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How Many Owners

Dear Dave
Are there an ideal number of owners to have in an engineering firm? Are more owners better than fewer owners, or are we better having fewer owners? We are just over 150 staff members in size and currently have 23 shareholders. Of the 23, a group of four owns about 75% of the total stock, with the rest of the stock more or less equally split between the others. We expanded the ownership ranks from just a handful of individuals 5 years ago with the idea that providing access to stock would be welcomed as a motivational benefit for our staff, but also to establish a pipeline of potential buyers for stock as our older principals were ready to retire from the firm. We’ve had a mixed result and are somewhat disappointed. We thought more people would buy more shares than has occurred, and the staff members who have bought seem kind of ambivalent about their ownership positions.

Dear CF
Generally speaking, I prefer seeing fewer owners than more owners.

This is particularly so for small to medium sized firms (less than a few hundred staff size) where management and ownership typically tend to be thought of as synonymous. Wherever that link exists, you are better off to keep the stock as tightly confined as possible within the entrepreneurial oriented management and leadership personalities within the firm - or as I like to call them, The Empire Builders. Key test: can those under consideration respect and embrace the difference in priorities between being engineers in business, and a business offering engineering services? It’s the later group who should own and manage a firm.

That is not to say other, non-business oriented individuals are not vitally important because they are. It is just that there are so many creative non-equity ways to engage and reward key individuals without confounding the governance and efficient management of the firm.

Firms who have not made a clear separation between management and ownership tend to get bogged down by having too many people involved in too many decisions. Decision making often becomes time consuming and difficult as management feels obligated to gather input from all owners. When decisions are finally made they run the risk of only taking common denominator actions that can be universally supported. The extra time can grind the management process to a crawl, and consensus decisions are very often not the best.

Even when the line has been supposedly drawn between ownership and management, it is not uncommon over time for the minority investment owners to begin to feel second-class, or shortchanged in some fashion as a result of not being consulted by the majority. This could be a factor contributing to the lack of more takers for your firm’s shares and the general ambivalence you are concerned about.

In larger firms, where management and an individual owner’s expectations of influence are clearly de-linked by sheer size alone, I have no real issue with making some shares available for purchase as a passive investment opportunity for those individuals who via their service and performance are offered the chance to participate in the financial success of the firm. This can be through direct share ownership, or indirect ownership through vehicles such as an Employee Stock Ownership Plan (ESOP). ESOP’s are a form of tax qualified defined contribution profit plans that differ from conventional profit sharing plans in that they invest in the company’s own shares. Any and all employees who meet the plans eligibility requirements participate.

Wahby and Associates