It happened again last week!
A friend of a friend was ousted from her position as CEO of a company she jointly owned, going from CEO to out of work in a day… A complete shock to her as there was no indication this was even under consideration.
And it’s not the first time, I’ve come across this – it happens far more frequently than you might imagine.
It’s generally about greed and human relationships, and most often when two people have gone into a business venture as equal partners – a 50:50 deal where they both bring money and/or skills to the game and get the business going.
And then, at some point, one of the partners gets greedy, or stops pulling their weight, or… The reasons given are myriad and, of course, in the eye of the person giving the reason. But, whatever the reason, things go sour quickly and at least one of the partners feels unfairly treated.
How is those possible and what can you do to try to prevent this happening?
- Do not have just two equal shareholders. The 50:50 share split results in more acrimonious break-ups than just about anything else. Where two people do want to start a business together, ALWAYS bring in a third person with a small minority share (e.g shareholding of 49.5% for each of the two main partners and 1% for the third person). And make sure that 3rd person is (A) independent of the other two, and neutral, and (B) willing and able to act as chair of the board of directors, preferably in a non-executive capacity.
This will prevent stalemates between the shareholders and between the directors (assuming both founders are on the board) as there will always be a casting vote by the independent chair. Even with larger boards, it’s a good idea to ensure an odd number of directors to facilitate smoother decision making.
- Agree on who will be in charge, day to day. Not everyone makes a good CEO (or CFO, CTO, COO, etc.). Recognise your respective strengths, skills and weaknesses and agree on the roles of the various founding parties.
- Agree on appropriate levels of remuneration for each executive and, if there are outside investors in the business, you’ll need their agreement, too, as shareholders, to prevent problems down the line.
- Ensure equal access to all company property. Remember that the company’s assets – whether physical or intellectual – belong to the company and the partners/founders in the business should have equal access to these in the event they need it and should ensure that they are not being kept “in the dark” on matters financial, or other.
- Agree vesting schedules. This is often overlooked, but it’s a good idea for the partners to agree a schedule for how the company shares accrue to the parties. This should be done so that one party doesn’t walk away after a couple of months, and still has the benefit of, say, half the business despite putting in very little effort. Of course, this will depend on the agreement between the parties as to who is responsible for what and the vesting will be contingent on this, too, as well as having a timeframe (four years is not uncommon).
- Dispute resolution. Any disputes that can arise can very quickly become expensive and can even threaten the continued existence of the company. Ensure that you agree a dispute resolution mechanism that is less onerous and expensive, such as mediation and arbitration.
- Agree how the company will operate – all the elements covered above, and more, should be done right at the outset, even before the company is formed, with the agreement(s) lodged as part of the company creation process. Depending on the jurisdiction, this would be covered by:
- South Africa – Shareholders’ Agreement and / or Memorandum of Incorporation
- UK, Zimbabwe, USA, Canada – Memorandum of Association and Articles of Association (with certain types of US company it may be called the Articles of Organization).
- Australia & New Zealand – Company Constitution
And so, on. These documents set out the rights of shareholders, directors and so forth, as well as things like dispute resolution. Most jurisdictions have default templates for the documents and although these are most commonly used, the parties should go through them and be clear that they meet the requirements of the business, or else should modify them to better suit what is envisaged.
And while they can be changed later, this can become a time-consuming and expensive task, so it’s worth doing it properly at the beginning.
By starting out with a comprehensive agreement, you will avoid many problems down the line – whether the business is going through tough times or is booming.
And start as you should continue – regular (I recommend monthly) formal board meetings, with minutes, to discuss progress, update strategy if necessary, and so on – not forgetting the all-important “going concern” question, too. Set up a board calendar for the year so you can be sure of covering everything and add to the calendar as the business grows.
Spending time at the beginning to put solid foundations in place with a comprehensive agreement, appropriate shareholding and a board of directors, preferably with an independent chair, will not only save a great deal of stress later, but accelerate the company’s growth prospects, too.
And, if you’re already up and running without these, it’s not too late – just a little more time-consuming – to put these things in place now.
You’ll be pleased you did!
Following a career spanning >50 years in the technology industry across three continents, with three decades in CxO roles leading significant, sustained growth in revenue and profitability, I now work with successful owner-led businesses to further enhance their growth, profitability and business value.
If you’d like to discuss your board, company culture, board, business strategy, trends, goals, or anything else related to your business, book a confidential, free 30-minute call with me here.
I’d be delighted to talk with you.
And if you’d like to learn more, these related posts might be of interest:
- Know Your Company Role(s)
- The Role & Responsibilities of the Company Board
- Why Even Small Companies Need Regular Board Meetings
- 1 Critical 5-Word Question for All Businesses
- Directors – Are You Risking Your Assets?
- Proper Preparation for Productive Boards
- Boards Accelerate Success & Increase Value for Small Companies, Too
- Board Meetings not Bored Meetings!
- How Independent NEDs Can Catapult Growth in a Small Business
- Building a High-Performing Board of Directors: Key Qualities to Look for in Board Members
- NEDs – a Cost-Effective Way to Add Significant Value to Your Business
You might also find this collection from McKinsey to be of interest:
And from The Corporate Governance Institute:
P.S. If you’ve enjoyed this post and would like to subscribe to my blog simply enter your details here or drop me a note by pressing here.
#BusinessFitness #Board #Business #Culture #Entrepreneur #Governance #NED #Planning #SmallBusiness #Trust #Valuations