance TASKS: Increase shareholder value Sustain the business Transfer control and wealth TRAITS: Data focused Outward Orientation Much Change Conditional Acceptance TASKS: Generate Profits Develop Skills Train Leaders 3

THE NUCLEAR FAMILY 4

MULTI-GENERATIONAL FAMILY 5

STAGES OF THE FAMILY BUSINESS The Founder Generation The Sibling Generation FOUNDER SIBLINGS 6

STAGES (cont.) Intergenerational Stage SENIORS SIBLINGS & SPOUSES DESCENDENTS 7

STAGES (cont.) Cousin Consortium Stage SENIORS FAMILY LEGACY Family A Family B Family CFamily D 8

NOW, TURN TO YOUR NEIGHBOR... 1.What generation is your family enterprise? 2.What governance issues are you facing now or in the next generation? 9

GOVERNANCE IN THE FOUR STAGES OF FAMILY OWNERSHIP Hands On Governance Management FOUNDER SIBLING INTERGENERATIONAL COUSIN CONSORTIUM 10

GOVERNANCE STRUCTURES AND THEIR APPLICATIONS Role: FAMILY MANAGEMENT OWNER DIRECTOR Focus: Relationships Operations Assets Fiduciary/ Legal Structure: Family Sr. Mgt Team/ Shareholder Trustees/ Meeting Strategic Planning Meetings Board 11

GUIDELINES FOR GOVERNANCE STRUCTURES Family Meetings or Councils are regular assemblies of family members to (1) educate, (2) communicate, (3) reach consensus on the purposes and responsibilities of the family, (4) celebrate the family legacy; and (5) plan activities reflecting those purposes and responsibilities. 13

GOVERNANCE STRUCTURES (CONT.) Senior Management/Leadership Team meetings are attended by key executives in the company for the purpose of planning and reviewing operating performance. Strategic Planning processes are conducted by senior management to clarify shareholder vision, set strategic business priorities, and provide for accountability in the implementation of plans. 14

GOVERNANCE STRUCTURES (CONT.) Shareholder Meetings should be separate from Senior Management Meetings or Family Councils; to affirm the Vision, Values and strategic direction of the family enterprise; to vote ownership shares on major issues; to ratify Buy-Sell Agreements; and to select directors of the company. 15

GOVERNANCE STRUCTURES (CONT.) Board of Directors meetings comply with legal and fiduciary requirements and assure the integrity of management’s strategic direction, financial accountability, and succession planning. Advisory Boards or the inclusion of non-voting volunteers may be used to supplement family members with voting rights who serve on the board. 16

GOVERNANCE STRUCTURES AND MEASURABLE RESULTS FAMILY MANAGEMENT OWNERS DIRECTOR Commun- Strategic direction Estate & Succession ications tax plans planning Vision Income Statements Shareholder CEO oversight & Balance Sheets Agreements Togetherness Performance Profitability Balance Sheet Love Compensation Dividends Board Fees; Promotions Asset GrowthOther 17

CASE STUDY Hand-out 18

SIX PRINCIPLES OF EFFECTIVE GOVERNANCE Principle 1: First responsibility is to the Business Principle 2: Heed the voice of the family Principle 3: Create and maintain an open system Principle 4: Continually clarify roles and boundaries Principle 5: Plan for succession in family leadership Principle 6: Respect non-family leadership 19

PRIMARY DUTIES OF BOARDS OF DIRECTORS 1.Protect shareholder interests 2.Establish strategic direction 3.Provide supportive oversight of the CEO 4.Plan for leadership succession 5.Perform legal and fiduciary duties 6.Promote the company name 7.Act in a crisis 20

OUTSIDE BOARD MEMBERS OR ADVISORY BOARDS Advisory vs Governance The value of an outside perspective Taking advantage of skills and experience of business leaders Family – Outsider balance favors family Voting procedures; conduct of meetings Don’t confuse the role of professional advisors with board responsibilities 21

TRAITS OF EFFECTIVE FAMILY BUSINESS BOARD MEMBERS Understanding and care for family and its legacy High ethical standards and reputation Willingness to say “no” to the CEO Open-mindedness; objectivity Interest in the company and enthusiasm for its mission Strategic thinking; analytical; problem solving Keen sensitivity to conflicts of interest 22

WHAT ABOUT YOU? 1.What governance structures are being used by your family enterprise? 2.What new structures or changes to existing governance structures might you consider? 3.What issues would the governance changes address? 4.What steps would you need to take to change your existing governance structure(s)? 23

PROFESSIONAL ADVISORS TO FAMILY BUSINESSES Business Attorneys – corporate documents; by- laws; annual filings Tax & Estate Attorneys – estate plans; buy-sell agreements; trust documents Tax Accountants – tax planning and annual filings for corporate entities, individuals and trusts Investment Advisors; Financial Planners – financial planning; wealth management Philanthropy Advisors – strategic philanthropy Family Business Consultants – family education; family dynamics; succession planning; coaching 24

COLLABORATION & THE 3 CIRCLE MODEL Business Accountant Business Attorney OWNER Banker Industry Expert & Others Executive Coach Estate Planning Attorney Financial Planner Financial Advisor Family Business Consultant Tax Accountant 25

BEST PRACTICES Honor the Family Legacy Values can be a Critical Success Factor Strategic planning w/Accountability Measures Family meetings and Family Governance Advisory Boards or Independent Directors on Governing Boards Succession planning Family Philanthropy 26

THANK YOU! 27