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A joker in the pack

Melanie stern is section editor of Families in Business

Shareholders increasingly demand greater inclusion and influence over decisions at the companies in which they invest. Melanie Stern examines some of the issues, not least trust, accountability and nepotism, that infuriate stakeholders in family businesses

You and a friend are playing poker. The cards are dealt. It seems Lady Luck's on your side tonight: you throw a few strong hands his way. But it's all over when your friend reveals a hard-to-get straight flush; so hard to get, in fact, that you wonder for a minute if he cheated. Your decision to cause a fuss over it comes down to whether you really trust your friend, based on conduct at previous poker nights. Perhaps he gave himself an unfair advantage, and if you don't ask, you might not win so many future poker games.

It's a similar situation brewing between the public shareholder community and the corporations in which they invest. Frustration is growing with a slew of corporate fraud cases revealing impotent regulators, corrupt federal law-makers and an absent respect for shareholder rights. Post-AIG, with Wall Street still shaking its head in disbelief that the hallowed Greenberg family now joins the ranks of recently disgraced business clans like the Rigases and the Tanzis, the governance conduct of listed family firms is again under fierce scrutiny, and found wanting.

One of the most common complaints about family-owned businesses is their lack of adequate and open communication. Witholding information enrages stakeholders and attracts press scrutiny, exacerbating suspicion around family ownership. This was demonstrated by US entrepreneur Malcolm Glazer's recent takeover of Manchester United Football Club. Neither Glazer's family-owned acquisition company Red Football nor its charitable foundation issued any press releases or statements about the bid to the public, never engaged in any dialogue with shareholders, and until recently, Glazer himself – who installed his three sons as non-executive directors at Manchester – did not speak to the media. Shareholders read this as a sign of utter disregard for their position, assuming Glazer's attitude to be reflective of his indifference to enshrining the club's 105-year history.
"Shareholders are already deeply suspicious of Glazer and his family because of the huge amount of debt that is being added to the company, and the fact that he has not announced any kind of plan for the club at all – our information is all based on leaks and speculation, nothing concrete," Nick Towle, chairman of MUFC shareholder dissent group Shareholders United (SU), tells Families In Business. "Glazer is treating us with an arrogance bordering on contempt." Meanwhile, SU plans to punish the Glazer family for their perceived indolence by boycotting all tickets and merchandise, in the hope that Glazer's plan to hike all prices and more than double pre-tax earnings to £107 million by 2008 will fail; the group is working with Japanese investment bank Nomura and other partners to raise a fund from the proceeds of the fan's enforced share sale to Glazer in readiness to buy a controlling stake in the club in three years – the time Towle thinks the ownership plan will collapse under the strain of the boycott – at a discount. "Glazer doesn't understand how damaging it will be to his own position to turn his own customers against him. If this was a widget company, he wouldn't have a problem – but MUFC fans believe they have moral ownership of the club, and see it as a community asset because it was their money that built it up over generations; now he is using their money to pay his debt, but has never made any attempt to discuss it with us." If there is nothing to hide, then showing one's hand and being ready to explain the rationale behind one's moves can really take the edge off a potentially critical situation.

Ownership structures
George Orwell's maxim, 'all animals are created equal, but some are more equal than others' has never been more true than among family businesses and their shareholders. Many families have managed to leapfrog over losing control of their businesses when joining the public markets with dual-class stock – creating one class of stock for themselves and another for their public owners, with the latter containing two or more votes per single share. Though this is a common practice at many non-family businesses, used in executive compensation and other staff packages, its use among ­family companies – Ford, for example, owns around 4% of their company's stock, but around 40% voting rights – exposes naked abuse of existing dominance to the detriment of other shareholders, sparking strong shareholder resistance. Families, meanwhile, argue that the structure allows them to sustain a long-term view and investment strategy, avoiding the peaks and troughs other public stocks suffer. But there has long been a stark correlation between dual-class stock family companies and corrupt or poorly-performing family companies.

In 1998, the California Public Employees' Retirement System, CalPERS), put large pension fund groups on the road to a high-profile shareholder advocacy role when they campaigned to pressure family-owned hotels group Marriott – in which it owned more than a million shares, worth some $35 million – into dropping a plan to create a dual-class structure. "This action serves as a reminder to the Marriott family that we are the patient long-term capital of the company and part of this 'family'," chairman Charles Valdes said in a stinging assessment of the family's ­motivations. "These proposals had no apparent benefit to shareowners, unless your last name happens to be Marriott."
CalPERS showed its lack of patience with family fiefdoms again in 2000 when it called for an end to the dual-class stock structure used by the founding family of meat production titan Tyson Foods. Saying that the structure "disenfranchised shareowners', CalPERS called an investment in Tyson 'dead money' – an accusation underlined by the fact that between 1994-99, under then-chairman and chief executive Don Tyson, $100 worth of Tyson class A stock – the class offered up to the public markets – gained just $5. "Tyson's class B shares effectively insulate management from accountability to shareholders, and given Tyson's long-term performance, we cannot accept that the Tyson family knows best," CalPERS' said chief executive James Burton. Tyson retains its dual-class structure today, even though 84.3% of non-family shareholders voted against it. One shareholder group, Illinois-based General Board of Pension and Health Benefits, explained how even this majority vote could not dislodge the structure. "We knew we would be outvoted given that class B shares owned by the Tyson family get ten votes per one share and class A shareholders receive one vote per one share," said spokesperson Vidette Bullock Mixon. "We firmly believe, however, that Tyson and its shareholders would be better served with equal voting numbers."

The company never recovered from that damning of its corporate governance practices, and was again in the spotlight this May when the Securities and Exchange Commission fined the company for paying Don Tyson $3 million in undisclosed fees, covered up by misleading or inaccurate filings to the commission, after he retired in 2001.

Greed and corruption
In the east, where family business are an impossibly complex shareholding web of as little as 1% in hundreds of subsidiaries that preserve the controlling ownerships of powerful business families, even if the companies are publicly-listed – corruption and bureaucracy help weigh any shareholder revolutions down. This June saw the withdrawal of asset manager Sovereign from a long campaign to revolutionise governance at family-controlled oil refinery SK Corp, in which it holds a 14.9% stake. Sovereign weathered several rejected requests over two years for extraordinary meetings with the board over governance and transparency issues centred on Chey Tae-Won, the second generation chairman of the company who had been convicted of securities fraud against the company. On his early release from a Korean prison in June, in which he was serving a second fraud sentence, Chey was welcomed back to his job without hesitation, at which point Sovereign's crusading chant fell silent. Chief executive James Fitter branded the move "a national tragedy".

More and more Western shareholders are taking a punt on growth in countries like China and Korea, especially hedge funds and socially-responsible funds, but their governance activism may not have any meaningful penetration of those markets until domestic regulators stamp out widespread corruption. "In countries with weak accountability systems and a weak judiciary, families can take advantage, with insiders selling shares to relatives or friends at a discount so as to keep control close," Espen Eckbo, Tuck professor of finance at Dartmouth University, and the founder of its Centre for Corporate Governance, tells Families in Business. "But in doing so, they devalue other publicly-held shares."

Board diversification
One of the most tender wounds on the family business landscape is independent directors. Time and again, shareholders cry foul of a lack of distinction between the family kitchen table and the boardroom, and find themselves disenfranchised by a management group littered with distant cousins or inexperienced offspring. At UK supermarket group Morrison, founder Sir Ken Morrison spent most of 2005 concurrently navigating criticism of his difficult Safeway acquisition, and being castigated by powerful shareholder lobbies for having just one independent director, David Jones, versus seven executives on the board. After continued campaigning on the issue by the UK's National Association of Pension Funds and the Association of British Insurers – whose members own about 20% of the UK stockmarket – in May, allegedly at the behest of Sir Ken, Jones successfully had three independents brought in.

Some shareholders thought this came too late in the day. When they do get a look in at an early stage, however, the effect is marked. Last July Sir Peter Davis, chairman of UK supermarket giant J Sainsbury resigned unexpectedly a fortnight before the company's AGM, following mounting pressure from shareholder groups threatening a revolt over a £2.5 million bonus he received despite falling profits and lost market share – though the scheme was approved by shareholders the previous year.

Stacking up the evidence, shareholders in family businesses do not have the smart money unless they can be sure that their investments are not at risk from owners forcing their hand to their patrons' detriment. "Morrisons is a good example of shareholders in family businesses only getting to wield influence after things have gone wrong," UK investor group Investor's Association's Steve Huxham tells Families In Business. "I don't know if shareholders in family businesses can really expect to have any say in the running of the company if the board is controlled by the family."

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