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How Being Both the Chief Executive and Chief Shareholder Doesn't Always Mix

How Being Both the Chief Executive and Chief Shareholder Doesn't Always Mix
Image credit: Indochino

Small business owners normally lead what are the most efficient and effective organizations ever designed by human hands: profit-seeking businesses where the chief executive also happens to be the chief (as in, largest) shareholder, too.

This has its benefits, chief among them that it avoids the agency problem, where the interests of the professional managers do not always synch and align with those of the shareholders.

In most circumstances, what is best for the managers of a small business is what is best for its shareholders, as they are normally one and the same.

But there are three scenarios where this is decidedly not the case:


1. When Contemplating Raising Outside Capital.
For far too many small business owners, when they think about raising capital, they think too much about "control."

As in: "I don't want anyone looking over my shoulder." Or, more to the point, “I don't want anyone telling me what to do."

When I hear comments like this, the first thought I usually have is that it might be a very good thing to have someone looking over your shoulder and telling you what to do!

Why? Because usually the advice given is in the interest of the businesses’ shareholders, even if the largest shareholder – the CEO – doesn't realize it.

2. When Contemplating Selling the Business.
More often than not, owners of businesses capable of attracting a buyer and being sold love what they do, and they especially love being the boss.

So the prospect of selling out and no longer being the boss can be emotionally difficult.

Now, from the perspective of the chief shareholder, the right response to this should be, “Who cares?”

With the risk of sounding harsh, this decision should be made solely on the strategic and financial merits -- lifestyle and heartstrings considerations be damned!

3. Contemplating Investing More of One’s Own Money in One’s Own Business.
As I have discussed before, when one is lucky enough to have capital to invest, the chief shareholder hat needs to be worn far more tightly than the chief executive one.

As the chief executive, it is just too easy to overlook portfolio diversification considerations, as it is not possible to “diversify” from the huge time and energy investments necessary to be an effective CEO of a growing company.

From this perspective, the right decision is to almost always to try to invest as much as one possibly can away from and outside of one's own business.

I know, this is extremely hard to do, as more often than not every instinct screams out to just pour more time, energy and treasure into it – to the exclusion of everything else.

That is the chief executive talking and is the kind of “irrational” commitment to success that is at the heart of what makes being a small business owner and an entrepreneur so intoxicating and admirable.

BUT when the three scenarios and opportunities above present themselves, take a pause and listen to Mr. and Mrs. Chief Shareholder, too.

If nothing else, your wallet will thank you. 

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Jay Turo is CEO of Growthink, a Los Angeles-based consulting firm that has helped more than 500,000 entrepreneurs and business owners develop business plans, raise funding and grow their businesses. His column appears on the Growthink blog on Mondays.

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