CHAPTER 6

Ownership Governance

There are two major tools for the governance of ownership: the shareholders council and the annual shareholders meeting (also called the annual shareholder meeting or the annual general meeting, AGM).

The Shareholders Council

The purpose of the shareholders council is to bring stockholders together to communicate, disseminate knowledge, and to make decisions by voting. The stockholders hear from upper management concerning the progress of the firm for the last quarter and their future plans for the business.

When a family firm is small, the family council will usually serve the purpose of the shareholders council. When the firm grows in sales, number of generations, and the number of shareholders, it becomes a prudent form of governance. The shareholder council becomes essential if the firm has any nonfamily shareholders or investors. Large companies may have both a shareholder council and a family council.

The family council differs from the shareholders council in that:

The most important tasks of the shareholders council are:

Other tasks of the shareholder council are to research possible candidates for future BOD members and forward their name to be voted on at the annual meeting by all shareholders. Succession of leadership will also be discussed at shareholder council meetings. The family council will take the primary lead on succession; however, if there are nonfamily shareholders, they will be interested in the best candidate for the job. Is that a family member? Or, is a nonfamily candidate the best choice? (Koberle-Schmid, Kenyon-Rouvinez, and Poza 2014).

The shareholder council would be elected for a certain term of years at the annual shareholder meeting. Most commonly the meetings would be held quarterly. The council would elect a chair who would be responsible for running the shareholder council meeting.

Example of When a Shareholder Council Is Needed

The Jones family business was started in 1967 by Ed Jones and his wife Margaret. They had four children. The business grew and the family now find themselves needing more financial capital. The family had an opportunity to take in a minority shareholder (another family) who were in the same social circle with the Jones family. The Jones family owns 75 percent of the firm, and the new shareholders own 25 percent. There is discussion among both families of going public by having an IPO of stock in the near future.

In the past, the business was governed by a family council when the second generation succeeded their parents. At the beginning of every year, they had an informal AGM to satisfy the requirements for the corporation. This structure worked well for their business and the siblings worked well together. Now, they have a new incoming family of seven members who will mix with the four second-generation Jones’ family members, as well as nine members of the third-generation Jones’ who have decided to enter the business. There will now be 20 stockholders in total.

By law, the Jones family will need to keep their family needs separate from those of the business to be fair to the minority shareholders. The family council will be retained and used to discuss issues important to the Jones family, and a shareholder’s council will be created with members of both families. The shareholder council will meet quarterly, and each year the business will have a formal annual meeting where the stockholders will exercise their vote. This type of governance tool will serve two functions; the first is to help the company meet the requirements of treating all shareholders the same as well as professionalize their governance and corporate structure to prepare for an IPO.

Annual Shareholder Meeting

The annual shareholders meeting is required by law in most countries. As the company grows, the annual meeting will grow from the founder and immediate family to a meeting that can be quite large for multigenerational family firms. During the annual meeting, the entire group of shareholders elects the members to represent the family on the family council and shareholder council as well as approves members to serve on the BOD. It is the shareholders’ right to elect the BOD. Then, the BOD sets the direction of the company. During the meeting, the shareholders will hear from the TMT about the progress the firm has made on its goals and objectives for the year. Dividends are proposed by the BOD and then approved by the shareholders. Capital improvements and debt obligations are also discussed.

Commonly, these meetings are held annually. This is easily understandable as some family firms can have hundreds of shareholders such as UK-based Clarks Footwear who had as many as 400 family stockholders and 2,000 employee stockholders (Cope 1997) and the 145 family stockholders of the 7th generation McIlhenny family of Tabasco sauce fame (Shevory 2007; Tabasco.com 2018). To meet more often, such as on a quarterly basis, would be impractical. This is the purpose of the shareholder council or the family council.

A fourth-generation family member and heir of the Stroh’s Beer company attended an annual shareholders meeting and was shocked to hear from the family management that the firm would soon cease to exist as a going concern and dividend income would soon come to an end. She blames the failure on poor decision making by ingrained family leaders (Stroh 2016). This is an example of poor governance in action. If the company used more effective governance mechanisms to increase communication and transparency, this would not have been a surprise. The institution of a family council and a shareholder’s council would have disseminated proper communication much earlier and prevented family members from being blindsided at the annual meeting.

Example of an Agenda for an AGM

The agenda of the AGM will depend on the legal and governance structure of the organization, such as if the company is a private or public corporation, has a family council, or has a BOD. Annual shareholder meetings are typically scheduled just after the end of the fiscal year. This allows for the previous year’s financial performance to be reviewed and discussed. By writing the BOD with their suggestions before the annual meeting, shareholders can shape the agenda.

The meeting agenda would be sent out with an announcement of the date of the annual meeting, usually 6 weeks in advance. Depending on the laws of the state in which the business is incorporated, some states require a certain number of shareholders to be present or vote by mail or proxy (give their vote to another member). Delaware, for example, requires a certain percentage will need to be present to have a valid meeting. Other states allow each business to set the number for a quorum in their corporate bylaws. The corporate bylaws also specify the timing and location of the annual meetings. In most cases, the meeting is held at the headquarters of the business itself or at a nearby hotel or conference center in the same city or one nearby.

The corporate secretary would take notes of the discussion and decisions (the minutes) during the meeting and have them prepared into document form to be disseminated and approved at the next meeting. Some states have a requirement that the minutes are disseminated shortly after (within weeks) the meeting.

The annual meeting is also an opportunity for the board and the owners to review the strategic direction of the company. It is the time and place to review how and why decisions have been made and to discuss future issues/opportunities that may influence the direction and performance of the company.

For the Chair

Preparation is important so that the meeting runs smoothly and achieves its objectives. The chair needs to be well-briefed and prepared to facilitate the meeting effectively.

Sample Procedure for an AGM

• Chair: Call the meeting to order.

• Chair introduces self.

• Welcome all to the 2nd, 10th, 27th (etc.) Annual General Meeting of Smith Family Business Inc.

• Introduce other directors/trustees.

• Chairman says: “I confirm that under the Constitution/Corporate Bylaws of The Smith Family Business we have a quorum and I declare the meeting of shareholders/beneficiaries properly constituted.”

• I advise the attendees that nonshareholders may be present (in-laws, spouses).

• As the notice of meeting (invitation to shareholders) has been circulated to all shareholders, I will take it as read.

• Proxies have been lodged by . . . shareholders holding . . . shares, representing . . . percent of the of the issued share capital of the company.

• “I advise that directors have confirmed that the minutes of the Annual General Meeting held on (date) are a true and correct record of that meeting. Copies of the minutes of the meeting are available at . . .”

1. Financial Statements and Auditors report “Ladies and Gentlemen, I move that we adopt the Financial Statements and Auditors report for the year ended (Date).”

• “I request a shareholder to second the motion. The motion is now open for discussion. Before inviting questions and discussion from shareholders, I shall briefly review the year.”

• Give a brief report of key corporate activities.

• “I now invite questions from the floor.”

• Put the motion to the meeting. “Call for those in favor to raise their right hand” (count raised hands) then those against. “Please raise your right hand” (count).

• (Declare the result of the vote).

1. Auditor. I record the continuance in Office of the auditors, or I move the motion to reappoint the auditors, or, I move the motion to appoint new auditors (vote).

2. Election of Director/s. “In accordance with the company’s constitution Mr. John Smith II is retiring. Mr. John Smith III offers himself for election. His company experience and expertise will be invaluable to our company. I move that Mr. Smith be elected as a director of the company.”

• “I request a shareholder to second the motion.”

• “The motion is now open for discussion.”

• Put the motion to the meeting, and vote.

1. “Is there any other business?”

• There being no other business.

1. I invite the Chief Executive to give a presentation now.

2. Close meeting “That concludes the business of the meeting. I thank you for your attendance, I would like to remind all shareholders to join the BOD and the top management team for refreshments immediately after the meeting.”

(Adapted from Template.net 2018)

Agenda for Small Family Business Shareholder Meeting

The following is a sample agenda for a privately held family-owned firm without a formal BOD or shareholder council.

Noon Lunch