Here's an article we first published on December 2, 2021 They’re funny things, companies. Different parts work or don’t work individually or collectively. And it’s all about who runs it, who directs the strategy, who makes it all happen.
Who is in control. And that’s what matters. Control.
There are three or arguably four types of control that matter in a company. I could write at length about why you actually don’t want one person to have all four because it creates an autocracy. A ‘my way or no way’ culture and also is very risky if that person just disappears. But you want at least two and probably three to make a business work. And, in many ways just as important you need everyone to know who has control and for everyone else to know where they fit in.
The most obvious legal way of having control of a company is holding more than 50% of the shares and votes. In that way, whatever happens strategically or operationally, you get the final say. If it goes to a vote, you win. End of story.
The second way is less than ideal but can be achieved. It is where, when no single shareholder has 50%, an agreement is written up which says that a specific person is able to run the business without the undue influence of the others. Exactly what those agreements say will almost always be kept entirely secret, but they are most common in situations where someone ‘takes over’ but the existing shareholders aren’t prepared to accept that they’ve totally lost control, even though, ironically, they have literally lost control of the whole business.
It could, to make up an example, be that the existing shareholders reduce their interest to 6%, 20% and, say, 25% but aren’t willing to sell those last two shares to give the new person 51%. The problem then is the new person says they’re only interested if they can have control. An argument ensues and the whole thing takes longer than it needed to take but eventually, they are given a legally binding document that says they have the decision-making powers to run the business both day to day and for the longer-term strategic vision. It can work but it’s always an uncomfortable fit and generally doesn’t last very long.
The third way is to control the board. Now this is where a lot of people get confused. A company is a legal entity. It’s a ‘thing’ but, basically, it’s a piece of paper. It’s the staff and the directors who make it do what it does. The board of directors are the people who make the decisions day to day, week to week and, pretty much year to year. And, in most companies they will explain to the shareholders, the owners, what they’ve done and ask them if they’re happy with that. In terms of controlling a business you have to control the board. You would do that by making sure you are on it first and foremost and are the head person. You then fill the board with people who’ll be with you. Family friends and advisers with years of professional experience and maybe even close family members. A brother perhaps. That gives you control.
Now, obviously, you need to get the other shareholders to agree to the board structure as part of the above agreement. The obvious way to do that is you let them be a director themselves. But only if you trust them to add something to the party. Perhaps a knowledge of politics in an influential continent for example, that would probably get you on the board. Alternatively, if you realise that they bring absolutely nothing to the table but a whirlwind of grief and aggravation, you might agree as part of the agreement that you’ll let their lawyer be a director. The fact you have the power to do that actually shows you’ve quite a lot of control.
It’s important to remember that shareholders never attend directors’ meetings unless they are also directors. It would be unworkable. I attend my companies’ board meetings as a director and act in the best interests of the company, not always the best interests of me as a shareholder. Equally, the fact I own some shares in BP doesn’t allow me to rock up to board meetings. It’s the difference between day to day running and an overall strategy. Directors come up with a strategy, owners agree strategy then directors implement it and that divorce of roles is important.
The final way of having control is called a shadow control. The best example is Richard Branson. He doesn’t own many shares and he doesn’t go to meetings, but his power and influence is such that, if he says it, the Virgin Group will do it. It’s very rare. In fact, in my experience, people who think they have that power over directors and staff tend to be in the exact opposite position. They tend to be people who, before a sale, walked round lording it over everyone and successfully irritating them so much the staff all vowed they’d leave if that person didn’t. As a result, they have no power over anything except the power to infuriate. Sometimes this is easily achieved by the new shareholder and director purely as a reaction to how little respect the previous people had.
As I’ve already said, two or three of these types of control is more than enough but most bring problems. When there are costs to be incurred in a business, the company will pay it but that will affect how much money is left for shareholders. If one shareholder lends money to the company to pay it, are there interest payments to the shareholder? If he owns all of it you wouldn’t expect so but if he only owns, say, 49%, he probably would charge interest because that way the other 51% are paying their share for his wealth.
The bigger issue tends to be the 49% owner would be irritated by the fact he was doing all the work and risking his money while the others were getting rich off his capital, sweat and tears. It’s why anything other than owning significantly more than 50% rarely works for long.
Of course, the perception of control is often the most important thing. Particularly in companies where people feel an attachment, a love of the company and what it does. Basically, where the customers are so committed to the company that they fail to accept it’s just a piece of paper. That brings a far greater responsibility to use the control in whatever form it comes to achieve the strategic objectives while keeping customers onside. This is done by keeping them aware of the exact roles and responsibilities of the other shareholders.
If everyone can see clearly who’s in control and feel everything is moving in the right direction, there’s no problem. But if rumours come out that there is dissent in the company and results of the company dip a little, questions will be asked. Then all you need is to see a snap on Facebook of one of the non-controlling shareholders holding a company branded golf umbrella and appearing to be mixing it up with company business in Marbella and the questions will start to come thick and fast.
The advice I would offer in that situation is very simple. Although the 49% person has legal control and can tell everyone that he’s in that position of control, he’s in an extremely difficult position. The customers will be nervous that the others are potentially doing the damage they were previously doing (which led to the need for a partial sale) and demand answers. And the older shareholders might not want their involvement spelled out for all to see but the long-term damage they could do to the company is immense. The managing director and 49% owner would need to say that, for the benefit of the company, clarity has to be offered. And if the old shareholders aren’t happy with that, it just adds to everyone’s belief that something inappropriate is happening. Yes, the new MD and shareholder needs to get on with the other shareholders because they own something together, but they need to know their place or the whole strategic vision becomes at risk. They’ve already had their chance and blew it. They should be glad to be involved in even a minority stake. And perhaps the most important piece of advice I’d offer the 49% shareholder would be to look for any opportunity to buy some of the shares from the others as soon as possible.
Two percent would do it, three would be better, much more would be best. Then the company, the staff, the directors, the potential staff who might join in the near future and the customers can understand the vision, know who is in control (not just on paper but in reality) and find it easier to sign up to the vision. The old shareholders should accept that their dream is over and their presence does nothing but harm to morale inside and outside the building and their continued involvement is little more than a vanity project for themselves. It’s over and they should accept it, they’ve almost certainly long since lost the respect of the company’s employees, customers or to be honest, those involved in the industry generally so better to sell at least some of their remaining shares and get on with their lives.
Of course, many companies can successfully run for years with the ‘minority controller’ situation. They have control over all the governance and day to day running. There is no long-term risk to the company or its finances. There’s no way the professional advisers I mentioned before would allow him to be in that position so, customers of any company in that situation shouldn’t worry too much. But they should push for clarity and answers and should hope to see a genuine majority control position in the short to medium term future to protect the strategic vision of the business.
Now, why does all of this matter at Sunderland? Well, I’ve no idea. I just thought you might be interested in a theoretical business case and the only way I can see any resolution to it.
