What Happens When an In-Law Becomes a Shareholder? – Part 3

By Prof. Enrique Soriano

Having in-laws join a family business can be both challenging and rewarding. By managing family dynamics carefully, providing support and training, and establishing clear agreements and processes, families can harness the unique talents and perspectives of in-laws and build successful and sustainable businesses that benefit everyone involved.

However, it was not the case with John when he was tapped to assume the role of business leader after George, his father-in-law and the founder of the business he had to take over, passed away. No rules or policies were set as he made his entry into the company, and there were also none regarding eventually owning shares in the company. John’s single biggest credential was being the husband of the founder’s eldest daughter. Still, George assumed all along that John, being an extended family member, would just naturally play his role to the hilt. Unfortunately, as predictable as night turned to day, the nightmare happened and John ended up abusing his mandate, eventually leading to his ouster by the Board and its shareholders.

The case of John as an in-law was unfortunate, yet it is a common sight to many families. However, on a positive note, cases like this can be prevented. Below is a Q&A portion of a recent international Family Governance forum which I was invited to as one of the resource speakers:

Q1: What should be the right approach in dealing with my daughter-in-law currently working as a senior manager in our family business? She is highly educated but lacks the experience and the necessary leadership skills to lead her division.

Answer: The case of an in-law joining or being cajoled into joining the family business can be quite daunting as it poses a difficult situation for the entire family and the business. In such a scenario, the family members must initiate several steps to address the overlapping family and business issues before it gets out of hand and ensure the future success of the business. I assume this is a case of a founder instinctively inviting an in-law based on convenience and trust and often to the dismay of other family members who are wary of a future issue involving your in-law getting entangled into unnecessary conflict.

The first step is to evaluate (ideally before he or she joins) the in-law’s skills and expertise in running her department. It is important to determine whether she has the necessary knowledge and experience to lead and engage her coworkers and other stakeholders effectively. If not, the family members may need to consider other options, such as requiring her to upskill via mentoring, on-the-job training mentored by a professional advisor, or through continuing professional education and development. The second step is to make the in-law sign a service agreement. I prefer the involvement of the in-law in the family business under a project-based engagement with definite scope and term limit rather than a full-time executive.

Q2: What if it still does not work? My children think that she is more entitled than the real owners. Her biggest waterloo is her temper.

Answer: If any of the intervention does not work, then the family, collectively using the mandate and power of the family council, can ask the in-law to withdraw from the business. This is a difficult intervention, but with the united stand of the family on top of employing the rules of the council and other family agreements, it can be done. For other family businesses still in a quandary on whether to employ an in-law, it pays to pre-qualify them before allowing in-laws to join the company.

Q3: What are the implications if we give in-laws share ownership? How important is it to impose restrictions on the shares assigned or sold to an in-law?

Answer: Before allowing any share ownership, I want the founder and family members to think long and hard about assigning or giving shares to in-laws. When they become co-owners of shares, their interest in the family business is clothed with public interest. Their authority, whether economic, legal, voting, or audit rights, is mandated in the Revised Corporation Code. Therefore, having restrictions on how these shares are treated is critical to ensure the future of the enterprise.