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Avoid the common pitfalls of family business boards
Serving on any board of directors is not without its difficulties, more so when it comes to family-owned businesses. Even those with established, professional boards comprised of independent directors and sound governance processes may encounter challenges due to the family’s role on the board.
While public companies’ boards are specifically focused on increasing shareholder value, family-boards are required to act on behalf of stakeholders with multiple and often conflicting agendas. The interpersonal dynamics at play in family businesses are also far more complex, often with significant ramifications that inevitably affect not only the family members involved but also the independent directors, creating a counter-productive culture of avoidance.
Successfully running a family business or, increasingly so, a single-family office, requires not only appointing a strong, capable board but also awareness of the potential pitfalls that require careful navigation when plotting the best path for it. These are a few of the most common challenges that may arise during the process of setting up a professional board for a family business or office and how to overcome them.
Many business owners maintain control of their companies by appointing only family members or close friends to their board of directors. This can present a myriad of problems, the most common of which is familiarity. Familiarity allows personal issues to seep into the business, often influencing board decisions. It also means that often, friends and family may tell the owner what they want to hear instead of what they need to. This results in myopic decision-making that ultimately becomes costly.
When appointing a board, the objective should be to achieve a balance of interests and skills to optimize the organization’s growth and success. This can be achieved by appointing capable family members alongside outside directors who bring vital insight and context to the bigger picture that balances hyper-focused insiders’ views.
Still, bringing in outside directors must be done with planning and care. Roles and expectations need to be defined at the outset. Family members should also be prepared and equipped for the shift in their roles and the expectations and responsibilities they carry as well as the evolution of the board and its mandate.
It is no secret that ineffective or a lack of governance compromises management’s ability to succeed. On the other hand, effective governance dramatically aids the business, bringing with it efficiency, simplicity, focus and alignment.
To ensure the effective running of their board, owners need to define a governance model that will best help them achieve the business’s objectives. This should include practical measures and cover everything from the size of the board, its composition, and roles within it, all the way down to the topics that come before it and how decisions are made.
Families who take the time to define and implement a governance model find themselves significantly clearer on their objectives, the roles of all concerned and how the board and organization will interact and function. They are also better equipped and considerably more objective when it comes to board member selection, regardless of whether they are independent individuals or family members.
Depending on the circumstances, in addition to accomplished independent directors, individual family members may occupy board seats by virtue of their position in the family. Others may be appointed due to their understanding of, and position in, the business.
While this may be acceptable to all involved, these individuals’ roles and the degree of power they wield within them must be well defined, articulated, understood, and enforced through governance processes. This helps ensure alignment of purpose and fosters consultation between family and independent directors, which breeds respect and cooperation.
Structures should also be put in place to afford young or inexperienced directors specific board training and mentorship that enables them to be adequately qualified and equipped to serve as active, insightful board members.
This helps to avoid awkward situations where unqualified and inexperienced family members feel it is their place to engage in high-level oversight discussions regarding senior business leaders. Furthermore, it also empowers those not directly active in the business to participate in and contribute to discussions in a meaningful way, instead of being perceived as observers rather than real board members.
Owners who waver in appointing younger family members to the board due to their inexperience may instead elect to allow them to attend board meetings merely as board observers. While this can be a useful tool in succession planning and future board talent development, it must be executed with discernment, consideration and input from all directors concerned.
Audiences tend to influence the nature of discussions and make not always facilitate open discussions, especially when sensitive matters arise. For this reason, having buy-in from all concerned is vital. Such consensus should involve the role, frequency and number of observers accommodated in such arrangements.
An advanced learning model should be developed that maximizes benefits to the observers but also minimizes disruption. An organized process that dictates who participates and that maps out guidelines for participation and conduct, as well as the expected norms on confidentiality, should be developed. Executives sessions should also be facilitated, wherein observers are asked to leave the meeting when more sensitive issues are discussed.
There is certainly no “one-size-fits-all” approach to these challenges. Being aware of the potential issues and investing careful thought and planning into the ways boards are appointed and evolve is vital to the success of the family business or family office for generations to come.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.