Key Takeaways
Family business boards should periodically reassess whether the metrics they monitor still reflect the company’s strategy, priorities, and risk profile rather than relying on measures simply because they have always been used.
Capital allocation decisions involving dividends, reinvestment, shareholder liquidity, cash, and debt should be evaluated together so directors can clearly explain how those choices support the company’s objectives and financial flexibility.
Year-end planning gives directors an opportunity to test assumptions about shareholder alignment, address deferred governance and financial issues, and identify where better communication, policies, or board discussion may be needed.
Throughout our Summer Series, we have looked at many of the questions family business directors encounter around the board table. Are we retaining too much cash? Are we reinvesting adequately for growth? How should we think about shareholder liquidity? Are we consistently communicating with shareholders or do we often surprise them?
As year-end approaches, those individual questions provide an opportunity to step back and ask a broader one: Are we asking the right questions in the first place? A familiar line often attributed to Peter Drucker says, “What gets measured gets managed.” Sahil Bloom takes this idea a step further in his book The 5 Types of Wealth when he writes, “Broken scoreboard, broken actions.”
The implication for family business directors is straightforward. If the board is measuring the wrong things, management may focus on the wrong outcomes. If directors are asking the wrong questions, even thoughtful answers may not move the business or the family in the right direction.
Are We Measuring the Right Things?
Revenue growth, EBITDA, and performance relative to budget are natural places to start. Those measures, however, do not provide a complete picture of whether management is creating shareholder value.
Is growth generating cash or consuming it?
Are recent investments producing adequate returns?
How does the company’s performance compare with relevant peers?
Has increased profitability come with increased leverage, customer concentration, or some other source of risk?
The board’s scorecard should reflect the strategy it has asked management to execute. A company investing heavily for growth will measure success differently than one focused on strengthening liquidity and reducing risk. Year-end is a good time to ask whether the metrics in the board package still reflect the company’s priorities or simply remain there because they have always been there.
Are Capital Allocation Decisions Consistent with Our Priorities?
Dividends, reinvestment, shareholder liquidity, and debt can look like separate topics. In practice, they are competing claims on the same pool of capital.
Cash retained in the business cannot also be distributed to shareholders, and capital used for redemptions is unavailable for a new facility or acquisition. Borrowing may allow the company to pursue multiple objectives at once, but it introduces additional financial risk and fixed obligations.
Directors should be able to explain why the company is allocating capital the way it is.
If the company is retaining earnings, what opportunities justify that reinvestment?
If cash is accumulating, what purpose does it serve?
Is the dividend consistent with the company’s earnings, capital needs, and shareholder objectives?
Does the current capital structure provide enough flexibility for the risks and opportunities management expects in the coming year?
There is rarely one correct allocation, but there should be an intentional one.
Where Are Shareholders Aligned, and Where Are We Assuming Alignment?
Family shareholders may share a surname without sharing the same financial circumstances, time horizons, or objectives. Some shareholders may prefer current distributions while others are comfortable reinvesting for long-term growth. Some may value liquidity more highly than others. Risk tolerance may differ by generation, ownership percentage, employment in the business, or the extent to which an individual shareholder’s wealth is concentrated in the family company. Boards do not need unanimity among shareholders to make sound decisions, but they do need to understand the ownership group they are serving.
Year-end planning provides an opportunity to test assumptions that may have gone unchallenged.
When did we last ask shareholders about their priorities?
Do shareholders understand the company’s strategy and financial performance?
Do they understand how the board approaches dividends, liquidity, leverage, and reinvestment?
Are directors mistaking the absence of disagreement for actual alignment?
A shareholder survey, regular financial education, or more deliberate shareholder communication can give directors better information before a disagreement exposes a gap that was already there.
What Have We Avoided Talking About?
Some of the most useful year-end questions are the ones that have repeatedly been pushed to the next meeting. Perhaps the board has deferred a conversation about shareholder liquidity because no one currently needs it. Maybe the company has not revisited its valuation in several years. An underperforming investment may continue to receive capital without clear discussion of expected returns. A dividend or redemption decision may still be handled on an ad hoc basis because a formal policy has never been established.
And, in many family businesses, the buy-sell agreement sits quietly in the background until a trigger event forces everyone to find out what it actually says. Directors should know what topics have been easy to defer and not allow them to linger any longer.
Conclusion
The answers to the questions listed above may point toward the need for a shareholder survey, additional shareholder education, a current valuation, a review of the dividend and redemption policies, or simply a more focused board discussion. The appropriate next step will vary by company. But the objective is to enter year-end with the right scoreboard and the right questions. Better questions will give directors a better framework for making the decisions that follow.