Does a Family Company REALLY Need a Board?

Written by on November 7, 2013 in Family Business with 0 Comments

Black and white - man playing chess - Upland ConsultingThe most successful family companies have found the answer: a clear Yes.  At some point, successful companies outgrow their founders, and this remains true even if family members are shareholders, directors and/or employees.

Creating a family company board can be a very hard thing to do.  It’s emotional, it has risks for the company, and it’s a leap of faith.  But a growing company will need many things that a small-and-staying-small family business doesn’t.  How can this happen?

Let’s look at three areas where non-family often participate.  First, there are almost always non-family employees, beyond the smallest companies and largest families.  So someone outside the family is already valued for a contribution they can make.  And someone outside the family is already trusted with some aspect of the business — perhaps a critical aspect like the accounts or the machinery.

Second, it’s not unusual for some of the shares to be held outside the family.  The need to fund growth, to grab an opportunity, to merge with another company, to avert a crisis or to bring in greater business expertise often leads to sharing equity beyond the family.  And why not?  Some contributions are best rewarded by direct participation in the company’s wealth creation.

And the board?  Just because the kids are the beneficiaries of the family trust, and some of them are being groomed to take over executive control, does that mean they should all be directors?  No.  A family company board, like any board, does its work best when it analyses its own developing need for skills and knowledge, and recruits accordingly.

“But wait!  I’ve got 15% of the shares and the constitution says I can appoint a director, and if I don’t my ratbag siblings are going to spend all the money!”  Well actually, if you are a director, your fiduciary duty is to the shareholders in toto (the company as a whole), and not to your shareholding or any other subset.  The same goes for your ratbag siblings, if they sit on the board.

Directorship of a family company should not be turf-protection.  The board and the business will not work properly if that’s the underlying rationale of director appointments.  Nor should board membership be the continuation of family politics by other means.  A monthly family quarrel is not a board meeting.  And if the board gets overridden by the founder, or by a bloc of family shareholders, you haven’t got a board at all.  You’ve got de facto directors telling the board what to do.

So we should qualify that earlier Yes.  A family company, beyond a certain size and level of ambition, needs an effective board.  A good board can be a think tank, a sheet anchor, a safe forum, and a wise counsellor at pivotal times.  It can be a place where the hard, uncomfortable questions about the business can be asked, and tackled with clear heads.  Times of succession (founder retiring, rising generation moving in), major growth, crisis, change of direction — these are best addressed from a family point of view, but also from a forty-paces businesslike point of view.  And that’s what you want outside, independent directors for.

It can sure take courage to loosen the reigns, to let the control of a company be shared a bit.  But growing a business always takes courage.  And there are ways to protect family interests while still freeing the business to flourish.  A family charter or pact, separate from the company constitution and the board charter, should set out clearly who gets what, and how to protect the interests of family members who don’t want an active part in the business.  A family council, separate from the board, should agree, clearly, frankly and in writing what the family want for their business now and in the future.  An advisory board, made up of trusted counsellors rather than directors, might be the right answer for now.

There are ways and means.  There are good precedents.

Family companies are the backbone of our economy, and across the developed world they are also some of the longest-lived companies of all.  Many of our iconic listed companies started as family businesses.  To achieve this, they had to outgrow their founders.  They needed to grow into big-league governance.

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