Both family businesses and private companies tend to struggle with the decision of when and why they should bring outside professionals on to their boards of directors. It’s not uncommon for us to hear things such as:
“Should I have a board that includes outside directors? Why?”
“I don’t want someone telling us what to do. What if they take over and we can’t do what we want to do? Will they slow us down?”
“It will cost us money to put outside board members on our board, and we will have more work to do. Will they want to look at our company financials?”
“Who would we ask to be on our board?”
We have heard these questions, concerns and reasons time and time again about why companies believe they should — or should not — have outside board members.
I have had the honor of sitting on a couple of family owned boards, and have immensely enjoyed the privilege of doing so. I haven’t chosen to do so based on any of the reasons suggested above. Rather, I have done so because I believe I bring an opportunity for the CEO to ask for advice, provide a different perspective all while remaining objective because I am not wrapped up in the internal operations of the company.
Outside board members enjoy and feel good when a CEO asks questions that complement their experience. It helps the CEO make objective decisions — having someone they can bounce a problem off of, as well as see all sides of a problem and help find the best solution. For me, having a banking background in addition to strategic and leadership skills-set, I have been able to provide an outside perspective that has helped identify strengths, or something the CEO might want to be aware of. Candidly speaking, I may initially question something, but it truly is for the good of the company. Creating an opportunity to broaden a company’s perspective is helpful and provides the CEO an opportunity to both weigh and debate the facts from knowledgeable people who are on their side.
Statistics show there are a higher percentage of companies that make it through a crisis and a downturn in the market with outside directors. Remember, board members do not manage the company they ensure the company is well managed. A board of advisors may be something to consider in a family or privately held business. It’s important to talk through the objectives and the skill set of who you would like to invite on to the board and why.
For the benefit of this strategic initiative, I asked FBA Past Chairman David Lucchetti, President and CEO of Pacific Coast Building Products, a family-owned business, why they have outside directors.
“I think it’s important because an outside board member offers a different business knowledge and an outside perspective,” Lucchetti said. “This outside perspective helps provide a good checks and balances system. They can help the family business to see beyond what they’ve always done by raising important questions, and helping the business make future decisions.”
Jeanne Reaves is a Regional Sponsor of FBA and provides consulting services to family businesses. For more information, visit the Jeanne Reaves Consulting website.
The Family Business Association of California, the only organization advocating exclusively for California’s thousands of family businesses, has named Sen. Jim Nielsen, R-Tehama, as its Outstanding Legislator for 2019.
FBA Executive Director Robert Rivinius said the veteran lawmaker was selected because he’s always been a strong advocate for family businesses.
Robert Rivinius, left, and Sen. Jim Nielsen.
“Sen. Nielsen grew up in a family business and has always been a strong advocate for family businesses during his years in the Legislature,” Rivinius said. “We need more lawmakers who understand the unique issues facing family businesses and who recognize how important family businesses are to the state’s economy and the fabric of our communities, and we thank him for his support.”
Nielsen said he was proud to receive the recognition.
“California needs strong family businesses because they’re the cornerstones of their communities and the foundation of our state’s economy,” Nielsen said. “I want to thank the leaders and members of FBA. It is an honor to be recognized.”
Nielsen was first elected to the Senate in 1978, serving until 1990. He returned to the Legislature in 2008 as a member of the Assembly and was elected to the Senate in 2012. He represents all or portions of Butte, Colusa, Glenn, Placer, Sacramento, Sutter, Tehama and Yuba counties. He serves as Vice Chair of the Budget & Fiscal Review and Elections & Constitutional Amendments committees and is a member of the Governmental Organization, Governance & Finance and Veterans Affairs committees.
He has been recognized by numerous taxpayer and small business groups for his leadership on state budget issues and for his unrelenting fight against profligate government spending. He is also a leader in protecting and strengthening private property rights and for reforming state regulations and out-of-control spending.
Founded in 2012, the Family Business Association of California is the only organization working exclusively at the Capitol to educate lawmakers and regulators about the importance of family businesses to the state’s economy and to their communities and to advocate positions on legislation and regulations. FBA has also taken the lead to defeat recent proposals to impose a state inheritance tax, which would make it much more difficult to keep businesses family-owned from generation to generation.
The US economy is clearly slowing. After adjusting for inflation, GDP grew by 2.9% in 2018, and by an even better 3.1% in 19Q1. But growth slowed to just 2% in 19Q2, is expected to grow at a similar pace the rest of this year, and to then slow further in 2020. According to some pundits, this rapid slowing is a clear sign we are in the final stages of this economic recovery and that a recession is fast approaching. They point out that we are in the 11th year of this recovery, making it the longest one in history, and as such we are simply due for a recession. Fortunately, they are wrong, expansions do not die of old age. Let me explain.
Elliot Eisenberg
Prior to WWII, the idea that expansions were more likely to end as they got older was very common and was frequently mentioned in business and economics textbooks. And indeed, it was justified by the data. Using a statistical technique called survival analysis, which looks at the probability of some particular event occurring given the age of the subject, be it a person or a car or sports team, it is clear that prior to WWII recessions were more likely to happen the longer the recovery.
The intuitive starting point is based on analogies to human mortality. In short, this presumption suggests that as an economic recovery ages, assorted imbalances and rigidities accumulate that hobble the economy and make it more fragile. As a result, a recovery is increasingly put at risk by smaller and smaller shocks, and it becomes increasingly likely the economic expansion will fall into recession the longer it lasts. Analogies to cars are also frequently cited. All else equal, as a car ages, the probability that it will suffer a mechanical breakdown increases. Thus, older cars are considered less reliable and generally command a lower price than new ones.
Happily, however, various postwar changes in the economy have contributed to more robust and longer-lived expansions! One key change has been the rise in the share of services produced in the economy and the concomitant decline in goods. This change has diminished the importance of inventory fluctuations and, as a result, has moderated the business cycle.
The role of the federal government has also drastically changed. Since WWII, government activity has, among other things, increasingly focused on stabilizing the economy. In short, the government has gone from a laissez-faire hands-off attitude towards the economy to a forceful, countercyclical policy. This approach has not only prolonged business cycles but has, importantly, eliminated the pattern of cycles becoming increasingly fragile as they age. In a sharp reversal, it is now recessions that are increasingly likely to end the longer they last as policymakers take action to revive growth, such as passing tax cuts and spending increases and lowering interest rates.
In closing, enjoy the current expansion. Treat it like a good friend or a fine glass of wine and savor every extra month together. While it is almost ten and a half years old, it might well last another year, two if we are lucky. Better yet, the recession that follows is not likely to be particularly deep, as there are no asset bubbles in the making, nor are the sectors of the economy that usually drive us into recession growing inappropriately quickly.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.
Elliot Eisenberg, Ph.D. GraphsandLaughs, LLC September 1, 2019
The Great Recession of 2008 is firmly in the rearview mirror, we are now enjoying the longest recovery in U.S. history, the unemployment rate is near a 50-year low, wage growth is pretty good, inflation is virtually non-existent, and the stock market is just a few percentage points off its all-time high. Yet, talk of recession is increasingly common. And it’s not surprising, given the weakening global economy, the decline in exports, the soft energy and transportation sectors, the ailing agricultural markets, and of course, the overarching U.S.-Sino trade/currency/tech war. That said, while the next recession may well not arrive till 2021, it is not entirely clear what will cause it.
Elliot Eisenberg
In general, recessions are caused by one of three things. Often, central banks raise interest rates too much in an effort to slow the economy to reduce late cycle inflationary pressures. In the process, they either raise rates too much or keep them too high for too long, driving the economy into a recession. A second reason we have recessions is due to unforeseen shocks to the economy. It might be a war or a sudden rise in energy or food prices which reduces household spending power and can cause widespread obsolescence of capital equipment because the higher price of energy makes the equipment uneconomical. A third cause, and one that has recently been the culprit is financial excesses (think bubbles) that result from overexuberance on the part of markets that lead to mispricing of assets and finally a financial crisis.
The 1973 recession was caused by a quadrupling of oil prices by OPEC. Overnight, oil went from $3/bbl to $12/bbl. Moreover, the supply of oil was severely restricted, which led to gasoline rationing and long lines at gas stations. This caused consumer spending to plummet and factories to close, crushing the economy. The recessions of 1979 and 1982 were deliberately engineered by the Fed and its then-chairman, Paul Volker. The only way to squeeze inflation, which was north of 13% at the time, out of the economy was to induce a recession. In 2001, it was the tech bubble, and in 2008 the recession was caused by the housing bubble.
But the 1990 recession was different; it had no singular cause. On one hand, it was a result of a commercial real estate bust partly caused by the S&L crisis, which in turn led to a severe drop in construction activity. But there was also a major rise in energy prices, due to Iraq’s invasion of Kuwait, which hurt consumer confidence and spending. In addition, there was the post-Cold War drawdown in defense spending, which led to a rise in unemployment. While none of these events in isolation would have precipitated a recession, collectively they did. Fortunately, it was short and shallow, but the recovery was slow and jobless.
As for what’s to come, I suspect the next recession will be caused by a confluence of factors. The trade war is already hurting GDP growth. Add to that a global slowdown, a decline in energy prices, a weakening transportation sector, feeble manufacturing activity, Brexit and other European problems, an largely impotent monetary policy as rates are already very low. If all this leads to one or two negative monthly job reports which, in turn, leads to weakening consumer confidence and spending, you probably have the beginnings of a recession. Regrettably, getting out of the next recession may take longer than usual because fiscal policy is already a spent force as we are already running historically very large deficits. And that means a much-reduced willingness on the part of Congress to cut taxes and boost spending.
The good news, the coming recession is not likely to be very deep as there are no obvious bubbles that must be punctured. And lastly, with a bit of luck, this recovery can keep on going for another few years; it is entirely possible.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.
By Robert Rivinius, FBA Executive Director When I have a chance to meet with someone in the Legislature or from the Governor’s Office, I take them a copy of the Cal-Chamber’s 2019 California Labor Law Digest. The book is 8″ x 11″, 2 1/2″ inches thick, and has 1,061 pages. As I present the book, I tell them that if they would like to start a family business in California they will need to know everything contained in the book, follow it to the letter of the law, and even if they do that, probably will be sued.
The lawsuit might be generated by some accommodation an employer was trying to make to actually help their employees, like a late lunch so a person can eat with their co-workers, or skipping a break in order to attend their child’s Little League game. Our labor laws have done a great job of taking flexibility away from California employers who would like to accommodate an employee’s reasonable requests.
I also ask the person receiving the book to keep it in their office and when a new regulation is proposed, take a look at the book and ask, “Are 1,061 pages of labor law compliance requirements not enough? Would 1,200 pages be better?” It usually is an eye-opener for the person receiving the book and maybe, even in a small way, could make a difference in their decision-making.
By Ken Monroe
Chair, Family Business Assn. of CA and president, Holt of California
This op-ed originally appeared in the Orange County Register on July 5, 2019
You can’t watch TV or go online these days without hearing about more and more politicians who are calling for America to become a socialist nation. With California’s presidential primary just nine months away, these calls will become even louder in the months ahead.
As a family business owner and chairman of the Family Business Association of California, I’d argue that in many ways we already live in a socialist state. After all, a basic definition of socialism is that the state redistributes the wealth and controls the means of production. Through high taxes and ever-increasing regulations, California does both quite effectively.
But there are other ways the state redistributes wealth, and one of the most egregious is the Private Attorneys General Act, or PAGA.
PAGA was one of the last bills signed into law by Gov. Gray Davis before his historic recall in 2003 and was his parting gift to the state’s trial lawyers. It allows private attorneys to act as the state and use the 800 pages of labor laws on the books to sue employers over any and all violations, even for incredibly trivial issues. For example, if a company doesn’t list its full legal name on a paystub, it’s a violation.
But no matter how trivial, the penalties for each labor code violation are the same: $100 for each employee per pay period for an initial violation, and $200 for each employee per pay period for each subsequent violation, along with other possible penalties.
These violations can be stacked, with multiple penalties for each statutory wage violation and can quickly add up. I know, because my company, Holt of California, was sued over allowing our employees the flexibility to schedule lunches so they could eat with friends, even if that meant they worked more than five hours set without a meal break.
Because the possible penalties and legal fees in PAGA lawsuits can easily total millions of dollars if a suit goes to trial, most employers settle the cases. While the employees usually get about 60% and the lawyers get about 35%, that means a few lawyers get large checks while the numerous employees end up with relatively little.
PAGA has created an unfair distribution of wealth and should be repealed, with the state once again given the power to enforce labor laws. Since trial lawyers are a major part of the state’s progressive governing coalition, this probably won’t happen any time soon.
But there are some reforms that could at least make PAGA truly focus on the needs of employees more than the trial lawyers’ desire for big paydays:
• First, give employers 90 days to cure underlying issues before a suit can continue. Faced with a similar deluge of lawsuits over construction defects a decade ago, the Legislature gave homebuilders an opportunity to make repairs before they could be sued, so there is a precedent.
• Cap attorney’s fees so that in cases where significant violations occurred that the employees get more of the settlements.
• And make some common-sense reforms in those 800 pages of labor laws. Give employees the right to take their lunch break when they want to and allow companies to include the name they do business as on paystubs. The state should focus on situations that really harm employees.
Successful economies need an ongoing economic engine to create wealth. Here in California, family businesses play a major role making California the fifth-largest economy in the world. But our state’s economic engine is being choked back by a whole host of state laws and regulations, so the Legislature should at least take some modest steps to strengthen our economy. PAGA reform would be a good place to start.
