Family businesses need effective leadership boards

March 29, 2010
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For a family business to operate effectively, it must have an effective board of directors, especially if it is to continue from one generation to the next. Because of the frequent blurring of family, ownership and management in a family business, the proper function of a board of directors is sometimes ignored.

An effective board of directors has been identified as one of the most important factors in determining whether a family business will continue from one generation to the next. Joe Astrachan, a nationally known expert on family business issues, has been a guest speaker at a number of programs for the Family Business Alliance. His research has identified three key factors for success in transition of a family business to the next generation: a functioning board of directors, a strategic plan for the business and some form of family meetings. Oddly, his research also indicates that having a formal succession plan does not correlate with actual success in transitioning the business to the next generation.

A board can vary in size and sophistication. At the minimal end of the spectrum, a board might include one or two family members that rarely meets, perhaps only to satisfy legal requirements. The next step up might be a board that includes a broader range of family members and actually meets. Some family businesses might add an informal advisory board consisting of friends or others who are not actually elected as directors. Moving further up would be a board that includes outside independent directors and meets regularly to give advice and direction to the company.

I cannot emphasize enough the value of outside directors, who are neither family members nor management. Outside directors can bring fresh and objective thinking, as well as independent ideas and experiences. Additionally, they are not subject to the same political and other considerations that impact family members and management in a family-owned business. Outside directors increase the level of accountability for management by encouraging and demanding that management bring their best game to the table. My family’s business, the Behler-Young Co., now owned and led by the third generation, has consistently had outside directors. The guidance and perspective they have added has been of immeasurable value. 

So what is the difference between an advisory board and a “real” board? Members of an advisory board are informal advisors and do not have the duties and responsibilities of a real director. While an advisory board is better than no outside board, I have found that they tend to not be as valuable. One of the reasons may be that they don't have “skin in the game” and thus are less likely to disagree with those in control of the company or otherwise hold them accountable. In my experience, if you are going to go through the exercise, it is worth having real directors who are compensated appropriately and have genuine responsibility.

Yes, a director does have genuine legal duties and responsibilities. These include acting in good faith and in a manner reasonably believed to be in the best interests of the corporation and its shareholders. A director has a duty of loyalty and confidentiality. Fulfilling these duties can take on some additional dimensions in the context of the family business.

An effective director must understand the company's business, ranging from its purpose, strategy, facilities, operations, financial statements, measures for success and key management personnel, among other matters. Perhaps more importantly, an effective director for a family business must understand the dynamics and politics between the family, the owners (if different) and management.

Who controls the voting? What are the family's goals in relationship to the business? How do family and management handle governance? What is the history and politics between family members active in the business and those who are not? How do the goals or needs of various family members differ? How does the business fit into the family’s overall wealth and estate planning? Is there a shareholder agreement in place and how does it impact operational control or future ownership?

Having an effective board requires effective meetings. An effective board should meet probably three to six times a year for at least several hours. Materials should be distributed in advance and each director should read them thoroughly. A director should come prepared to question and challenge management on what management is doing, and perhaps more importantly, on what they aren’t doing. While it is generally not the role of the board to develop a strategic plan or specific action items, the board should review, understand and challenge plans developed by management.

At a previous Family Business Alliance program, Win Irwin of Irwin Seating and I spoke regarding boards of directors in family businesses. Win used the term “nose in, fingers out” to refer to the proper role for board members. This term captures the proper role better than any legalistic framework.

Before accepting an invitation to be on the board of a family business, you are well advised to do some investigation. What is the political landscape? Is there indemnification and/or D&O coverage for directors? Why are you being asked to be on the board — because of the owners? Because of the bank? What will your role be and will you be permitted to be a good director? Will you be expected to rubber stamp the actions of management or the family?

An effective board helps any business and is particularly helpful for a family-owned business. Additional resources and programming for family businesses are available through the Family Business Alliance (www.fbagr.org).

Bruce Young is a partner with Warner Norcross & Judd LLP specializing in corporate and transactional work with an emphasis on family owned businesses. He is a third-generation shareholder of the Behler-Young Co., where he serves as secretary and on the board of directors. He is also on the board of the Family Business Alliance.

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