12/08/10

By Julie Meyer, CEO of Ariadne Capital and a dragon on the BBC’s Online Dragon’s Den

Dragon's view

Twice in the past month, I’ve got back in touch with businesses with husband and wife teams at their core. In both cases, the businesses are doing well, and my hesitancy to not get involved because of the “power knot” may have been too strong.

A girlfriend is considering buying a business with a friend she’s known for 20 years. As we discussed the opportunity, it was clear she’s done an excellent job analysing the business opportunity, but has underestimated the potential problems in terms of “corporate architecture” — by which I mean the structure of the firm in terms of where the power and responsibility really lies in the firm. Her friend as the dominant shareholder may not accept her as CEO because she believes she has the power of owning the majority of shares. In the early days, this may not be a problem, but down the line she may exercise her shareholder muscles if she doesn’t get what she wants as an executive.

Corporate architecture has a disproportionate impact on a firms’ success: Three things matter:

• Strong firms have strong CEOs. Great CEOs serve their companies and teams, but the team knows, that if there is a difference of opinion, that the CEO’s vote carries the day. The CEO tries hard not to have these situations, but ultimately there are always going to be different opinions. You have to know who’s in charge or you have paralysis when action is required. Witness how the Bank of England, the FSA and the Treasury Department did not know who was in charge at the time of the financial crisis.

• Alignment is everything. You’d be surprised at how frequently shareholder agreements of early stage firms enable management teams, different classes of shareholders, and founders to pull in different directions. I’ve seen tragic situations where a company had the team to become a global leading firm but was pulled apart at the seams by investor groups who were in charge rather than the CEO.

• The deal is always done at the beginning in any relationship — whether that be business or personal life actually. The most you can ever do once that relationship structure is set is to course correct or adjust at the edges, but you fundamentally never renegotiate the relationship.

There are three levels of power in any company: that of the shareholder base, management led by the CEO, and the board led by the chairman or CEO as the case may be. Checks and balances are important, but the Hasbro boardgame, Risk, it is not. You are on the same side.


Join us on