Whether you’re a second generation manufacturer or running a global conglomerate like Peugeot, you’re taking on a unique challenge as a family business owner. You’re constantly balancing two priorities: the health of the business and the health of the family mission.
These concerns are tied at the hip and often at odds with one another. They bring to mind the quandary of a medic dedicated to tending a patient beset by assassins on every side. Some are gunning for shareholder value, some for the family interests – and without the right corporate structure, the assassins have free reign.
Consider that the default for corporate governance is that owners are obligated to maximize the value of the company. Some family businesses, however, have other long-term goals in mind. For example, we’ve seen one private company worth over $125 million embroiled in such a battle. Sixty percent of the ownership group was comprised of family members that wanted to pass the company on to the next generation. Forty percent was held by another family member and an independent group that wanted to obtain liquidity or similar economic return for their shares.
Even though they were in the minority, the “assassins” were able to assert that the ownership group was not maximizing value by holding onto the company. In the end, the majority owners faced a forced exit because the charter documents did not override the default fiduciary duty to maximize shareholder value.
What should they have done? To preserve the overarching goals of the family and the enterprise, owners should bake these provisions into their corporate documents. They can use specific language that permits Boards of Directors or Managers to prioritize factors beyond economic return. One proven path is to call out the highest priority goals,which often revolve around preserving family ownership, preserving the composition of stakeholders or preserving independence.
All of this holds true for family trusts as well, which are commonly tied to the business. Estate and corporate attorneys should get together to ensure the structure of the trust and the company are aligned, otherwise similar issues could arise that directly impact the family’s assets.
PSA Peugeot Citroen serves as a high-profile example of how family and business goals can derail centuries of work (although the company doesn’t necessarily have an issue with its governance documents). Nobody should point to Peugeot as a failed family business – 200 years building a megabrand goes a long way to solidify a place in history. If we boil the company’s current situation down to basics, though, we can apply it to a more fledgling operation.
The Peugeot patriarchs are down for the count at this point, as the Board decided to cede control in early 2014. The owners reduced their holdings and propped the door open for a Chinese company and the French government to step into power. The decision was no doubt a back breaker for the family, and, in fact, the New York Times reported that Thierry Peugeot, Chairman of the Board, was vocal in his dissent.
“In a public dispute rare for the usually tight-lipped clan, Thierry last month sent a letter to his brother Robert…protesting the ‘strategy of disengagement’… But in the end, according to a person close to the family, Thierry Peugeot found himself ‘very isolated,’ and he abstained from voting on Monday when the rest of the family voted to welcome the new investors.”
Questions about the decision continue to swirl, and there is healthy skepticism about whether the deal was necessary at all. Forbes pointed to an open letter by Max Warburton of Bernstein Research, which noted, “We don’t think this deal is strictly necessary. We don’t believe Peugeot-Citroen needs the capital as we’re convinced it can take further actions to reduce cash burn in 2014. We also fail to see the benefits for Dongfeng from taking a stake, other than looking like a potentially clever value investors.”
For Peugeot and for much younger family businesses, what’s the real priority? Clearly in the mind of Thierry Peugeot, this move didn’t line up with his vision. Was that vision spelled out? Was there a fracture around the family’s goals? M. Peugeot took on the role of the medic here, and he seems to have lost both patients.
All this, and the Peugeots still stand as an exception to the rule: family businesses rarely make it to the third generation. Owners who take care of the little things at the outset can better empower the family down the line. They may still end up in M. Peugeot’s chair someday, but the protections they put in place will provide more clarity when the tough calls must be made.
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