We the Family: The Benefits of Creating a Family Constitution

After three generations of family ownership, Belk Inc., a department store chain founded in 1888 by William Henry Belk, was acquired by a private equity firm in 2015. Ask Tim Belk, a member of the third generation and Belk’s former CEO, about the reasons behind the sale, and he will be quick to tell you that the company was not looking to sell. Why, then, the decision to sell after more than a century of family ownership? For Tim and the other members of his generation, it came down to the business’s top duty to shareholders: being good stewards of the family wealth and maximizing shareholder value.

We recently sat down with Tim to discuss what running a family business entails, the process of selling his family’s 127-year-old company and why organic farming is one of his post-Belk ventures.

Brown Brothers Harriman: Tell us about your professional background and how you came to work for the family business.

Tim Belk: I felt welcome at Belk after college; however, instead of going to work there and realizing it was not the right fit, I thought it would be better to work somewhere else and then decide that I really wanted to work at Belk. After working on a political campaign and then in Washington, D.C., I eventually decided I wanted to work in the family business, so I went to business school and then joined.

BBH: What was the path like when you got there? How did you eventually become CEO?

TB: I started at the bottom and had many different jobs over the years. After working in various roles in some of our stores, from the toy department to buying to advertising, I went over to corporate. There, I worked in real estate and human resources, and then had the responsibility of overseeing several of our stores and partner groups.

After my father died in 1997, my two brothers and I became direct reports to my uncle, who was modernizing the company. He made the big decisions, and we implemented. Over time, he consolidated the 112 corporations we had into one and centralized our management and legal structure. In the early 2000s, when my uncle was in his 80s, my brothers and I started wondering what his succession plan was. We were a big company, so we knew that communication around his eventual departure from the business, whenever that might occur, would be important. We also wanted to make sure it was a smooth leadership transition, whether it involved an outsider coming in or one of us taking over. So, one day we asked him what his plan was. He didn’t respond right away. About six months later, he pulled us into a conference room and said, “Tim will be chairman and CEO, McKay will be promoted to president and chief merchant, and Johnny will be president and COO.” That meeting lasted about five minutes.

We had to decide if we could work together under the new arrangement. One of the first things we did was hire a business coach to help us with communication and to identify where we could improve. Then, we set our sights on growth. We had a big acquisition in 2005 and another in 2006. At the same time, we were opening stores. Things accelerated quickly.

We the Family: The Benefits of Creating a Family Constitution

BBH: When did you get involved in the company’s governance?

TB: As my uncle was consolidating the company, he put in place a retirement age for board members and began adding outsiders as family members retired. We liked having strong directors with a point of view and valuable experience. We sought individuals who could add value to the conversation – and hopefully would tell us things we needed to know but were not asking.

BBH: Did you have a formal family council? If not, how did the family interact with the board of directors as owners of the business?

TB: We did not have a formal family council. Three families owned 70% of the company, and we had an annual meeting with all the members of those families who were college age and above to educate them on what was going on in the business and our goals and strategies, as well as to expose them to some of the key executives. This allowed them to get a feel for their investment and how things were going. Those meetings were important. It was not a family council, but it was similar.

BBH: For family members who wanted to join the company as employees, were there any rules or parameters in place?

TB: Yes. At one point, my brothers and I decided we should develop some rules for engagement. As we talked about it with some of our family members and a consultant, we came up with the idea of letting the next generation develop the approach. The idea was that if they came up with it, they would live by it. They designed a policy that was not very different than what we would have set up. Some of the guidelines for those interested in going into upper management included working somewhere else for three years or more and (preferably) going to business school. After joining, family members entered a training program. They were paid competitively and evaluated just like anybody else. We did not want to be so restrictive that family members felt they could not work there, but we also wanted some rules to help them understand that if they did want to go into upper management, they were going to have to deliver. Results matter. You may be working with family, but at the end of the day, it is a business investment.

We the Family: The Benefits of Creating a Family Constitution

BBH: There were many family shareholders at Belk. Did they have the ability to generate liquidity from their shares?

TB: At one point, we began to feel like we needed a cash-out mechanism because we did not want the company to be the go-to for cash. We looked at how some other companies were doing it, and the result was to have an outside valuation firm value the company annually. This allowed us to get real transparency around our numbers each year and to then do a tender offer if we had certain cash flow. That turned out to be an effective way for people to look and see what their stock was worth and how the company was doing and also gave confidence to family member shareholders who owned a large chunk of the business.

BBH: You sold Belk in 2015. How did the sale come about?

TB: We did not intend to sell the business. After the Great Recession, we put together a five-year plan. We were in a solid position with strong cash flow and began to invest in the company’s growth. Fast-forward five years, and we were looking at another five-year plan. The pace of change was accelerating, and technology was becoming more important, which created more risk in the business. We believed in our plan’s ability to generate value and had strong convictions about delivering on it. However, some of our directors told us to remember that there were three families who owned the majority of the company and that we had to be good stewards of the family wealth. Because of this, we decided to validate that our plan was the best option and would maximize shareholder value.

We looked at a number of options, and the only one that was a viable alternative to our internal plan was the possibility of selling. We did not know if anyone would be interested – and even if they were, we did not know whether they would be willing to pay a price that our shareholders would accept. That last part was important because our shareholders were not interested in selling. It turned out that another firm was interested and had a healthy price. We got the three families on board and eventually came to a good price with the outside buyer.

BBH: What steps had you taken in advance that turned out to be helpful in preparing the company for a sale, as well as during the process?

TB: We ran Belk like a public company. Six of nine directors were nonfamily, and we had an independent compensation committee. We looked at a survey on best board practices annually and compared ourselves to that. In addition, because of the number of shareholders, we had to file publicly, so public information was not a problem.

We hired people to help us think about communication because we did not want our employees to misunderstand and get scared. We had to explain what was going on to people throughout the organization. This went all the way down to the store level so that our sales associates could talk to our customers. They had shopped with us for generations, and we wanted to make sure that they did not get worried either. Communication was huge.

In addition, we had to get outside help to figure out a retention plan in order to keep top talent.

There were also many questions around governance. How do you decide what the right price is? How do you involve your other shareholders in that?

We the Family: The Benefits of Creating a Family Constitution

BBH: When you were thinking about an acquirer, it sounds like price was a consideration. What were some of the others?

TB: Price was the main one. We also wanted to think about who would take the company to the next level. The buyer we went with asked the best questions and seemed to have the best understanding of where the opportunities were.

BBH: The business had been in the family for more than 100 years. Was there an emotional component to the sale?

TB: There was, but over time we had started emphasizing the business side of it to the family through communication related to how the company – their investment – was doing as well as the ability to generate liquidity and sell shares. The business conversation was important.

Still, there was a lot of emotion and sentiment, so we had to approach communication carefully. Our family members’ first reaction when we told them we were exploring a sale was, “Why are you doing this?” We had to explain to them that we were not likely to sell, but we had to make sure we were maximizing value for the shareholders. There were good relations between our board and our shareholders, so our directors acted as a sounding board and were available to answer questions. People were used to seeing some selling of Belk stock, but that was just for liquidity purposes. A full sale was a big deal, and it took some time for people to process.

We also had a long philanthropic history. Part of our business strategy was getting involved in the communities where we operated. We believed that we could build our business by understanding those communities better, and people valued us more because we were involved.

BBH: Was it difficult to manage the business throughout the process?

TB: Yes, it was like having two jobs. It was an exhilarating and rare learning experience that we knew was the right thing to do. However, it was wearing. We were fortunate the business stayed healthy during the process.

BBH: What advice would you give somebody who was about to undertake a similar process?

TB: There are a few things. One, communication is so important. Two, it will take longer than you think. Three, the board plays a critical role. And finally, if you are going to explore a sale, do it from a position of strength if you can – not when you are having trouble.

BBH: You retired from Belk in 2016. What are you doing now?

TB: When I left Belk, I was not sure that I was ready to step out of that position. Once I did, though, I realized I was more ready than I thought. I was in my early 60s and healthy, and it was exciting to think about what the next chapter was. I talked to a lot of former executives who had retired, and everybody told me to be slow to decide what I wanted to do next to avoid taking on an obligation that was not the right fit.

I knew that I wanted to do something involving my wife. She had the idea of taking our family farm organic, and I said I would be her project manager. It was her dream, and we also thought it was a way to bring our children together. We came up with a plan to convert the entire farm to organic and launched Wild Hope Farm. I was excited because of what we had done with Belk in the past and was interested in showing that you can be cash flow positive and scale in the organic farming industry. It will take us a few years to determine whether we can be cash flow positive and have a farm that is a demonstration project, and if it works, we would like to consider setting up a nonprofit through which we train future organic farmers. That is our big dream.

We are about a year and a half in. We have an experienced farmer, Shawn Jadrnicek, who works for us full time. Getting family involved has also worked well. One of my daughters, Katherine, is the other principal on the farm, and her younger sister, Molly, joined when we put in our first apprentice position. I am not there daily – just a half day a week. It is too early to tell whether we can accomplish some of our business objectives, but we are having fun with it. We’re essentially a startup in an early-stage industry with a lot of growth and innovation. Furthermore, we are going to support this lifestyle and movement, and that is exciting. It has been interesting.

In addition to the farm, I’m working on a civic project that is still in the incubator stage and taking up a decent amount of my time.

We the Family: The Benefits of Creating a Family Constitution

BBH: You also sit on some boards of directors. What is it like being on a board as an outsider?

TB: I can help them avoid all the mistakes that I have made! One of the companies is currently undergoing a generational transition, so I can share with them my observations, experiences and issues to avoid.

BBH: What’s your favorite story from your career at Belk?

TB: I have a lot of them. One that comes to mind is from the early days. When I got out of business school and joined the company, I was full of energy and ready for big challenges. My first job was running the toy department in one of our stores during the holiday season. I set a lofty goal to sell one Rubik’s Cube – the hot item at the time – for every person who lived in the city, which had a population of around 25,000.

I had these huge plans, and there were only two people in my department. At some point, one of the employees walked into my office, which was a desk in a stockroom, closed the door and said something had to change and that it was not possible for such a small team to accomplish everything that I wanted to do. At that moment, I realized that you have to bring your team with you. You need to share your plans and build them out with the people on board – and they may not want to work exactly the way you do. Learning that was a pivotal moment for me in terms of how to be a leader.

BBH: Tim, thank you so much for your time and insight.

Interview conducted by Jake Turner, and article written by Kaitlin Barbour.

 

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