Starting a board of directors is frequently cited by family business owners as something they know they “should do.” In fact it’s a perennial top request for new family business workshop topics. With all of this reported interest, it’s surprising that only 48% of family businesses have actually instituted a functioning board. Two important considerations about boards may help tip the balance: (1) A board can be customized to fit any size or structure of business and (2) the process of preparing for a board, even before the board is fully implemented, has benefits for an operating family business.
Benefits of Boards
A functioning board signals that a business is building for growth, diversification, expansion and innovation. Why is a board such a powerful business accelerator? A successful family board chairman described his top directors as experts “who can look you in the eye and tell you that your breath stinks.” Objective opinions can change the possible trajectories driving calculated shifts in product lines and skill development in employees. As a business owner your board becomes a team of specialists studying your business with the focused intention of making the most of the enterprise you have built.
Nonfamily directors are needed in addition to the hired business professionals that are often used as informal business advisors. Accountants oversee financial issues and recommend tax strategies. Attorneys help to mitigate risk and protect assets. These professionals also desire long-term relationships with your business and may be less inclined toward risk or promoting change. Industry data exchanges and study groups provide benchmarks to assess business performance and identify industry trends. Peer forums provide personal development and self-reflection to develop transformative leaders. Board members integrate all of this information at the enterprise level to provide new insights and perhaps, cautionary tales.
In addition to business development, a board strengthens family focus and discipline. Next generation leaders often report to me that the family behaves better “when there are outsiders at our meetings.” Time dedicated to preparing agendas and financial statements in advance of the meeting is required to support decision-making and analysis. One executive told me “I do this because I respect the business and the legacy that my family has built. I prepare our documents for the meetings and put on a suit and a tie.” This is an opportunity to clearly model responsibilities as stewards of the enterprise.
Advisory boards also facilitate connections to the business successors. Setting objective expectations and using their experience to develop and mentor young leaders facilitates a transition that may seem many years away but will arrive quickly. In fact junior board structures where young family members are tasked with managing the family’s community donations are being used to teach responsibility, due diligence and reinforce the family’s philanthropic values.
Preparation starts with long-term business planning and conversations with family owners and family employees. Knowing where your business is headed long-term clarifies the expertise and resources that are needed to succeed. Is the owner planning to retire and needs input on succession and transition planning? Is the firm’s goal to move into international markets? Will there be a possible acquisition of a similar business in the future? The payoff is a set of focused experts committed to achieving your business goals and bringing their expertise to bear on the problems encountered along the way.
Create a prospectus that documents the expertise and experience that is needed, the annual meeting schedule and the compensation to be provided. It will serve as a reference document for recruitment and screening of potential candidates. The expertise sought should align with the future business plans and complement the experiences of family board members. The prospectus will be useful to business community contacts and hired advisors who will help recruit candidates.
A well-prepared prospectus will focus the search and attract higher caliber candidates. Candidates should not accept the assignment until they have reviewed the documentation and been vetted by family board members. Close business associates or golfing partners who have long provided informal input could serve as trusted board directors provided they can meet the “bad breath” standard.
Customizing a Board for Your Business
A large board with a majority of independent directors having fiduciary responsibilities and formal voting processes is not a good fit for smaller businesses. Advisors without these powers or responsibilities are a starting point. But this advisory board should be part of a formal governance structure that separates ownership decision-making from family issues.
The numbers of directors will vary with each ownership structure. Family members sit on boards to connect business decisions to the family’s values and to shareholder interests. Nonfamily members provide the extra set of eyes and areas of expertise that are of interest for the company. First-time smaller advisory boards should select at least two nonfamily members. Chairs of family businesses are highly sought as board members because they understand the value and culture of family ownership.
Compensation varies from nominal honoraria to prorated amounts based on the hourly rate of pay earned by the chief executive. The expectation of time invested for each meeting should drive the consideration of compensation. Motivated business executives are often interested in the experience of helping to grow a company over the monetary reward. Think of the compensation as an investment made to improve business performance.
Biggest obstacles to getting started
Establishing a board is not a short-term fix and requires critical planning for the largest gains. Lack of time may be the reason that less than half of family businesses implement boards. Another obstacle may be the reluctance to share financial data and accept questioning from experts outside of the operation. CEOs that realize it’s better for a new idea to fail in the board room than in the marketplace are willing to have transparent discussions.
A podcast on Advisory Boards in Family Business is available on the Austin Family Business Program website and features an in-depth interview with Tom Kelly, CEO of Neil Kelly Inc. and Greg Waggoner, Chairman of Leupold & Stevens. Their viewpoints and experiences may provide additional insights.
The Austin Family Business Program defines family business excellence as strong family harmony, active development of next generation leaders and a sound business infrastructure that will support business growth after the departure of the current family owner. Active boards, that include external directors, make it clear that your family is serious about advancing the business to a higher level of excellence.
Sherri Noxel Ph.D.
Director, Austin Family Business Program
A.E. Coleman Chair in Family Business
L.W. “Bill” Lane Professor in Family Business Management