Christmas for FOBs, a time of sharing, not stressing

Christmas 2023 is on the horizon, and in Jamaica it’s the time of the year when attention is directed to family, the mixture ingredients to capture the ‘best’ cake texture for distribution across different families.

The mixture of ingredients is analogous to the pot-pourri of issues with which many family-owned businesses grapple.

The observation among many FOBs in Jamaica is that the Christmas season seems to be the time when they seek to identify and agree on an optimal mix of options to meet or satisfy the needs and demands of family members and critical business interests.

Two main issues are payments and dividends and family philanthropy.

Further observation is that grappling with these issues during what is considered one of the busiest and most stressful time for both family and business has resulted in serious and sometimes irreparable family fractures.

The recommended best practice is to address these issues within the framework of the family business constitution. However, experience shows that only few FOBs have a family business constitution.

It might therefore prove useful to address the referenced issues in this space, as part of my Christmas gift to all FOBs in Jamaica.

Payments and dividends

There is some measure of consensus among family business advisers that all family members employed in the business must be considered as regular employees of the business and should not be the recipients of any special privilege because they are family members.

However, in the absence of clear guidelines for addressing payments and dividends many family conflicts have emerged. These issues seem to rear their head during the Christmas season. This might be linked to the practice in Jamaica of businesses paying Christmas bonuses and ‘giving a little extra’, which have become part of the expectation of employees and other interests.

Many FOBs face the pressure of giving these bonuses and extra to family members who are not employees, including many “long-distance cousins” who seem to show up only at Christmas.

How should FOBs address this challenge? As with any structured business, organised and operated on agreed business principles, FOBs must not conflate the emotions of family with the execution of sound business practices

FOBs should therefore have clear written guidelines on:

- The role of each family member; and the level of compensation as defined by the job and not by virtue of the employee being a family member, which is a common occurrence in too many FOBs in Jamaica; and

- The dividends to be paid to shareholders and other family interests in the business. A dividend policy should form part of the strategy of the business, which outlines how dividends are distributed to shareholders and other critical business interests. Usually, the policy outlines the frequency and the amount that should be paid out and should be clearly stated whether or not this is mandatory. Experiences show that the approach to paying dividend is too subjective and fluid among too many FOBs in Jamaica.

Three common approaches used to eliminate or minimise subjectivity in dividend payment are:

a) Stable – aka fixed dollar amount: This represents the easiest and most commonly used approach. The goal of this approach is to provide shareholders and critical business interests with a steady and predictable dividend payout each year. Payout is usually dependent on whether or not the business makes a profit.

b) Constant – aka fixed payout ratio: the business pays a percentage of its earnings each year, thus exposing shareholders and other investors to the up and down of the earnings from the business.

c) Residual – aka cash sweep: the business pays out from the dividends remaining after capital expenditures, or capex, and working capital. While considered to be volatile, this policy is considered by many FOBs to represent the best practical option, in terms of business operations.

Family philanthropy

One of the distinguishing factors between FOBs and non-family-owned businesses, NFOBs, is the approach to philanthropy.

FOBs are known for their generosity, and usually consider helping to build communities as part of giving back. Family business philanthropy provides an effective way for families to pass along their shared beliefs and values, especially to the next generation of family members.

However, many FOBs in Jamaica have either adopted an ad hoc approach to philanthropy or have shown little or no interest. In Jamaica, the advent of the Christmas season comes with lines of persons, groups and organisations making requests for philanthropic outreach from the business.

In the absence of a family business constitution, in which family philanthropy is a component, owners of many family businesses provide feedback of the stress caused from having to attempt to adjust their budget and make other changes to accommodate the different requests during the Christmas season.

FOBs can eliminate or minimise the stress and possible family infighting by having a clearly defined set of guidelines that inform the approach of the business toward family philanthropy. There are different types or approaches to philanthropy.

Three approaches observed among FOBs in Jamaica include:

- Chequebook philanthropy: This involves giving because or when someone asks. This is usually facilitated by having a line item in the budget. The amount given does not exceed what is budgeted and nothing is given unless or until a request is made. In many cases, the public does not know about the availability of this line item in the budget. The merit of sharing this information with the public is determined in the best interest of the business.

- Formative philanthropy: This involves giving back to organisations that are considered important to the family. Unlike the chequebook philanthropy, this approach is more targeted, such as giving to church, school (alma mater), children’s home or any organisation, project or entity determined to be important to the family.

- Endowments: This involves the donation of money or assets to a nonprofit organisation for the ongoing support of that organisation. In many cases the endowment is managed through a foundation.

The approach taken in family philanthropy should be one that is line with the values if the family and the business and can be supported by the resources of the business.

FOBs as a critical component to the economic life of Jamaica and the sustainability of this economic life can be enhanced by reducing the stress on family and businesses. Becoming more organised and process-oriented in managing issues such as payments and dividends and family philanthropy will help to reduce the stress on both family and business, especially during the Yuletide season.

Christmas in Jamaica is a time to celebrate and share, not a time for stress. Merry Christmas to all FOBs.

More anon!

Lawrence Nicholson, PhD, is a senior lecturer at the Mona School of Business & Management, University of the West Indies, author of Understanding the Caribbean Enterprise: Insights from MSMEs and Family-Owned Businesses and a director of the RJRGLEANER Communications Group. Email: lawrence.n.08@gmail.com