When nonactive family owners live far away, their involvement in the company is similar to that of a shareholder in any company: It's simply an investment. "But since they can't look in the newspaper to see how the stock is selling," says Cohn, "they're really at sea."
These family members often don't understand that dividend checks may shrink because the business needs to reinvest profits, or why so much is set aside for research and development. They don't have a clue about whether the business is losing market share, having a cash flow problem or suffering from a high turnover rate. Their lack of knowledge and involvement can lead to mistrust and be the source of a major conflict between the active shareholders and themselves.
To improve the situation, the family can try to make corrections and refocus on what it must do to draw together instead of apart. Or, if the conflict escalates and becomes corrosive, owners may choose to sell. "Because we're in the age of acquisitions, midlife may be a time when the family decides it's better to reap substantial financial gains from a sale rather than continue owning a business that causes such grief," says John Messervey, president of the National Family Business Council, a consulting firm in Lake Forest, Illinois.
Just as family members' remoteness or lack of involvement might threaten the business's future, so will interference into daily management by nonactive owners. According to Messervey, "When nonactive shareholders get entrenched in trying to run the business, the family member at the helm of the business might begin thinking `Why am I doing this? I own 4 percent of the stock, do 90 percent of the work, and have to answer to people who don't know as much about this business as I do. It makes more sense for me to own my own business and report to no one.' And he or she would be right."