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December 01, 2010 at 07:00 PM
One sign that a business is maturing is when its leaders do not fear dissent. This is also a sign that the company has not yet drifted into stodgy bureaucracy. Because the independent advisory profession is relatively young, owners of such practices often struggle with whether to allow freedom of ideas or to limit tolerance for contrary views. Do they seek obedience or seek consensus?
Some firms bounce between free-spirited, open dialogue and a paranoid death grip, like a driver alternately pushing the brake and the accelerator while hurtling down the highway. “Great idea, let’s go with it; no, shut up and do as I say!”
This debate about how to grow an advisory business becomes especially fervent when firm ownership broadens beyond the founder. Should ownership include the right to vote on policies, procedures and people? Should new owners have a real say in how the business is run—not just an opinion, but a vote on issues that count?
There are two familiar scenarios in which the right-to-vote debate arises: 1.) when one advisory firm merges into another; and 2.) when advisors open up the “partnership” to new people who are helping the firm to grow.
Those in control who oppose granting suffrage to others can offer a very rational argument as to why, as founders of the enterprise, they are unwilling to allow new people—especially minority shareholders—to exert influence over the strategic direction of the business. Leaders often fear the possibility of an overthrow if the other shareholders were to “gang up” on them. There are hundreds of examples in professions where upstarts staged a successful coup d’état or collective walk-outs that marginalized another shareholder’s leverage, so this fear is not unfounded.
On the other hand, those who seek voting rights along with the responsibility of ownership believe that this is a natural entitlement, as they are putting themselves on the line for the business—and the other shareholders. They too fear being marginalized. Without a vote, they feel they would have no leverage over the directions and decisions that could affect their stake.
The Merger Dilemma
Lately I’ve been hearing many tales of woe from prospective merger candidates who got all the way to the altar with a larger firm only to be told that their shares would have restricted rights or be of a different class with different features. Non-voting shares often seem to be the final card played in negotiations. This last minute sleight of hand accomplishes only one thing: confirms that they can’t be trusted.
I know one such situation in which two firms were an absolutely perfect match. They had identical investment philosophies, approaches to how they served clients, client demographics and a shared sense of what was important in life. They spent at least a year getting to know each other before delving into the financial aspects of the merger, just to ensure that they were making the right decision. As an observer who knew both firms reasonably well, I was very proud of how they approached their pending nuptials—as a relationship based on transparency and trust, rather than who gets paid what and who controls what. The terms of the merger included an exchange of shares based on an independent valuation of both firms.
The principal shareholder of the larger practice told the sole owner of the smaller practice that they were very excited about the impact of the merger on both their businesses. “But,” he said, “upon deliberation of what this means for us, my partners and I decided that we would not give you voting shares as part of the deal. We never want to be in a position where you could team up with the other partners and outvote one of us. Nor do we want to be in a position where your vote steers us in a direction one of us might not want to go. My partners and I worked hard to build our business relationship and are concerned that if we allow you voting rights, this foundation could be disrupted.”
