Fabrice Walewski is CEO of Touax Group, a listed family-controlled company based in Paris, France.
Stephen McClure is a principal at The Family Business Consulting Group.
Fabrice Walewski says:
Touax Group is currently managed by the fifth generation of the founding family. The business, which went public in 1906, leases equipment including shipping containers and modular buildings. The quality of the relationship with our customers as well as the quality of our service is a key part of our success.
Consequently, it is critically important to secure the best talent for the business and we have invested heavily in our senior leadership teams over the past decade.
Touax can win new market share or contracts because our teams offer reactivity and flexibility; for example, structuring tailor-made, off balance sheet operating lease transactions to enable customers to rely less on bank financing.
Touax used to be a privately owned by the family and employed less than 100 staff, but success and globalisation have meant that we now own a listed business employing over 600 people. Today, the business is a decentralised organisation with four profit centres that increasingly delegates more responsibility to its managers.
Crucially, this transformation from a private business to a public one means it is essential that an alignment of interest exists between the company and its managers.
To do this we offer stock options and warrants. Stock options are granted for free and are therefore more popular. However, most European countries have decided to tax stock options heavily, reducing their advantages.
When Touax's shareholders subscribe to capital increases, a 3-year business plan is prepared and validated by managers. In order to align interest, stock warrants are issued and sold to managers. Total issuance of stock warrants cannot dilute the existing shareholders by more than 15%.
Managers invest on average 6 to 12 months of their salary to buy stock warrants. They are at risk (alongside shareholders) but also have access to a significant potential upside if the business plan targets are exceeded. To earn this potential profit, managers have to stay for at least 3 years. If they leave, Touax has the option (but not the obligation) to buy back the warrants at cost.
The first issuance in July 2005 was a success. From 2005 to 2007, net profit increased by 187%, and share price by 71.4%. The value of the warrants has been multiplied by 15 in December 2007, and despite poor stock market performance, the value of the warrants has still been multiplied by 6 in December 2008.
It is much easier to issue stock warrants for a listed company compared to a privately-owned one. When stock warrants are listed, they offer real liquidity for the buyers or sellers. In contrast, stock warrants on private companies always create a liquidity problem.
For example, Touax never guarantees a return on investment or a buy back to its managers. They keep the risk but also all the upside. Being listed offers them a real opportunity to sell at best market conditions, and to maximise their return while Touax has no obligation to purchase them back.
But it's not all about company stock. We also propose non-listed investments to our managers. As in the private equity business, Touax's managers can invest up to 10% in investments done by the company. This creates confidence between shareholders and managers and completely aligns the interests of both parties.
In December 2008, Touax managed approximately €1.3 billion of assets (railcars, modular buildings, river barges and shipping containers) including €900 million on behalf of private and institutional investors. All those assets are leased to various international companies on a long-term basis and generate a recurrent rental income. Managers have so far invested approximately €5 million.
We believe these incentives that are provided by our listed status, coupled with strong family business values and professionalism, enable us to secure the best possible
Stephen McClure says:
Using stock to attract and reward non-family management is a tempting idea. The rationale: you can compete on a level playing field with public companies that routinely provide stock options, and it aligns management and shareholder interests. It's a realistic option for family companies that have an active public market for their stock.
Yet, privately-held family companies with restricted stock entertain the idea too; many in response to management recruiters who are keenly aware that stock incentives will help lure top talent from the public company arena.
In the end, most private family companies do not grant stock to non-family executives, for a number of reasons, not the least of which is an inability to get the broader family to allow it. Yet, they are able to hire impressive non-family talent. They do it by appealing to the non-financial interests of candidates first and financial considerations second.
Family firms that fully appreciate how their own values, culture and beliefs contribute to business success are devoted to finding non-family managers that respect and live the same ideals. They recruit from a separate segment of the talent pool; they seek capable non-family executives who don't make a decision based upon the availability of stock incentives. They desire competitive compensation packages, yet first are value-driven and appreciate family influenced businesses.
In fact, we often observe problems when family firms aggressively and successfully recruit talent from the public company arena. Upon joining, the new recruits rapidly apply their experience to much neglected areas and quickly demonstrate success…they become celebrities. In contrast with their business expertise, they have little experience with family-owned or family-operated firms. When family and business conflict emerges, as it will, the new managers label it messy, undisciplined, and un-businesslike; they proclaim that family issues have no place in the business.
The managers may exert great pressure on their advocates and champions to reject all "nonstandard" family involvement; the family or board leaders who led the effort to upgrade management now find themselves caught between professional managers and their family shareholders. Or the managers might complain to their peers and other employees, naively undermining the legitimate role of the family.
Professional managers who see things as black and white, either it's a "business" or a "family hobby", drive a wedge between family members and devalue the "family effect" that distinguishes the family firm as a unique, competitive enterprise. Of course, there are often changes to family roles that are needed and facilitated by experienced management from outside the family firm, yet required change is a matter of degree.
Family and business issues overlap in successful family companies and recognition of the value of each and management of the paradox are both critical to a healthy family firm.
At some point, external business talent is needed by all growing and competitive family firms. However, family firms that recruit from a management talent pool which focuses on developing wealth must seek out those who are also values-driven.
Private family firms have options other than stock incentives, including discretionary bonuses and perquisites, profit sharing, long-term profit based deferred compensation, phantom stock, as well as allowing participation in investment opportunities.
Primarily, they have a family business success formula derived from family and business. A strong addition to the management team will be a fairly compensated (yet perhaps not exactly as the competition does it) individual that fills a business expertise gap and adds to the existing and irreplaceable value of the family business contradiction.