Stock Market Convulsions – Lessons for Families

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Chris Eckrich

Chris Eckrich

Last week was a great lesson in the consequences of emotional reactivity to business information.  Monday’s news was gloomy – business conditions had eroded from earlier projections and the debt deal wasn’t enough.  The Dow was in a free fall as investors ran for cover.  The sun came up 24 hours later and investors realized that maybe they overreacted, and much of the losses were won back.  Only to drop again, then roar back as a few key indicators seemed to back away from the story line of financial Armageddon.

Family enterprise shareholders are regularly exposed to information about their businesses, and not all of it is good news.  When hearing bad news, it is natural to catastrophize and begin thinking of all the things that could go wrong, which nurtures further anxious thinking.  Many a family CEO has received phone calls from fearful shareholders questioning management’s abilities at a time when management is usually working very hard to make the business work properly.  Unless both caller and CEO are gifted communicators and can find common ground, it is not unusual to have the call end with the CEO frustrated and the shareholder finding little to ease the anxiety.  There is a better way.

Families do well to work on building strong communication systems between the business and shareholders, and nurture trust through clear and agreed upon governance.  This usually occurs in family ownership forums or family meetings, during which the family creates the rules for how governance will occur, and how information will be disseminated.  Once this framework is in place, trust is built and strengthened over time as each group (Owners, Board, CEO, Family) lives up to its expectations with the others. 

Trust and communication are necessary, but not sufficient to prevent reactivity among ownership groups.  Also needed is a deep sense of long-term commitment towards achieving ownership’s vision.  Securing long-term commitment requires that shareholders be educated about the business, the opportunities it offers to owners, and how it will achieve the owner’s objectives.  For many enterprising families, shareholders are educated regularly (often starting at an early age) about the long-terms benefits of family business ownership.  This education is crucial in helping shareholders appreciate and value the businesses they own, and to deepen their sense of long-term commitment to the business.  Then, when difficult business situations arise, shareholders provide stability to the enterprise rather than chaos.

As for the stock market, one wonders what would have happened if investors all had a 10, 20 or 30 year investment horizon, rather than being driven by the news of the day.  It probably would have been a pretty bland week.

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