Your Family Business Needs a Board
A board should be at the helm of any family business, steering the business in the right direction. If you wish to have a business that is resilient and has a positive impact on all stakeholders (e.g., employees, customers, vendors, and society) you must make sure your board is intact and functioning optimally. This article offers some questions to consider as you develop best practices for your own board, such as who should be on the board, whether you need an independent director, and how often your board should meet. As you shore up your own family business in these turbulent times, it’s important to think through the purpose and practices of your board. Because in the end, the ultimate fate of your business (e.g., sale, merger, or dissolution) will be determined by the owners. Not management.
Governing a family business is like sailing a ship. Indeed, the term governing itself comes from the Greek word for “guiding or steering.” Any family that owns a family business must consider where their family business is headed. That’s determined by who is steering the business and in what direction they’re headed. This is even more compelling as we face the rocky waters of the pandemic, rising inflation, and geopolitical unrest. If you wish to have a business that is resilient and has a positive impact on all stakeholders (e.g., employees, customers, vendors, and society) you must make sure your board is intact and functioning optimally. The board determines the company’s direction, as a collective group, similar to the way that a captain steers a ship.
As you shore up your own family business in these turbulent times, here are some questions to consider, and suggestions to help you develop best practices for your board.
Unfortunately, when asked whether their family business has a board, many owners reply “no.” The response is meant to indicate either that a board doesn’t legally exist or that there is a board but it’s not functioning as such. Either way, “no” is not the best answer. In fact, most companies have a board created at inception in the governing documents. If you review your articles of incorporation or by-laws, you may be surprised to find that a board exists. It’s worth taking time to find out if that’s the case and, if so, see who is listed as a board member. If, instead, a board has been created but is dormant, you must ask why that’s the case. Often, family business owners cede control to the founder or other dominant family members who may or may not actually be on the board. This creates an unnecessary gap in corporate governance that will cause strategic complications at some point in the future, if not today.
While there are a variety of formats for boards, depending on where the business was created and/or where it operates, all boards serve the purpose of providing oversight, guidance, and representation of the owners’ interests. By definition, a board should operate at the strategic level and not get caught up in the day-to-day administration. Clear delineation between the big picture questions that a board must consider and the practical, tactical work of management is essential. In a family business, the board must also ensure that the business operations align with the values and goals of the owning family. That’s because, in the end, the ultimate fate of a business (e.g., sale, merger, or dissolution) is determined by the owners. Not management.
Many family business boards consist solely of family members. While this might provide some comfort to family members that their interests are being represented, especially when there are different groups or branches of family members, it’s rarely advisable. Indeed, it might end up harming their interests — the opposite of what they are seeking to accomplish. This is especially true as industries are being transformed at increasingly rapid rates and when disruption is the name of the game for many business models. Board members must collectively possess knowledge, skills, and experience ranging from finance and law to industry trends and operational challenges. Issues such as audit, compliance, and compensation can’t be ignored for the sake of the family dynamics that often drive board member selection. At the same time, a family business board must also have one or more members — family or non-family members — who understand and champion the values and goals of the family owners.
Some family owners have a board that meets every day or once a week. In these cases, the distinction between management and governance is being ignored. Just as the captain of a ship can’t reconsider the direction every minute (it’s better to set the direction and head for it without making too many adjustments), a board needs appropriate space and time to focus on key strategic priorities. A board that meets too often inadvertently takes away precious management time and risks micromanaging issues that are not the board’s responsibility. Quarterly meetings are often the norm, though in the start-up stage or times of crisis (such as a pandemic), more frequent meetings may be advisable. The chair of the board must lead the meeting with a combination of structured time for key presentations and decisions, while ensuring that all voices can be heard. The best board chairs understand how to use time between meetings to get input on agendas, air difficult questions and issues, and identify hot topics that could derail not just a meeting but, worse, the overall direction of the board.
While the term “independent director” may have a specific regulatory definition depending on the company, in the family business context it’s often used to refer to a non-family director. The selection and inclusion of independent directors is still very much a “work in progress” for most family businesses. Some family owners pick a close friend or confidante, which gives comfort that the director can be trusted, but often this is no better than appointing a family member who doesn’t have proper board qualifications. In fact, it’s best to create job descriptions for board member focusing on the purpose and needs of the board before beginning to consider possible candidates. Further, once an independent director joins the board, it’s essential to create a system that will respect their voice and input. The fate of the business and its stakeholders is in the hands of the board; independent directors should not be chosen for optics rather than substantive purposes.
Most of the world’s businesses are owned by families. They play vital roles in the local and global economy, the magnitude of which is only exceeded by governmental organizations. The board is at the helm of the business, and where the board heads the business is the direction it will go. Further, the nature of business, and the duration of businesses, is changing rapidly. In the future, businesses will need to be nimbler and more open to fundamental changes that are existential in nature. A board must be willing and able to consider when, whether, and how to change industries or arrange a sale of the business. In the end, a resilient business may not even be the highest goal. Family businesses increasingly face questions that require more than managerial expertise, but rather governance structures and processes that come from an even higher calling — a resilient family, economy, and society.