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How engaged is your ownership group?

Nicolas Hollanders explains what it means for family business owners to be engaged with the project.

An “active” or “engaged” owner usually refers to a shareholder that, although not entrusted with either a direct governance or operational role, is fully committed to the continuity of the family business.

An ill-studied concept

Different conceptual models have been built describing the drivers of family business continuity and the conditions for success, though few have focused directly on the concept of engaged owners. The assumption among many practitioners is that a good governance system is likely to yield engagement as a natural outcome of the efforts. This might be true, but it tells us little about the desire and the readiness of owners to engage in such efforts, nor does it help distinguish which of these efforts are likely to generate the highest motivation post factum.

Semantically, “owners’ engagement” in a family business has little in common with the notion of “shareholder engagement” as used in the capital markets. In this context, engagement describes the process by which investors in public companies leverage their ownership to influence corporate decision-making. Though there is clearly some overlap, this notion is far too restrictive as it is geared towards exerting influence on specific subjects such as the appointment of management or directors, executive compensation, or sustainability objectives, to name a just a few. Institutional shareholders are aligned around economic incentives and don’t need to like each other, work together effectively, or have any personal relationship at all. In contrast, being able to harness the positive collaboration and support of family members is a necessary condition for enterprise continuity.

The distinction between engaged and passive owners in a family business is much less about influence over decisions. The demographics of the family, the evolution of the business, and the inevitability of generational transitions require the system to continuously adapt to new constraints and seize new opportunities. Consequently, family governance depends not only on its leaders, but also on the contributions and support of all its members. Whether they are willing or not to “engage” is likely to make a substantial difference in terms of their capacity to align behind a shared vision, to live in accordance with the family’s core values, and to support leadership in their stewardship of the enterprise.

An “active” or “engaged” owner usually refers to a shareholder that, although not entrusted with either a direct governance or operational role, is fully committed to the continuity of the family business. They remain informed and participate whenever asked, interact openly with their peers, support new initiatives, and occasionally contribute directly to the evolution of the system. In contrast, the term “passive” or “disengaged” owner is usually used to describe an individual that has lost their emotional connection to the business and sees it simply as a vehicle to generate financial returns. This often translates into a more reactive attitude, where behavior is driven essentially by compliance in order to continue to enjoy the economic benefits.

Defining engagement

Engagement has been studied deeply in other fields, mostly related to work environments, volunteer activities and teaching. There are countless studies and theories attempting to define and characterize the concept and its implication for organizations. Yet no authoritative standard has ever emerged from these efforts. Several competing (sometimes proprietary) definitions have been developed by HR consulting firms, eager to offer advice on how engagement can be created and leveraged. While some provide interesting insights, many confuse the conditions necessary to support engagement with the measure of engagement itself. With a few notable exceptions, engagement in the family business has mostly been studied from an employment perspective.

But is engagement really that different in a family governance system? Can we not satisfy ourselves with a generic description of the term, and take the inferential leap of faith that engagement is likely to emerge from any effort to improve the governance of the system? If only that were true.

As we will see, engagement is closely tied to the notion of “discretionary effort”. Any member in a family governance system can chose to which degree they want to participate in- or contribute to- the system. In a family system, the requirements to stay “in” the system are usually very low. The passive owner can satisfy himself with mere compliance with the rules and regulations the family has defined. He or she will attend the compulsory meetings (if any), sign diligently any form submitted, respect the restrictions for share transfers and punctually cash the dividends. Doing so, their owner’s status will be safe, as will their descendant’s. Passive owners will contribute little to nothing to the advancement of the organization, and yet they will still remain part of it and participate in its economic returns. This means that the continuity and the future success depends almost entirely on the discretionary efforts that others will make. These others are the truly engaged owners, and this engagement is a vital ingredient in the long-term survival of the system.

Engagement vs. Involvement

Some describe the “engagement” of owners as the degree to which they are involved in the family governance system. In this context, engagement equates with participation, and the extent to which individuals are active in several capacities. This involvement is however a mere factual observation, which tells us how broadly owners are involved, but not how deeply they are invested in their respective capacities, roles or tasks.

One could even go a step further and argue that involvement is more likely a result of engagement: the more engaged the owner is, the more willing and available he or she will be to pick up a responsibility. In that perspective, involvement is rather an outcome of engagement than a substitute.

Engagement vs. Satisfaction

Both notions are sometimes confused but point at two very different realities: satisfaction is a state of “satiety” or “pleasantness” where there is little compelling drive for change or improvement. Engagement in contrast is a more dynamic concept, reflecting that the individual has energy and enthusiasm available to contribute further to the performance or the enhancement of the organization. In this sense, engagement connotes “activation”, as opposed to “satiation”.

An owner can be very dissatisfied with the current state of the organization yet have a lot of drive and willingness to contribute to its improvement. Think of the members of the Next Generation, who display a strong enthusiasm and desire to participate, even though they disagree with some of the fundamental governance or leadership. Conversely, owners who are very satisfied with the system might well favor the status quo and feel little energy for change, potentially putting the long-term survival of the system at risk.

Engagement vs. Motivation

Irrespective of activity, people can deploy varying degrees of themselves in their roles – whether physically, cognitively, or emotionally. However, as demonstrated in early engagement literature, the more they are willing and motivated to draw into their own resources, the more likely they are to achieve a more impactful performance.

Motivation is therefore closely correlated with engagement. However, both notions do not completely overlap: motivation in general is a broader concept as it can also be driven by shorter-term circumstances or individual rewards. In contrast, engagement connotes a more enduring condition geared towards the betterment of the organization. Engagement can therefore be considered as one of several key aspects of the more general construct of motivation.

Towards a definition of owner engagement in a family business

Drawing on earlier research in related fields and considering the specific context of family businesses, we propose to define family owner’s engagement as follows:

“The emotional commitment of  family owners who engage in discretionary efforts to support the long-term continuity of their family enterprise”.

Two fundamental notions underpin this definition:

  • Emotional commitment” refers to the intrinsic, affective nature of engagement. Engagement cannot be imposed and depends on the perception that the individual has of the system and its future, and the desire to remain part of it.
  • Discretionary” reflects that the engaged owner is not just willing or ready to engage. He or she does actively participate, though not by compliance or obligation, but rather by the desire to go beyond what is expected of all family members.
  • Finally, the term “effort” (towards the goal) is deliberately preferred to any notion of achieving results. Engagement is about the desire to contribute to its advancement and longevity, not the direct outcome of these efforts, which is obviously subject to other influences beyond their control.

Why measure engagement?

Measuring the engagement of owners offers four distinct advantages for family leadership teams:

  1. Understanding the “State of the Union”: Before embarking on a generational transition or governance (re)design, the family may want to understand how much “fuel” there is in the system. What is the available energy to undertake the work? Families with low levels of engagement might be tempted by a “Copernican revolution”, offering immediate and deep transformation, at the risk of failing despite the best intentions. In such circumstances, an incremental approach might more likely be successful, where each step yields additional engagement and followership without shocking the system with deep structural change.
  2. Providing a “Health Check” of the system: In addition to understanding current levels of engagement within the system, measuring engagement longitudinally offers a unique perspective on the likelihood of successful continuity. Have recent changes made in the system improved the engagement of the family? Conversely, if engagement levels of family members are steadily decreasing, when and how should leadership intervene?
  3. Identifying Opportunities and Risks: Engagement is unlikely to be evenly distributed among all family owners. Measuring engagement at a more granular level allows leaders to better understand their constituencies and their levels of engagement by generation, location, gender, and position in the family, to name just a few. Understanding where engagement is either higher or lower helps define a targeted action plan, segmented by audience, to nurture future leadership candidates and identify worrisome pockets of disengagement.
  4. Identifying Priorities: If engagement is to be measured simultaneously with a governance system evaluation, statistical tools can help find correlations between the level of engagement and the ratings across several dimensions of the system (including vision, values, education, communication, structures, etc.). This will also help the family focus its efforts on the topics where improvement is likely to yield a higher level of engagement overall.

Building a family engagement model

The indicators of engagement

Based on the above definition, we believe the following elements to be good indicators of the level of ownership engagement:

  1. The belief that the Family Ownership system is adequate and therefore is viable in the long-term;
  2. The sense of fulfillment that Owners experience when investing their time and resources in the development of the System;
  3. The expression of desire to remain part of the System in the future, both for themselves and their descendants.

Whilst these dimensions can be built into surveys with appropriate scales and dimensions, one should not forget that engagement is an abstract construct. Unlike speed or temperature with meaning by themselves, engagement scores can only make sense when compared to other systems or across time, or by looking at different sub-groups compared to the scores of the Family as a whole.

The drivers of engagement

Limited research has yet been conducted to understand which factors are most likely to affect the engagement of family business owners. Based on our experience, we can however define and characterize the different dimensions of a governance system that underpin its overall continuity. This will allow us to draw causal inferences based on strong correlations.

As an example, the disbelief in the long-term future might be tied to the absence of a compelling vision, or the lack of leadership resources in the family to sustain it. Likewise, the reluctance to invest discretionary time or resources might be linked to the lack of available information, or a misalignment between personal aspirations and the collective aspirations of the family. Finally, the desire to stay within the system – or the preference to leave – might be linked to a variety of factors: dividend level, risk incurred, or simply lack of trust in the current leadership team.

Identifying drivers for engagement therefore requires nesting this assessment in a broader continuity framework. Such a questionnaire should be tailored to the generational stage of the family, its composition, and the current state of its governance. Assuming the number of respondents is large enough, statistical analysis will allow investigation into the correlations between the surveyed dimensions and the expressed level of engagement. From there, the Family will be able to select the most productive initiatives to enhance the overall system for the benefit of all.

Conclusion

The importance of engagement is not be underestimated. Engagement is a dynamic vector and is a critical condition for a Family Business system to remain adaptable and face challenges, notably generational shifts. For lack of it, the system is unlikely to survive.

Measuring engagement is a powerful tool for enterprising families and their advisors. From an initial diagnostic, potentially benchmarked with other families, to a measure of progress over time, a carefully designed engagement survey can provide both grounding and direction for any governance work.

Selected References

  • Macy & Schneider, The Meaning of Employee Engagement, 2008
  • Mercer Capital, How to promote positive shareholder engagement
  • Kahn, Psychological conditions of personal engagement and disengagement at work, 2005
  • Li Sun, Employee engagement: a literature review, 2019
  • IFB, Next Generation Engagement in UK family businesses, 2016
  • Meyer & Herscovitch, Commitment in the workplace: toward a general model, 2001
  • Buckingham and Coffman, First break all the rules, 1999
  • Erickson, Testimony submitted to the US Senate Committee on Health, Education and Labor, 2005
  • Azoury, Daoub and Sleiaty, Employee engagement in family and non-family firms, 2013
  • Renkert-Thomas, Engaged Ownership: A Guide for Owners of Family Businesses, 2015
  • Siegling, Knight & Petrides, Drive: Measurement of a sleeping giant, 2019

For more on the subject, listen to our LGA Lighthouse podcast episode:

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