I would suggest both the outside shareholder and CFO were correct in their concerns. As a shareholder, I myself would be anxious about paying my taxes associated with the income of the company. But as the CFO, I think it is also reasonable to be concerned about the liquidity of the company. Here is what these different views illustrate: you are going to run into different views no matter what. That’s why it is important to address these issues ahead of time so you can better plan and ensure people don’t feel they have been unfairly treated down the road.
Process Fairness Versus Outcome Fairness
As a business owner, you know all too well that the outcome of a decision is not always what you expect. In business as in life, while we have control over our decisions, we don’t have control over the outcomes of said decisions.
This also proves true when it comes to trying to make fair business decisions. Although your process of coming to a decision about distribution may be fair, you can still end up with a very unfair outcome. Because of this, it’s more important to be concerned about your process itself rather than the outcome of the process.
For instance, I once represented a business owner who had both a number of businesses, as well as wealth outside of these businesses. He knew he was dying, and he wanted to be fair to his three children. In an effort to be fair, he decided to divide his estate equally to each child. However, in deciding how to divide his estate, he chose to give his eldest son the business and his other children the other assets. He explained to them that he felt this son was the best person to run the company and that he did not wish to involve the other siblings as minority owners. He told them he felt this was the fairest way to secure each of their economic futures.
At the time, the children who did not get any of the business assets felt they had not been treated fairly, although they were richly rewarded with other assets. However, a few years later, as the result of some grave problems the father left behind in the business, the business the oldest son had received became almost worthless. At the same time, the assets his other children had received from their father continued to appreciate. In retrospect, I am sure the eldest son would have much preferred to receive the other assets rather than the declining business his father gave him.
As this story serves to remind us, we can seldom control the outcome, only the process.
When Should We Develop A Process For Determining Fairness?
As a business owner, you may choose to ignore fairness as part of your decision-making process. This is your right and prerogative. However, if you are a business owner who does decide to add fairness into your succession planning process, I recommend you develop a process for certain fundamental issues involved in a business. The more you can address these issues in advance and determine how your business will deal with them, the less likely someone will argue at a later date that they have been treated unfairly.
A closely held business owner may wish to consider following a decision-making process when dealing with four significant matters. These four significant matters are as follows:
a. Selecting a leader or the CEO
b. Determining compensation
c. Deciding on a dividend policy
d. Deciding on the transfer of ownership
These four succession planning issues are so fundamental that you really do want to be sure that you’ve developed a decision-making process that is seen as fair and reasonable by all. Without a deliberate process, I have found that regardless of the outcome, someone will almost always argue that they have not been treated fairly. One the other hand, if you develop a decision-making process in advance that takes into account everyone’s views, those who might not like the outcome will at least appreciate the fairness of how the decision was made.