Boards of Directors in Family Businesses: Debunking the Myths
By Mary Sigmond, YPO
Family business leaders tend to wrestle with whether and when to create a board — as well as how to structure it to meet a variety of proprietary concerns. They often find, however, that bringing on a board, particularly one with independent directors in the mix, can be a significant step toward sustainable growth and continuity.
Results of a recent study on board development conducted by global family business consultants Lansberg Gersick & Associates, find that more than half of family business owners polled feel adding a board was highly effective in achieving their business and economic goals. Adding at least two independent directors jumps that satisfaction rate to 83 percent. And family boards comprised of a majority of independent directors increases the satisfaction rate to 96 percent.
In a recent discussion sponsored by the YPO Family Business Network, Don Carlson, an entrepreneur, attorney and former executive with Goldman Sachs and his colleague Michèle Desjardins, President of Koby Consulting Inc. and a senior associate of Lansberg Gersick & Associates, walked family business leaders through the key reasons why they should seriously consider implementing a professional board in their business.
“There are strategic advantages for family businesses when they create an independent board of directors,” explains Desjardins. “Our clients who have transitioned their board to a standard, more fiduciary board with professional directors have never looked back.” She also explains that boards force family businesses to collaborate and delegate more to satisfy the demands of shareholders and strengthen the economic viability of the business.
Strategic advantages of boards with outside directors include:
- A capable, professional board can provide continuity through turbulent times, especially through a transition.
- An objective assessment. Outside directors provide oversight in succession planning, which is key to establishing leadership credibility for successor(s).
- Smooth leadership succession. The implementation of an independent board can be the new leader’s most important step during the leadership succession process.
- Specialized expertise. Directors are often experts in areas such as HR, finance or marketing that may not be currently present in the skillsets of family members.
- An expanded network. Board members often bring in their own key contacts and critical industry relationships.
- Professional board members will demand and hold the members of the family and management accountable to developing and sticking to a long-term strategy, and delivering on goals.
Debunking the myths
In working with family businesses, Carson and Desjardins have identified the top eight concerns families have about implementing a board and provide leaders with alternative ways of thinking about the positive effects a board may make in their business.
Myth #1: We will lose control of our company.
Hired professional directors know that they are there to serve the owners. Develop a list of criteria in selecting directors. First and foremost, they should share your core values. A fertile hunting ground to begin is to look at other family businesses and outside executives who have owned a family business. Don’t forget that you get to choose and structure the board and can always remove a member of the board if you are unhappy.
Myth #2: We know our company better than any outsiders and we can make better decisions on our own.
Absolutely, however, you don’t have a monopoly on the markets, emerging trends and strategies. Begin with a strategic analysis of your company’s strengths and weaknesses and then recruit outside directors who have relevant expertise. Don’t fire your current family directors; just add to that talent pool.
Myth #3: We can’t find quality independent directors.
Work with a consultant to source people. Your network is a great resource for talent. Talk to your customers and business network. Look to members of YPO. Remember, good directors don’t do it for the money in most cases but for the experience and insight.
Myth #4: The family loses privacy when discussing family matters in board meetings.
Outside board members and professional directors are used to managing confidential information and are no more likely to leak information than a family member. Remember to clearly outline during the onboarding process the importance of maintaining privacy and make sure to include a legal confidentiality agreement. You’ll find that independent directors will reduce family tensions and disagreements.
Myth #5: It’s expensive.
It is true that independent directors cost money, however, you get the most “bang for your buck” when you pay them the equivalent to most senior executives in the company. A good rule of thumb is to take the CEO’s salary, divide it by the number of work days the board member puts in and use this as a per diem.
Myth #6: Board meetings are a bureaucratic headache.
Creating a fiduciary board requires planning and work but it is inherent in the concept of true accountability. Prepping for board meetings forces management to think through issues, put things down on paper, create an agenda, send out materials ahead of time and follow through. Price is what you pay, value is what you get. It will get easier over time and the independent board will give legitimacy to the decisions made in these meetings.
Myth #7: Having outsiders will break the balance between branches.
Even branches need representatives. All directors have a fiduciary and legal obligation to represent the interests of all shareholders. They will look past the loyalties of the branches and proceed in the interest of the company.
Myth #8: We are not ready.
You will never be 100 percent ready, organized or have a coherent enough strategy to implement a board. Know that you can make adjustments along the way and board members will help. Board evaluations are also an excellent way to check in and see where tweaks need to be made.
“It is a good idea to explore the idea of an independent board of directors at any stage of your family business,” says Carson. “It should play a significant part in your dream vision for your company and its future growth and stability.”