The Power Vacuum and the Successors - Part III
Shareholders have ownership, but a stock certificate brings with it no automatic sense of strategy. Even if all the shareholders were to get together in a paneled boardroom, complete with charts and reports and projections, they would not necessarily have any sense of strategy. A management problem is vastly different from a shareholder problem.
The poor successor, no matter who makes up his "inside" board, faces the immense problem of filing his many roles -- as shareholder, chief executive officer, and chief employee. There's no way this poor devil can have a sense of strategy, because he's buried in the struggle to survive his untenable situation.
If an outside board doesn't exist by this point, I have serious doubts whether one can successfully be installed to save the business. It can be done. I've seen it done. But it's an absolutely backward way to do things, not to mention a hell of a situation into which to bring an outside director.
The founder didn't want somebody looking over his shoulder, probably because he was afraid they'd usurp his power as the benevolent despot. So the outside board is not installed during his reign. The founder meets his Maker and the successor meets an absolute mess. There is no continuum of authority, no steady hand on the helm during the transition. The resulting uphill struggle can be almost overwhelming.
Directors for TransitionBut to the successor, it's a struggle that must be undertaken. It's true the outside board does its best work when it is installed early enough. It's also true there's little sense creating an outside board when all the other things need doing. There's little sense in putting a board when managers are incompetent, advisors are inadequate, there's no internal control system, and the family is hopelessly at odds. In those circumstances, a board can't really be expected to solve anything. A formal board of outside directors is the strong wrapping around a carefully packed package. If installed early enough, around the right package, it can effectively function as the surrogate father, filling the vacuum left by the founder upon his demise.
But these truths don't relieve the successor of the obligation to try to solve the problem -- again, assuming he or she understands the problem and wants to solve it.
The successor to a company unprepared for transition has to juggle many problems at once. Often he inherits a feuding family, managerial deadwood left over from the founder's regime, professional cronies who call themselves advisors, and a firmly entrenched board of minority shareholders, relatives, and hangers-on. The whole situation is like a semi-collapsed building where to move just one stick is to bring the whole thing crashing down.
Even the strongest, most competent successor couldn't wade into this mess swinging like Genghis Khan and expect to survive the result. Two things are required, even though they seem contradictory: patience and action. Often, there are individuals on the board who, are absolutely unremovable -- Grandma, for example, who has always been a director, owns a significant percentage of the stock, and would be crushed if she were to be removed.
In situations like this, I've found forming an "informal" board of outside directors an effective interim solution. The approach is not unlike Franklin D. Roosevelt's attempt to pack the Supreme Court to bring it around to his side. Any successor struggling against overwhelming odds of an unprepared succession must have the help of a firm, objective and understanding guiding hand as he attempts to clean up the ownership structure, recondition the management team, evaluate advisors, and, if he can find the time, run daily operations of the business.
That's the kind of action the successor must take. The only time a problem is unsolvable is when a solution isn't attempted. Patience is required because solutions to a situation that took many years to form don't come overnight. For humanitarian, legal, and sound business reasons, many needed changes cannot be put into effect right away. Long-term managers, who've given their lives to the company, cannot simply be thrown into the street. They may have to be moved within the organization, but even that takes time. Cleaning up the ownership structure will take the agreement and cooperation of other owners. Their trust and acceptance, especially in an unstable family situation, won't readily be obtained. Advisors may be easier to change, but the determination whether they should be and the decision about who should replace them is complex and shouldn't be done in haste. Finally, some inappropriate members of the board may just have to be waited out. Even Grandma isn't immortal.
All these complexities and problems could have been avoided had the founder thought ahead and planned for his success and his mortality. But successors face reality, not could-have-beens.
If Dad, for whatever reason, didn't fix it, the job falls upon his successors. Here is where a strong faith in the future is an absolute must.