The Importance of Training Non-Active Shareholders

One of the most common sources of problems in family firms is the disparity in information levels among members of the family who work for the business and know everything about it, and those who do not and are generally quite vague about what is going on. This sense of being an outsider tends to built up strong feelings of insecurity and frustration. In family businesses as a whole - and not just in Brazil - the insiders tend to be men, while women are the outsiders.

"What are my brothers (or cousins) getting up to?" wonders an insecure shareholder who doesn't receive information and was not trained to understand what goes on in the business. Worse still: "Are they robbing me?" or even "Am I running the risk of losing everything I own?"

No matter how competent and honest these brothers or cousins may be, their female shareholders have no way of confirming this - a situation that has dragged on for generations. The new factor is that these women - together with other outside shareholders - are no longer willing to accept this situation. They have frequently contacted lawyers or external auditors to keep them informed or provide protection against the risks their assets run, whether real or imaginary. At times, this situation has resulted in conflicts that may even result in the family losing the business.

Recently, a well-known family firm was battered by a conflict that lasted several years between insider and outsider shareholders. Those who were not part of management were unhappy about what was going on in the company. This conflict absorbed several million dollars in fees paid to lawyers and auditors, and ended up morosely with an agreement that could have been reached far earlier. During this period, the business stagnated and failed to make investments, losing its market share. Soon after the fight ended, the family sold the business.

None of this had to happen. Two things could have been done to avoid this distressing outcome:

1. Information: family members working for the company must learn to respect the rights of their outside shareholders and keep them informed.

2. Training: men or women shareholders not working for the company can absorb sufficient knowledge to understand what is happening, making them into competent shareholders. They can be advised of who has the right to require a Board to be set up and on which they can claim a seat, learning what to ask and how to assess the performance of its management.

Although new to Brazil, this concept of shareholder training is already routine practice in Europe. There no one would dream of inheriting valuable assets with no idea of how to care for them. Regardless of the vocation of these shareholders - housewife, artist, physician or any other profession -- it is not hard to learn the basic skills that help monitor the progress of a business. This training can be divided into the following stages;

1. Legal Knowledge: Overview of the structure of a public corporation and a limited liability company, By-Laws or Articles of Incorporation, and shareholder rights. It is also worthwhile offering an overview of family law. It is amazing how little we know about this topic which can become important in any family business. When dealing with a divorce or winding up an estate, people frequently run into unpleasant surprises because they were not sufficiently well-informed on these matters. It is also good to learn a little more about the concept of the stable union, introduced a few years ago in Brazil to replace the outdated concept of the common-law marriage. It is also important to learn about the importance of drawing up a will.

2. Reading a balance sheet: there are many people who think that balance sheets are complicated, an impenetrable puzzle. Nothing could be more mistaken: accounting is something so simple that even a small child can understand it. In a class lasting only an hour and a half, it is possible to provide the basic information needed to read a balance sheet and get a good idea of how the business is doing.

3. Most family conflicts are not caused by objective reasons: such as business or money, but rather have emotional, affective roots. It is important to endow family members with an idea of how these conflicts may arise, offering suggestions on how to avoid them or at least reduce the probability of their occurrence.

All this training can easily be provided. What is missing so far is that family members not working for the firm fail to perceive how important this knowledge could be for them. They remain unaware that secure and well-informed non-active shareholders are far more important than the false feeling of power savored by insiders clinging to their privileges, determined to avoid sharing information with other shareholders.