Differentiating between the responsibilities of ownership versus management is not just good business practice, it’s fundamental for any business wanting to grow and planning a future exit.
Clearly separating ownership and management’s responsibilities allows you to not only attract the key expertise necessary to grow the business but also retain the individuals necessary for this growth. In turn, enabling these individuals to leverage their expertise optimizes execution. Business opportunities can be maximized and enhanced results make for a more attractive proposition to potential acquirers. A clearly defined boundary between ownership and management then translates into an increased likelihood of a future exit.
When the lines are blurred between what is an ownership decision and what is a management decision typically personnel defer to the owner instead of their superior or the defined process. This deference occurs regardless of the scope or type of decision. Rigor is not implemented in focusing efforts on the overall corporate objectives. Business and individual performance are not gauged against KPIs. Instead the default is to follow the owner’s mandate. Any new hire, including ones within the senior executive team would have difficulty in realizing any changes to improve performance. Performance, corporate culture and productivity are hindered. Business opportunities are missed.
Regardless of the importance of defining an owner’s versus a manager’s role, it’s still a fairly daunting task. As a former owner/founder who has “been there, done that” I recognize all too well how tough it can be. Here are some steps to facilitate the process.
Step 1: It’s About Maximizing Shareholder Value
The first step is to recognize the importance of having a different set of responsibilities for each the owners and the managers. Understand that without clearly defined boundaries no one can focus on their job. Individuals are then incapacitated from carrying out their responsibilities and leveraging their strengths. That means as an owner, as an employer, you’re not benefitting from the totality of the individual’s value. The company’s value cannot then be maximized, and shareholder value is certainly not maximized.
The goals as an owner should be to maximize shareholder value. It stands to reason that you can maximize shareholder value with the separation of ownership and management.
Step 2: The Buck Stops at the Board
The next big step is to discuss the big owner type discussions in a structured and disciplined way. A board is a good option. As an owner, the buck stops with you. You’re responsible for the ‘big ticket items’. Who is running the company becomes the board’s decision. How the company is performing becomes a board discussion. And the strategic direction of the company requires board involvement. So create a board structure. It doesn’t need to be a complex structure but define the:
- Structure of the board (for a smaller business it would be mostly majority shareholders – normally any significant investor will also stipulate a board seat – )
- Frequency of board meetings
- Yearly board schedule
- Topics for discussion
Step 3: Wear 2 Hats
Sometimes owners are also involved in the day-to-day operations of the company. Regardless of the title you need to abide by the hierarchy of the organization and confine your decision-making to the parameters of your role.
On Tuesday you might sit at the Board table with your “Director hat” to talk about strategic decisions, evaluate corporate performance or even assess the CEO’s performance. On Wednesday you need to put on your “Management hat” and focus exclusively on your role without using undue influence because of your ownership in the company. This is a tricky road to navigate. But if the importance of not only bringing in “A” players but also allowing them to carry out their roles to maximize shareholder value is repeatedly remembered, the road becomes a little less bumpy.
Step 4: Preach It & Practice It
The toughest hurdle to overcome is recognizing the problem; then it comes about determining the solution, and lastly executing on the defined plan. So communicate the plan, foster a culture that supports the owner-management boundary and practice what you preach.