What Happens When An In-Law Becomes a Shareholder? Part 2

By Prof. Enrique Soriano

The passing of a shareholder, especially a parent or founder of a company, can result in their shares being inherited by their heirs, including their in-laws. This situation can create unique and challenging circumstances for both the business and the family, just like in the case I shared last week about John, who became the CEO of his father-in-law’s company after his passing and whose series of poor judgments jeopardized and damaged the company’s reputation.

Continuing last week’s story, the impact was so disruptive that it created a toxic work environment that pushed senior executives to tender their resignations one after the other. In less than a year, the consequences of his decisions resulted in a loss of customers and a tarnished brand image. When the family commissioned an independent audit team to probe why sales plummeted, resulting in financial losses, the initial findings pointed to misallocating resources and unethical dealings.

The audit also uncovered a spate of lawsuits and penalties that the company continued to endure. These were primarily due to John’s noncompliance with regulations, breaches of contracts, and other actions that violated corporate laws. Sensing the CEO’s lackadaisical attitude in resolving the mounting problems created by his ineptness, the family realized it had to act to save the family business. The members, comprising the next-generation shareholders, recognized the organization’s importance and the need to protect their founder’s legacy, so they decided to engage our services.

To urgently address the business’ sorry state, our team buckled down to work and proposed interventions that marshaled all family members to a mindset focused on communication, governance, stewardship, shared purpose, and corporate best practices. These initiatives led to the creation of the family code of conduct, business protocols, and ownership agreements, as well as the initiation of a series of workshops to educate the Board and other non-active shareholders on the importance of their roles in the family business.

When the results of the audit investigation came out, it was clear that John did commit blatant violations. With enforceable agreements in place, the joint family council and the Board voted to remove him as CEO. The action to save the business by removing John from a position of power and finding a new leader with the skills and experience necessary to turn the business around was important, critical and urgent. The Board then issued an official statement for an emergency stockholder’s meeting: “The mismanagement of the family business by John created serious repercussions to the business and its stakeholders. By taking action to address the situation, we are putting in place governance and preventive measures so we can mitigate the risks associated with poor management and ensure long-term success. There were reports of serious anomalies committed by John. Regardless of his status as an in-law and being part of the family, we want to make it clear that he will have to be made accountable for his actions.”

John knew the consequences, so he had no choice but to comply with the decision of the family council, with the Board acting as the enforcer of rules.

As for his wife, we proactively made sure she was aware of the information coming from the independent audit as well as the initiative of the clan in requiring John to come forward and explain his side using the Family Council as an objective platform bereft of any unnecessary emotional drama and blackmailing. With this, she may have had a heavy heart at her husband’s ouster, but she accepted her siblings’ collective decisions well.

That was the rule we set in place as part of the family governance process: to hear John’s side first and, with due process, decide on the appropriate sanction. We knew the sensitive nature of the incident and that any misstep could lead to a range of emotional consequences, hence the importance of making sure John’s wife was in the loop so she wouldn’t feel betrayed by her siblings.