INTRODUCTION II. PUBLICLY HELD FAMILY COMPANIES A. Definitions and Incidence B. Firm Performance C. Suggestive Circumstances III. PRIVATE BENEFITS OF CONTROL A. Complexities of Control and the Benefits It Confers B. Illicit Pecuniary Benefits IV. DISTINCTIVE FUNCTIONS OF INDEPENDENT DIRECTORS A. Directors' Duties and Definitions of-Independence 1. Directors' Duties 2. Definitions of Independence B. Functions Served by Independent Directors 1. Vigilance 2. Reality Checks a. Family Identity and Transactions in Control b. CEO Succession and Tenure 3. Intermediating Between Management and Family Shareholders a. Independent Directors and Founders b. Family Rebels on the Board 4. Formal lnstitutions and Practices of Governance V. CONCLUSION: DEBATES VIEWED UNDER THE RAKING LIGHT I. INTRODUCTION
Companies within the sphere of public capital markets in the United States that retain characteristics of family firms pose a series of intriguing questions about corporate governance that warrant examination in light of the surprising incidence and size of such firms. In particular, a family-influenced or family-controlled firm with nonfamily equity investors is an environment in which directors' roles and duties require careful assessment. Although in many reported cases--some well-known for other reasons--directors' performance within family-controlled companies appears to have ranged in quality from exemplary to deplorable, the underlying issues surrounding directors remain unexplored in legal scholarship. Moreover, questions concerning the governance of such companies regularly surface in highly visible ways. For example, in 2006 directors of the Ford Motor Company confronted the difficult question of whether a descendant of the firm's founder, one bearing the last name "Ford," should continue serving as the company's CEO. (1) More recently, directors of Dow Jones & Co.--62% of its voting power represented by shares held by trusts on behalf of the Bancroft family--assessed the company's response to a financially generous offer for its shares made by News Corporation (News Corp.), while the Bancrofts and their trustees determined their responses as Dow Jones's controlling shareholders. (2) News Corp. itself, originally Australian but since reincorporated in Delaware, (3) is controlled by Rupert Murdoch and, through a trust, the Murdoch family controls around 30% of News Corp.'s shares. (4) The past and possibly future roles for Mr. Murdoch's own children within News Corp. bear on the company's future, as do allegiances and disaffections internal to the family. (5) On a darker note, members of the Rigas family, who founded and controlled the large telecommunications company Adelphia, were convicted of federal felonies grounded in their apparent disregard of common sense and legal boundaries between the company's assets and their own entitlements, compounded by federal securities fraud. (6)
Public companies that are either controlled by individual founders or members of the founder's family or, more loosely, influenced by them, are a significant phenomenon in the United States. Definitional and measurement questions aside for the moment, such firms are often said to account for about one third of the Fortune 500. (7) Although that is a minority of the Fortune 500, it represents a substantial minority and a substantial fraction of overall market capitalization. Its substantiality calls into question the wisdom of premising one's perspective on corporate governance in the United States on a stylized fact of diffuse ownership (8) and then identifying the consequences that stem from a separation between ownership and control as the sole governance concerns for publicly held companies in the United States, in contrast with their counterparts elsewhere. (9) That is, a single focus on diffused ownership and its consequences may tend to slight the governance implications of less typical ownership structures. Moreover, within a cohort of family-controlled public firms, dual-voting structures enable the preservation of control in the absence of a proportionate investment in the firm's equity. Within this cohort of firms the market for corporate control does not operate with the immediacy and vigor observed elsewhere. Transactions in control occur only through processes of negotiation and consent, which heightens the importance of governance mechanisms that operate within dual-class firms.
To be sure, the same firm does not necessarily remain family-controlled or family-influenced throughout its existence. Family influence and presence within a publicly held firm may dissipate within a generation of the firm's founding or may endure through multiple generations. Many firms that have a controlling shareholder following an initial public offering (IPO) subsequently have widely dispersed ownership with no controlling shareholder. (10) In other firms, control and influence descend from the founder to children and other members of the founder's family, whether during or after the founder's association with the company, thereby creating a cohort of owners who may not view their shares in the family firm as fungible investment interests. (11)
Additionally, family companies with public shareholders are interesting simply because they may exhibit many of the characteristics of family businesses more generally. Hierarchies and patterns of deference rooted in the family may echo within the firm. Individuals' roles--as family member, equity owner, or participant in business management or operations--may overlap and, at times, collide. Tensions within the family may be reflected in decisions that formally concern the business or its ownership structure. Family stories and business stories often coincide. (12) Family history may shape how a participant understands the company's business and the terms on which the participant identifies with the business. Within a family company, particular business assets and operations may carry symbolic values for family members that inhibit their ability or willingness to listen to or otherwise learn the facts as viewed more objectively. (13) These factors differentiate family groups from other types of controlling shareholders. Moreover, within family companies, even the financial ties among members are complicated by the possibility and vicissitudes of anticipated inheritance, uniquely personalized contingencies that do not accompany ties with other types of controlling shareholders.
These characteristics make service as a director challenging. The challenges are especially severe for independent directors, in part because the concept of independence is poorly defined in this context. Analyses of the roles and duties of independent directors typically focus on a director's ties to the company's business and its senior management, not allegiances to particular shareholders. Moreover, the composition of family-company boards is distinctive because such boards often include members of the family or directors who are formally designated as family representatives. (14) Family representation on the board may be formally assured through voting agreements among family shareholders. (15) Effective service as an independent director in this context may require buffering senior management from family shareholders, whether or not they are fellow members of the board, as well as difficult assessments of the stated preferences of family shareholders in light of the corporation's business situation and the interests of its nonfamily shareholders.
The questions examined in this Article are relevant to debates within the ample scholarly literature on corporate governance. A focus on family firms with public shareholders furnishes an oblique and revealing angle of vision into ongoing debates and questions concerning corporate governance within public companies more generally. Something like a raking light cast across the surface of a painting or manuscript, this focus illumines features and limitations otherwise overlooked. Publicly held family firms may be ones in which basic questions about the corporation's overall objectives and their implications for directors are more difficult to answer. For example, directors are often urged to adopt, as a lodestar, the maximization of shareholder value. However, in family-controlled firms, the definition and measurement of "shareholder value" turns on which cohort of shareholders is relevant. For family shareholders, value may encompass expectations, commitments, and measures not relevant to other shareholders. Additionally, a focus on these firms may prompt one to doubt the wisdom of urging that directors translate shareholders' stated preferences directly into action, given the prospect that shareholders' interests may so sharply diverge. Even if viewed as transitional forms of indeterminate duration--as an interlude between a firm's IPO and wide dispersion of its shares--some family-controlled firms endure through multiple generations, and even those in which the founder's or family's interest diffuses more rapidly nonetheless represent a sizable fraction of public companies in the United States.
Moreover, although it is clear that the possession and exercise of control may benefit shareholders, the personal benefits of control are diverse. The law legitimates some and proscribes others. In many ways, the law insulates the infusion of a family's values and interests into the culture of the corporation it controls, recognizing that such an infusion is often either benign or beyond the effective reach of the law. Delaware's Court of Chancery recently acknowledged that founders and their descendants commonly "believe that their businesses stand for something more than their stock price. Founders therefore often care how their family legacy--in the form of a corporate culture that treats workers and consumers well, or a commitment to product quality--will fare if the...
Guests at the table? Independent directors in family-influenced public companies.
|Author:||DeMott, Deborah A.|
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