Entrepreneurship Column Adds On-Line Capability For Questions

In the course of any venture it is important to experiment with ways of expanding its relevance and utility. So it is with this column.

The 800 telephone number that the College of Business Administration at Eastern Washington University has been providing for your questions or comments has been well used by readers in Washington, Idaho and Montana, and will soon be expanded to cover a wider geographic area. All of the calls to date have been timely and on point.

Unfortunately, I haven’t had the resources to answer every question. Therefore, given the large volume of reader interest, it now seems appropriate to expand the “interactivity” of this column in order to get more “cooks” contributing to our “broth.”

To accomplish this, I’ve established an E-Mail number with Prodigy, the on-line computer service. Now, if you have a question or a comment, you can use your PC to write directly to me at TFPK29A.prodigy.com.

Periodically I will post selected questions on a Prodigy bulletin board to solicit input and answers from experts around the country. Then I’ll compile and condense the responses for this column. (If you can’t wait for me, you’ll be able to review the communications yourself on Prodigy.)

My Prodigy address is also accessible thorough the Internet. So, “fire up your box” (to most of us that means “turn on your computer”) and contact me at TFPK29A@prodigy.com.

A few months ago we cautioned business partners against dividing control in a firm on a 50-50 basis. With control divided equally, the fast and firm decisions that a growing business needs are often frustrated. A mediocre decision, aggressively made, can be more beneficial than an erudite decision that is deferred.

One reader agrees that such decision-making paralysis is harmful, but wants to know how to keep a majority partner from having all of the say with respect to major issues.

Q. Is it possible for majority and minority equity partners to divide control so that the majority shareholder can’t make all of the decisions without considering other important viewpoints?

A. Yes. Many owners opt for a governance approach that allows for reasoned, expeditious decisionmaking, but doesn’t give any of the principal owners unilateral control. A partnership, for example, can construct a detailed agreement among its principals that outlines how major items can be voted on by its partners, without consideration for how much equity each owns.

In a corporation, seats on a firm’s board of directors can be allocated in manner that prevents a single owner from having all of the power. Here, the decision-making process can be facilitated by the actions of other voting directors who own smaller amounts of stock that are disproportionate to their voting power.

Sometimes a firm will sell or give small stock interests to one or more “outside” parties who won’t be inclined to take sides and whose only concern will be the successful operation of the business.

It is also possible to retain directors who have no equity interest whatsoever. Since they have no “turf” related motives, they are able - presumably - to cast objective, enlightened, deciding votes when disagreements among the larger shareholders emerge.

However, if you use this technique you must also pay attention to the process by which directors are elected. Absent an agreement that spells out contrary procedures, the stockholder that has the most shares will, in most cases, have the ability to elect a majority of the board.

So, even if an independent director is elected to the board, he or she can be ousted at the next annual shareholders meeting by the stockholder who has enough shares to exercise control. The bylaws of the corporation or a separate shareholders agreement can be crafted to achieve a more lasting diffusion of voting clout among shareholders and board members.

It’s important to have this kind of division of power agreed to by all parties, in writing, before a company starts operations. Once a firm is launched, routine disagreements among owners can balloon to a point where such a “leveled playing field” is unachievable.

The efficacy of using minority, outside directors depends upon the talent, integrity, and fortitude of the individuals selected. These holders of “swing votes” must be able to selectively resist the shareholders with the strongest personalities and the greatest powers of persuasion.

Then too, it’s hard to find people who are willing to play this role. There is potential liability associated with every corporate director’s seat and the small equity stake that an outsider will own may not make his or her participation financially worth the time and risk involved.

To be effective, “outside” directors must be motivated to learn the business, maintain their independence, and become expert enough to be a savvy - as well as wise - Solomon.

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