This is the second in a series of articles on problems confronting business people who elect to become absentee owners of a business. The reader is referred to Part One for a statement of the usual problems confronting absentee owners. This article shall discuss methods which this office has seen successfully minimize the problems confronting such an owner.
METHODS TO PONDER:
Most business owners supervise their business with day to day personal interaction, usually working more hours than most employees. This “hands on” approach to business allows the employer to truly understand the dynamics of the business, from personnel to interaction with customers.
Once that constant personal supervision is cut back, there must be devised ways to maintain sufficient connection to much of the business information so as to allow the owner to be aware of trends and the many dynamics within the company. This matters not only because the owner has to know if he or she must return to protect the business, but also because those dynamics are important to understand changing roles of the managers left behind, a topic discussed in Part One of this series as vital to understand if the owner is not to find him or herself betrayed.
How to do this?
A. THE USUAL METHODS: GOOD BUT SELDOM ENOUGH:
First, let us discuss the methods most often used and seldom fully successful. Most absentee owners use a combination of methods.
First, owners review the financials quarterly or monthly. This is certainly needed (monthly being better than quarterly) but is far from perfect. Those figures describe a past situation, not a trend or future situations, are silent on all issues but raw performance, and can be easily manipulated by any manager who knows how to work the books. One owner we represented was convinced a saleswoman was “loafing” off the moment he left. For two quarters her figures declined. He was considering firing her until she landed the massive contract she had been spending most of her time working on…and was the only salesperson to remain loyal to him when the other three (whose figures had improved while the owner was gone) left.
Second, the owners often arrange “briefing” meetings, perhaps quarterly, sometimes more often, to come back to the plant and inspect the premises, talk with the employees, etc. The problem with this method is that it becomes an “Admirals Inspection.” Knowing that the boss is returning simply compels those remaining behind to clean up for the inspection, prepare a pretty picture for the day that the boss is back, then return to normal conduct when the inspection is done.
Third, owners occasionally “drop by” for unannounced but always dreaded “Surprise visits.” While such appearances do not have the drawback of allowing the remaining personnel to create a false impression by preparing in advance for a visit, thus are better, they are often disrupting or annoying to the managers and employees left behind. Further, a few hours or even a day in a plant does not do more than give a snap shot of activities and quite often key personnel are already committed to other meetings or events or even out of the office. Lastly, after several such visits occur, the remaining employees begin to feel distrusted and “spied” upon and morale can suffer.
An excellent business woman we knew would have “hidden” surprise visits. Perhaps once every two weeks there would be a reason why she would have to come in…she would arrange a meeting with a third party in the area or would need to use her old office…and would “drop by” perhaps once every ten days with a few hour’s notice. Sometimes she would arrange to take a key employee to lunch, casually, during these visits. This worked much better than the more formal inspections used by others.
Fourth, some owners utilize trusted employees to report back on events, at times even encouraging “spying.” In our experience, this reporting is almost inevitable whenever there is an absentee owner since usually one or two of the employees is annoyed by the new management and finds ways to complain to the owners. But we have known owners who actually “recruited” spies within the company to report back on events.
There are many problems with this method. Most spies have their own agenda and their information is or should be suspect. Second, the effect on morale can be devastating. Inevitably suspicions arise, the company is divided in loyalties, and smooth operations deteriorate. Lastly, the information imparted cannot be utilized without revealing methods of discovery that most managers will find insulting to the point of leading to resignations.
Fifth, and most dangerous, many owners blithely state that they trust and respect the managers who they selected and do not perform any oversight whatsoever or casually check in once or twice a year, giving the managers “freedom” to become their own bosses. As stated in the first section of this series, the dynamics of running a business can undermine that former relationship and to ignore them is to do so at one’s peril. Or, as one manager said to the writer during litigation brought by the former owner, “What did he think was going to happen? He was never there, we were doing all the work, he’d only come in to collect his paycheck. After a few years of that…well, it gets kind of old.” And that manager was the son of the owner suing!
Giving the remaining managers freedom to work and freedom from constant supervision is necessary and beneficial…but the right balance must be found. Or, as an owner put it to the writer, “Check every so often…and let them know you are checking every so often…but don’t shove it in their faces.”
A combination of the above methods, with safeguards and with restraint, is certainly appropriate. Checking the books, visiting the premises, listening, if not always reacting, to reports from managers and employees there and letting the managers have some freedom of action is all intelligent and necessary. We suggest additional methods, however, to increase the chances for a successful absentee ownership.
B. ADDITIONAL METHODS TO CONSIDER:
1. REMOTE ACCESS TO INFORMATION:
One advantage that technology gives absentee owners now is on line constant access to most information within the office if the owner wishes. Any good computer expert can set up a system by which the owner can, remotely, access all information in real time from correspondence to financial records and can do it cheaply anywhere in the world.
Recall that information on a company computer is NOT personal. The courts have routinely held that if an employee utilizes a company computer, that employee consents automatically to having the company gain access to the information.
The intelligent owner will always make sure he or she has all the relevant passwords and check events within the company on a regular basis. One owner actually took lessons to master how to use the computer better and would schedule weekly “checks” into ongoing events, correspondence, e mails between employees, etc. “I can keep my finger on the pulse from my desk overlooking the Lake,” he cheerfully told the author. “And I make sure they know I am doing it…commenting on their letters or replying to e mails let’s them know that the old boss is still to be reckoned with.”
2. USE OF “GOLDEN CHAINS”:
As discussed in detail in our article on Golden Chains, there are various methods to use with key employees that will both give them incentive to remain with the Company and cost them a good deal if they elect to leave the company.
These include non compete agreements which, if combined with some type of minor ownership, are fully enforceable in California. Any owner seeking to operate from afar should most carefully create the various structures described in the Golden Chains article and rigorously enforce the tools that exist from those structure.
3. EDUCATION OF ROLE OF CAPITAL:
Most absentee owners are still far more vital to the Company than the employees and managers may realize yet most absentee owners do not take the time or trouble to educate the remaining managers as to the important role they play. Part of this may just be pride: the owner does not feel the need to demonstrate to employees his or her own value.
But that is a false sense of pride. Especially when an owner is absent, there is a tendency among those working day to day to assume the owner is not “earning” his or her way. Yes, that feeling may be unjustified and, yes, the owner is not legally required to prove value to employees…but such education can be a wise move if one wants to avoid the dangers described in the first part of this article.
Thus, if the owner still guarantees debt; if the owner’s relationship with banks, major vendors and customers and suppliers is a valuable asset of the company, the owner should find some way to communicate that to the key employees and management. One owner found an excellent way to bring home to the key employees his critical role. He simply asked them if they would be willing to guaranty the one million dollar line of credit with the bank. The bank had not even asked, but the owner reasoned that if they knew that he was putting so much of his wealth at risk, they would understand one reason he took a large paycheck home.
“And what would have happened if one of them had volunteered to do just that, “ I asked?
“Then I would have known the one guy I could expect to be the next boss and he would have received a promotion on the spot. But that was no real fear…when people have to put up that type of risk capital, they normally realize that a paycheck…without risk…makes one sleep better at night.”
4. CREATE A HIERARCHY OF CORE MANAGEMENT:
Napoleon put it cynically when speaking of the effect medals would have on his soldiers. Fingering a small medal, he commented, “Men will risk all for a little piece of tin.”
Much of the dissatisfaction that remaining managers feel is that they are not given the status of owners or treated as more than a substitute for the absentee boss. One stated to me, “If things go badly, I get blamed. If things go well, he gets the money, the credit and the prestige.”
The absentee owners walks a tight rope here. He must make the manager feel valued…but if he feels more valuable than the owner, betrayal becomes a real possibility.
The way one wise owner solved that problem was to create a “Core Team” of managers who met with him at least every other week at an expensive restaurant or retreat to discuss strategic matters, and who thus became part of a planning team that received status and recognition from the other employees left behind. He fully realized that he faced the danger of that team becoming his new competitors, thus used Golden Chains plus non compete agreements for at least half the members of the team. That way he knew that he always would have an ally on the team to report on any disaffection.
5, EDUCATE MANAGEMENT AS TO POSSIBLE ROLES IN THE FUTURE.
Part of being an absentee owner is to understand that any good manager will eventually want to become…an absentee owner. Put even more simply, the grass on this side of the fence must appear at least nearly as green as on the other side.
To achieve that, the wise absentee owner will create a very real chance for future ownership in the minds of the key employees and managers but will do so very carefully, with legal advice, so that no “constructive contract” is created by the promise. One owner created certain criteria for future ownership that had a right to purchase stock on the part of employees existing IF they made a certain profit for a certain period of time. Further, if the profit exceeded a certain amount, they would receive a discount on the price of the stock.
Such plans have to be carefully structured with good accounting and legal advice, but there is no reason a carefully structured plan cannot replace the desire to start one’s own business.
6, DIVIDE THE COMPANY INTO SELF CONTAINED DIVISIONS:
Stalin once commented that the way he kept his commissars from seeking to overthrow him was to keep them fighting among themselves. Such a cynical view does not usually work: Stalin, after all, killed millions. But a more civilized variation can work.
One can split a company into divisions which interact but which have separate criteria for performance and separate bonus structures and let the divisions compete with each other to achieve their ends. This not only can create incentive, but can avoid the “conspiracy” of top managers banding together to take over the company.
One company divided its two main sales components (industrial and consumer) into separate divisions, arranged a reporting methodology and accounting system so that if one succeeded in one’s division one received a good bonus, and made sure the absentee owner was the main liaison between the two divisions. In terms of the overall company, the absentee owners was the only person with a finger on all aspects yet the managers knew that if they succeeded in their bailiwick, they would earn a good bonus.
One disadvantage is that one does not create the type of strategic planning training for the entire company that one would otherwise wish. One is forced to remain a boss and run the overall company and at the time of full retirement or sale of the company, there is not likely to be anyone with any experience in running the entire operation.
7. USE THE PROFESSIONALS:
Even when one leaves the day to day grind, the accountant, lawyers, financial advisors, etc. usually remain behind interacting with the personnel and usually have access to vital information. The fiduciary duty that pertains to such professionals normally runs to the owner…in this case the absentee owner…and they can be an excellent “early warning” system of problems within the company and possible disaffection with key managers.
And most professionals have been through similar situations before and can quickly spot trouble areas before less experienced people would see it.
Or, as one client put it when the writer cautioned him about leaving for a three month vacation when he would be entirely out of reach, “I have my eyes and ears still here…you.”
None of the above methods are fool proof and the wise owner will use a combination of all of them…and his or her own knowledge of his or her own business…to devise a system that maximizes the chance for successful absentee ownership. Above all, one must remain flexible and realize that as employees come and go, as the business climate changes, methods to maintain adequate supervision while absent will need to alter as well.
This may not be obvious when one is usually out of the premises but is a skill set quite important to any owner who wishes to keep ownership from afar.
The writer remembers one successful absentee owner who actually spent more time reviewing industry publications and trends from abroad than he had when doing the day to day business. When asked if that made sense, he commented that he finally had time to understand the strategic side of the business and was enjoying viewing the business from that slightly more distant vantage.
“But don’t you find it annoying to have to do that,” I asked?
“Not as annoying as having my business disappear on me. For ten hours a month I can figure out the basic industry and know what strategic decisions have to be made…I used to put in that many hours each day. No big deal.”
And perhaps in that statement is the most important lesson to be learned: to be an absentee owner requires one…to work. One works differently but one still works.
And if one does not want to do that work, it is time to sell the business, instead.