Operations

Balancing Ownership and Operations Responsibilities

It’s been my privilege to work with several family businesses over the last 13 years. In some, the owners have no day-to-day responsibilities, but have turned over operational responsibilities to a CEO or GM. In others, they are both owners and operators. These clients have spanned several industries. However, in one business discipline, for both types of organizations, one challenge is identical, “When owners exercise their ownership responsibilities, on what should they focus?” The problem is more pronounced when, in their day jobs, they have real operational responsibilities. Those demands consistently tug and pull at them, even when they are attempting to wear their ownership hats. But even those owners who have relinquished day-to-day operations to someone else seem to gravitate towards operational problems. I think there are a few reasons –

• Operational problems are easier – they are more concrete and the solutions are sometimes very clear (or at least the options for solutions are clear)
• Everyone has an opinion – we all know what we like
• There is likely some familiarity with the problem, even if that familiarity comes from another life or work experience

However, to effectively position the organization for health and growth, owners need to focus on a few specific items. I created the list below for a family business CEO to guide her family members/staff (who have operational responsibilities) through an exercise during which they could discuss their performance on ownership responsibilities and operational responsibilities. The list below was on the left slide of a table. On the right side of the table was a list of each employee’s specific operational tasks. Below the table were specific questions and performance metrics for each of the bullet points.

• Culture – Define, model, build and perpetuate it – Culture is the unwritten code of conduct for the organization. It controls the way we treat everyone else in the organization – employees, suppliers and customers.
• Learning Orientation – Understand that the industry, employees and customers change and so must we. Embrace lifelong learning realizing that we never will “arrive”.
• Vision – Define the desired future state of the organization – Business composition, value creation, customer experience, investor returns, corporate image.
• Investment-Grade Decisions – Focus the bulk of ownership decision-making on investment-grade decisions – those that will impact the organization 2, 5, 10 and 20 years from now. Leave operational decisions to those directly responsible.
• Leadership Succession – What knowledge and experience will those who run the organization in the future need? How will they get it? What is the sequence of events for a family member who wants to join the business?
• Stewardship – While every owner benefits from the “golden eggs”, their responsibility is to care for the “goose that lays the golden eggs”. How can we best manage the property, equipment, personnel and finances to ensure that the organization continues to generate maximum returns for years to come?

I want to dig a little deeper into each of the ownership responsibilities.

Culture – Peter Drucker reminded us, “Culture eats strategy for breakfast.” Without a doubt, the most important job of an owner is to live the way they want their managers and employees to live. Do you want employees to put the good of organization above their own personal enrichment? Then take a smaller dividend at the end of the year so you can reinvest more in the business. Do you want employees to be good stewards of the organization’s resources? Then don’t use any of the organization’s assets for your own personal use. Do you want employees to treat every customer like they’re the most important one – even if they generate very little revenue? Then show extraordinary kindness to every employee regardless of their place on the org chart. You get the idea. Your example has far greater impact than the mission statement posted on the lobby wall or the employee commitment that the employee has signed.

Learning Orientation – Ego is the enemy – always has been, always will be. As soon as we believe we’ve figured it out, we’ve started the countdown timer for the end of our business. The founding generation and successive generations may have done everything right in steering the organization to its current state, but their brilliant work may no longer be applicable in the future. Every business that wants to survive must engage in creative destruction (Joseph Schumpeter)– regularly replacing outdated production units (products or services) with new production units that are birthed by innovations in both in product and process. Embrace the core principles that make your organization what it is fundamentally, but “kill all the sacred cows” that keep your organization from effectively creating greater value for current and future customers. Keep growing. Keep asking good questions. Keep hiring people who have your core values but approach the world differently.

Vision – No one has a bigger stake in the game than those who have invested their resources in acquiring and operating the business. And no one should have a clearer picture of what that business could or should be. Sadly, I’ve run into several circumstances where that is not the case. Managers or staff members see much more potential and promise in the organization than those who own it. They have a greater awareness of the organization’s challenges and greater clarity of the incredible upside if new markets, products or services were added. Many times, the vision of the founder, which might be several generations old, is still the mold for the business. There’s nothing wrong with that if the vision is big and embraces the change that inevitably happens over the course of time, but frequently that’s not the case. Owners must ask hard questions about the continued viability of the business model (how do we create value and is that value sustainable), the need for ongoing revenue and asset growth and the perception of the organization with customers and in the industry. Then they must craft a vision that clearly depicts a desirable future state for the organization.

Investment Grade Decisions – The challenge of building something that will outlive you is pretty daunting, but that’s the purview of owners. Whether your exit plan is to sell the business, get a payout from the business, pass it on to the next generation or something else, today’s investment decisions make those future plans possible. With the vision firmly in hand, the challenge is to make decisions that truly merit board attention – markets to enter, product categories to launch and facilities to build. It’s tempting to spend time talking about buying delivery trucks, replacing computers and painting bathrooms, but the management staff is more than capable of making those decisions. Give careful attention to the capital and operating budgets at the beginning of the year and, within those constraints, leave those decisions in capable hands. If there’s a seismic shift in the world during the budget year, it’s certainly appropriate to revisit the budget. As the organization grows in size and complexity, there will be increasingly more operational things that clamor for your attention. That makes your commitment to entertain only investment-grade decisions even more important.

Leadership Succession – I didn’t list these in order, but if I did, this probably should have been pushed further up the list. Very few things are more important than the people who are leading the organization. Owners, especially those who have chosen to turn over day-to-day operational responsibilities to a CEO or GM, must be diligent to find, support and invest in the person who will act in their stead every day. For those owners who have operational responsibility, DNA doesn’t automatically equip those in your family tree to successfully lead in the organization. So, whether it’s in the family or someone else, what readies someone to take the reins in the organization? Organizations that successfully pass the torch from one leader to the next are very deliberate about defining the hard skills, soft skills, knowledge and experience that must be present for those in key positions. Then, they make sure they put potential leaders in positions to build those skills. Let me hasten to add this, once the leader is in place let them lead. I hate to pull out an overused quote, but this one from Steve Jobs is pretty good, “It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”

Stewardship – These stats from the Family Business Alliance should give us pause – More than 30% of all family-owned businesses make the transition into the second generation. 12% will still be viable into the third generation. 3% of all family businesses will make it to the fourth generation and beyond. Every time I read these stats, I think about Aesop’s fable, The Goose and the Golden Egg. If you don’t remember it, a man possessed a goose who laid a golden egg every day. Over time, the man became dissatisfied with just one golden egg every day. He decided to kill the goose and get all the eggs at once. He killed the goose and cut it open. He found no golden eggs inside and the goose was dead. While every owner should enjoy the financial rewards from their business, the ability to change the financial trajectory of an entire family is a wonderful gift. Those who are inclined to take advantage of the opportunity must skillfully manage the resources of the organization so that it continues to create value for customers and generates adequate returns for future generations of owners. To borrow from the fable, enjoy the eggs, but your primary responsibility is to nurture and care for the goose.

Ownership is not for the faint of heart – whether you’re involved in day-to-day operations or not. The challenges are many and the stakes are high – many times effecting the lives of family members and employees who depend on us. That being the case, I want to remind you of something we learned from Gary Keller in his book The One Thing. We don’t want to run the organization the “best we can do it”. That implies that the ceiling is our current level of skill and knowledge. Instead, we want to run the organization the “best it can be done.” The distinction is subtle, but it carries with it a commitment to stay hungry, stay curious, learn, grow and be the best owners we can be.