JULY 10, 2018
A cornerstone of effective family business governance is developing strong boards of directors. One board factor that correlates with family business performance and continuity is the addition of outside independent directors. Another factor that has not received as much attention, is the importance of developing family members into strong directors, capable of complementing the independent outside directors. These “governing family owners” and “non-owning family members” play a pivotal role in the success and continuity of the family business.
A natural first phase in family business governance is to create a family-only board. These initial boards are usually comprised of family-member owners working in the business. This family-only board often evolves to include younger generation family members working in the business who may not yet have ownership. Typically, the governing family members (both owners and non-owners) in this stage are narrowly-focused on the growth and operation of the family business’ current offerings and operation with limited outside influence.
“The roles of all board members are greatly enhanced with the appropriate selection of both family members and independent board members.”
As the business develops further into the second and third generation, increasingly outside influence has greater impact. When transitions occur, governance often evolves from a family-only board, to an advisory board, to a fiduciary board with family members as the majority, and then to a fiduciary board with non-family members as the majority (see the figure 1). Each stage represents a meaningful change from the previous one.
Figure 1
Gaining Strength from Difference
As an example, the Irwin Seating Company has evolved from a family-only board when it was founded over 100 years ago to a fiduciary board today with four family members (two in the business and two outside the business) and four independent outside board members. This blend of board members has been effectively governing Irwin for the past several years. The two family members in the business have a deep understanding of the business, while the two family members outside the business and the independent board members working in other organizations bring unique perspectives to the table. During a recent assessment, there were several contributions the board members and executives cited as valuable:
Acting as a sounding board
Creating a level of accountability, particularly to the annual plan
Assisting with banking and financial structures
Providing guidance on estate planning matters
Helping build shareholder relationships
Giving encouragement and support, as well as challenging certain initiatives
Providing in-depth support when critical events occur, most recently the turn-around of one division
Both the governing family members and the independent directors of a fiduciary board have some similar roles and responsibilities, including:
Selecting and removing corporate officers
Setting officer compensation
Declaring dividends
Holding management accountable for its performance
However, many family boards, like Irwin, take on more expansive roles, including:
Reviewing and approving budgets
Developing long-term strategic direction
Serving on committees that oversee the audit and compensation process
Assisting in creating policies
Approving significant capital expenditures, including acquisitions
Mixing Expertise with Insight
Ultimately, the key to high-performance boards, whether advisory or fiduciary, is WHO sits around the board table. A complementary mix of skills and experiences relevant to the family business being served has proven to be a strong indicator for ongoing family business success. While having specific industry or functional experience is important, it is equally important to include members who have different industry or organizational experiences and a variety of functional expertise, including finance, marketing, sales, operations, human resources and information technology.
The roles of all board members are greatly enhanced with the appropriate selection of both family members and independent board members. It is unlikely that all family directors, particularly those not employed in the business, will possess the same level of skills and experience that independent directors bring to the table. An equally important attribute for board effectiveness is a profound understanding of the owning family. Therefore, it is best to establish qualifications and training for family directors to ensure they can function effectively on a board with independent directors.
Table 1 is a sample list of qualifications that show some of the unique differences between family and independent board members that one family business has used as their guideline for selecting a blend of qualified board members.
Table 1
Board Member Qualifications
Raising the Bar Realistically
Strong family business boards have consciously developed distinct criteria for family members and outside board members. To raise the bar on board member skills it is realistic to apply more demanding “business experience” qualifications for outside independent board members; and more demanding “family dynamics experience” qualifications for family members. The process of creating these qualifications and then applying them to the selection of board members greatly increases the probability of long-term continuity.
Source for selective data in article:
Pendergast, J., Ward, J. & Brun de Pontet, S. (2011). Building a Successful Family Business Board. New York. Palgrave Macmillan.
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