The Council's Evolution
Follett Corporation is a fourth generation family company. We had $1.7 billion in sales last year. We serve the education market in the U.S. and Canada as distributors, wholesalers and retailers. We are a large and growing privately held company with a rapidly increasing number of shareholders. The family has over 200 descendants across five generations alive today. There are four main family branches that began in our second generation. These branches vary in size today from 30 to 70 members. We have 12 third generation branches, 39 fourth generation branches and over 100 family members in our fifth generation. When the fifth generation starts getting married, there is really going to be major branching.
In the last decade, we went through a process of succession from our third to our fourth generations. This process really drove our governance evolution and led to the development of a family council. Our family's succession is happening and has happened in three areas sequentially. It began with family succession on the board, was followed by family succession in management, and is currently ongoing in family ownership. Our governance evolution is also an ongoing process and is driven by emerging functional needs. Some of these needs are created by our growing business. Some of these needs are created by family succession in these three areas. For governance to work it has to adapt to functional needs and it also has to reflect the embedded family culture.
In 1990, we were a third generation family board that was composed of cousins and spouses. It was a fairly large board that included both management and non-management family directors and was primarily led by family management. It included women shareholders who held rotating seats. We had a seat for each of the four, second generation family branches, and the women from those family branches rotated in two-year terms onto the board. Many of these women were the actual descendents of the family and significant shareholders, and they helped to provide an ownership link with our board. Our board also fulfilled a cultural transmission function. At that time, members of the family were brought onto the board after they had come into the business and worked in the business for a certain amount of time. It was a kind of right of passage, and in 1990, the first few members of the fourth generation had already been brought onto the board in this process.
The Need for a Family Council
We started our discussions about a family council in 1989. We had learned about the challenging stage of family business development that we were in, and we started thinking that maybe we needed to have a family council. The following year the board started looking at succession on the board, and they formed an ad-hoc committee with the specific purpose of developing a plan for board succession. The underlying question that we were trying to answer was: how are we going to bring the fourth generation onto the board and into governance? Unlike the third generation, it was a very large generation and the highest percentage of this generation was not in the business. In order to bring this group into greater contact with the business, we founded a family council in 1991. This council was in turn empowered to nominate four rotating seats on the board. The size of our board was expanded again. We had a lot of discussion at the time about the right size and composition of our board. This change was really driven by the desire to involve the fourth generation in governance and we made this change with the recognition that this was an evolutionary process – that this was not the board or the council that we were going to have forever.
The Council's Organization
Initially, we started out with a very inclusive family membership definition. You didn't have to be a shareholder. We included all spouses, adopted descendents; we had a broad definition so that we could bring in the whole family. All family members that were over the age of 21 could participate in a family assembly once a year. The council was elected at this family assembly. There were 16 members to the council and we had an informal goal of spreading representation across the four second generation family branches. The council elected its own officers and also voted to recommend four of its members to the nominating committee of the board.
Branch Representation
Almost from the first day it was created the council has been evolving. First we formalized our family branch representation. We initially wanted to move away from branch representation, but this did not really reflect our embedded culture. There were many family members who had the expectation of branch representation. We were also faced with the differing sizes of those branches and their different levels of participation, so in order to get broad representation we found that we had to formalize it. This formalization, though, did lead to some problems. We had a very complicated structure. We had term limits and we had qualification restrictions both in terms of the council and in terms of the board, and what we found was that this led to a very limited candidate pool, particularly for those family council members who were to serve as directors. While all this was going on in the council, our board was beginning to face the prospect of management succession.
Succession
Our women family directors asked for a committee to develop a succession process. A committee of the board initiated a facilitated process to prepare for succession. They hired a facilitator. The facilitator came and worked with our family doing interviews and then facilitated a large family meeting. Out of this our governance structures were revisited and a plan for a succession process was developed. Our board and council structures were changed again. In first establishing our council we were driven by board succession, while our subsequent governance changes were driven by management succession.
The first thing that we did was to downsize our board and add independent directors. The initial goal of this was to create more objective succession decision-making processes. This also reflected our desire to have a smaller, more professional board. The council representation was changed so that it represented the 12 third generation branches, with each branch selecting two council members. The selection process was no longer formalized. There wasn't a vote. Each family could decide how to select their representation. Initially, the council recommended the slate for inside directors, and the thought was that the nomination of family directors would come from our family council. Subsequently, though, the director nominations process was returned to the board because we saw that nominations were a board function and we wanted to pursue best practice.
The Council's Functions Evolve
Originally, our council activities were very closely linked to the board. This was because of the selection and participation of council directors, but it also reflected the way that we structured our meetings. The board meetings were on Fridays and the council meetings were on Saturdays and attendance at the two meetings was virtually the same. We were preparing our family members to be directors in the council so a lot of the council time was spent in training. The council also functioned to organize meetings, including family meetings, and we conducted a fair amount of committee work early on. Today, our model is evolving towards a more event driven shareholder relations model and less of a representational body.
Many Challenges Face the Council
- Future Challenges of the Family Council
- Drop in participation levels challenges functional model
- Future dramatic increase in family size
- Future dispersal of ownership interests
- Impacts of business growth, complexity, and challenges
- Must continue evolution of council to address current needs
The first challenge that we have experienced is a drop in participation levels that tests our functional model of being a representational body. We have low participation in council meetings. I think we had a certain amount of meeting fatigue in our family. There were just too many meetings and too much business content. We also got to the point where our board and management succession were done and we were facing a change in what the functions of the council would be. We are moving from a shortterm to a long-term orientation, and the needs we are beginning to face are really driven by our next succession cycle. The first driver of all of our future challenges is the dramatic increase in our family size. We have a very large fifth generation that is coming of age and they need orientation. Marriages will double the size of that generation in about 20 years and then we will also face the challenge of orienting adults who are coming from outside the family. The sixth generation will follow closely on that and our family size will explode, as will our diversity and geographic spread. This will be a huge challenge for us. The second main driver of our future challenges is the future dispersal of our ownership interests. We currently still have a small group of key shareholders. Our voting stock concentrates control in older generations and family management can still work directly with these individual shareholders today. Ownership succession for us has lagged the board and management succession, and it is an ongoing and continuous process.
Over time our future ownership dispersal will likely create new functional needs for our council. Right now we are facing the need to have more effective large group shareholder relations.
One of the complicating aspects of ownership in the future is that along with individual shareholders, we are starting to see more and more shareholding vehicles. Shares are held in trusts, partnerships and LLCs. Over time, we will have greater variety in the size of share holdings and the larger holdings will likely be held less by individuals and more by these holding vehicles, which will often be collectively managed. I think we will see these emerging and becoming more like institutional investors. Another driver of our future challenges is the impact of business growth, complexity and challenges. We anticipate our business will continue to grow and develop and we think that it is important that our ownership remain responsive to the business, its needs and its strategic challenges. On the business side, we are modeling best practice to be more like a public company. On the family council side, we will have to continue our evolution to address the current needs of ownership. The structures that we will use will continue to evolve and change. Currently, we view our council as a voluntary association, however, I think it is likely in the future that we will evolve toward more formal structures, as we get larger in size. The important thing is that we remain willing to change.
Adaptation will be the key to our success and this adaptation must have a dual focus. We have to produce the necessary shortterm outcomes of shareholder relations while thinking long-term and keeping focused on the next generation's succession. We also have to keep resources available for our council and the most essential of these resources is human leadership. We need to be focused on the family.
Key On-going Council Functions
- Key On-going Functions of Our Council
- Build family coherence
- Provide for family education and fun
- Draw-out and transmit family culture and values
- Provide the business and board with a link to the family
- Support the development of effective shareholder relations
- Create value for the family and the business
Finally, I would like to list some of the key on-going functions of our council. Whatever our functional model becomes, the purposes remain pretty much the same. We have to build family coherence. We have to provide for family education and fun. We didn't provide enough fun in the past. We have to draw out and transmit the family culture and values. We have to provide the business and the board with a link to the family, and we have to support the development of effective shareholder relations. If we can do all these things effectively, then we will create value for the family and the business through our family council. An effective family council can support the creation of three kinds of value: shareholder value, social value and personal value. Creating shareholder value is absolutely essential for our family. To do this, a family council has to keep family shareholders informed, active and engaged. We have to instill the patient longterm commitment to reinvest that has kept our family business going. We can create social value by building a business that supports many stakeholders and by instilling the idea in the family that we are making a contribution to society through the business. We can create personal value for our family members by promoting education and personal growth through council programming and participation and by telling the stories of the family business, its success and its values. These are the things that personally connect individuals to the greater whole of their family business.
Clear Objectives and Goals
The objective of our council is not only to create these kinds of value, but also to transmit them. The goal is to maintain family continuity and enable our family business' strategic advantages over time. The family council's purpose is to ensure transmission of the family business to the next generation. Assisting an effective transmission between generations is the primary way that a family council can add value. To do this, its functional model must reflect the embedded culture and it must remain adaptive and continue to evolve in response to the needs of the ownership family and the business.
Audience Questions
Do you have a buy/sell agreement for family members and if so, how do you value the shares of the stock and have you had a transaction among the shareholders?
We just instituted a liquidity program. We were using a formula method of valuation for gifting purposes up until this last year, since those were the only transactions that happened. Then we started a liquidity program, and when it was put into place we took our dividend program and we started thinking of it as a liquidity program. We are using part of our dividend program to buy back shares that are based on an outside valuation.
How did you go through the process of evolving? Were there discussions among the family; was there a shared recognition that things had changed?
I think it is kind of interesting to contrast Charlie's family and our family, because Charlie's family has all these rules and they have a very defined structure. It may be that we are so much bigger that it is very difficult to work that way, but I think we also have an ad-hoc culture where we would rather not talk too much about how we are going to solve a problem until we have the problem. Sometimes, we don't have the laid-out process like other families do and sometimes there is a little bit of muddling really. But we meet, and it is a combination of having large meetings, where everyone comes together, and having individual family managers and leaders go out and talk to shareholders.
