We are looking at a shift of generation because Estonia's first-generation capitalists, who laid the foundation of the economy as it is today, are reaching their golden years. Why will it be bumpy? Because the Estonian private sector is not prepared for this transgenerational shift of momentum.

Generational capital transfer is hardly a new phenomenon in the West. But the backbone of the Estonian economy still leans on entrepreneurs who started their businesses in the early 1990s, when still young and hungry, and have steered them through three decades. For such owners who have learned and grown on the go, so to speak, their company is like a body part that they will never see through the dispassionate eyes of a professional investor.

The class of legacy owners is still fully involved in the day-to-day management of companies in everything from strategy to picking out office furniture. But every minute spent toiling for the business is a minute not spent living a life of comfortable leisure that owners have spent their lives working toward. In other words, if you want to have time to go sailing or golfing, you need to leave what you've built to your children or sell it off. If selling is off the table, the only option left is to sort out your corporate governance.

Luckily, during a time when a company's founder, executive manager, chief strategist and collector were all rolled into one, the Estonian legislator saw it fit to introduce an effective toolbox for limiting owner dependence.

In the case of corporations, we are talking about the corporate governance or supervisory board level between the management and owners. But even though I have also seen effective supervisory boards able to add value to the company, the reality in Estonia is that, most times, what should be the most important body in the company is virtually unutilized. The decade of major change of ownership is therefore bound to reveal a host of companies that will prove quite helpless without their legacy owners.

Governance level

The G20/OECD Principles of Corporate Governance consider the governance level represented by the supervisory board to be a company's most important organ. A strong supervisory board should ensure a company's smooth operation even during major periods of capital migration.

This way, the corporation is governed even if the owner is unreachable for a month or when it has a thousand small owners instead of a single one. Or when shares are locked in a safe for six months by a bailiff, notary or law firm.

According to the principles, the supervisory board looks at the owner's expectations, points the company in the right direction, hires a management board to meet strategic goals, and exercises control over the latter's activity.

The owner (the general meeting of shareholders) mans the supervisory board with top experts the company needs in that particular stage of development. Usually, this requires a strong financial expert, a member with audit experience, a few experts in the company's area of activity who do not have a conflict of interest, plus a few people from other walks of life, depending on the company's needs. Members of the supervisory board must only serve the interests of the whole company, not individual shareholders.

This kind of governance level will help a company be effective irrespective of which "safe" currently holds its shares.

And reversely, having a weak governance level will hit a company as soon as its shares move from one "safe" to another. Weak governance and untapped potential usually manifest in two ways in Estonia, with the supervisory board functioning either as a rubber stamp or a miniature parliament.

Rubber stamp and a council of distant cousins

The supervisory boards of legacy-owned companies are often manned by the owner's childhood friends, family members and celebrities who style themselves experts in every field. This council of distant cousins then meets at a spa hotel's conference room once a year to stamp documents they are handed and exchange pledges to "see you next year."

This kind of corporate governance only works until something happens to shareholder A, when shareholder B goes through a dramatic divorce, or when shareholder C becomes a bailiff's "customer." Or simply until shareholder D gets too old or shareholder E loses interest. Things also tend to fall apart when shares change hands and new players come on board.

Such a council of distant cousins usually lacks the expert know-how necessary for strategic management of the business and cannot govern the company without constant instructions from the owner. This kind of a virtual lack of corporate governance constitutes a red flag for major corporations, funds or financial investors looking to acquire the company.

Parliamentarism is not a value in business

Companies that have many owners face another risk in place of owner dependency. The supervisory board sees itself as a miniature parliament where everyone is tasked with representing the shareholders who appointed them. But a supervisory board that needs to govern through compromises or taking votes is dysfunctional as it makes decisions based on least resistance as opposed to what's best for the company.

A company's owners are entitled to differences of opinion, while these need to be hashed out at the proper place – during shareholder meetings which have a set start and end time. Even if takes a physical altercation to make a decision there, it needs to be done by the time the hammer falls, which lays down the company's priorities and the owner's expectations. The latter needs to be clear and universally understood – the days of phoning in orders are gone.

From there, the supervisory board needs to act as a united team and execute the owner's expectations.

Having trained more than a few of Estonia's native capitalists on corporate governance, I can generalize with confidence: owners not only tolerate supervisory boards becoming miniature parliaments, they consider it their natural function. The idea of a supervisory board as a team of professionals with a backbone usually comes as a surprise.

A good independent supervisory board

No matter how enlightened the legacy owner, turning a patriarchal organization into a mature company of professional owners constitutes a major change of culture and a developmental leap. Making the transition smooth falls outside the responsibilities of the management board. It is the governance level of the hitherto relatively hidden supervisory boards where the power and responsibility for entering the next phase of development lies.

With the end of the era of legacy owners and the decade of major ownership changes knocking on the door, it is possible to offer a few recommendations, based on the G20/OECD Principles of Corporate Governance, good practice and experience, of how to render companies more valuable and resilient through a strong governance level.

Take a frank and impassionate look at the company's situation and put together a supervisory board whose know-how and experience would benefit it the most in the coming years. Prefer people with corporate governance experience (we're not talking about life coaching, which every middle-aged person can do for a solid B+). If you cannot find them in Estonia, look abroad.

Be cautious of star experts as a supervisory board only has value as an integral and mutually complementary team that may not have room for the egos of gurus and celebrity analysts. The ability to make carefully considered decisions is more valuable than a radiant ego. In the case of differences, members of a supervisory board need to have enough professional character and selflessness to ask one another questions for as long as a common position can be reached. Decisions made by taking votes and compromising are the last thing the owner and company need from its supervisory board.

If a member's position, risk assessment or forecast forces them to strongly disagree with the rest of the supervisory board, it is entirely normal to voice said position in the meeting minutes as it constitutes an argument, not a fist fight or voting someone else down. If a member finds the supervisory board's conduct unacceptable, they need to resign and let the owners know why.

That game of golf won't play itself

Once the owner or owners have found the people to whom they can trust corporate governance comes the most daunting task: to surrender the reins without fear and sail into the sunset in search of that perfect game of golf.

In all seriousness, letting go and putting your full trust in someone else is best described using the word faith. Ask if only your parents. It requires nothing short of a new mental state from the legacy owner who has turned nothing into a whole lot of something. Still, that carefree game of golf in the name of which you have been working for three decades won't play itself.

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