Advisory boards can help family firms navigate pitfalls and mitigate risk

By Susan Stautberg, Edward Stautberg

To survive and thrive, family companies need new ideas and a fresh point of view. An advisory board can jump-start innovative thinking by infusing new perspectives into the family business. A council of diverse outside experts can show families how to overcome inherent vulnerabilities and to navigate the pitfalls that often plague family companies, such as sibling infighting and hidden agendas. To help mitigate the risk around the governance of family businesses, advisory boards offer a number of benefits.

Candid feedback

Bringing together outside individuals who have solid business expertise, are ready to give candid feedback and will pose the difficult questions can provide a competitive advantage. Outside thinking enables companies at the entrepreneurial level as well as those at a more mature stage of growth to escape from the standard thinking within the industry about issues such as price, volume, demand and staffing. An advisory board imports proven ideas and strategies from other industries and cultures.

Diane Graham, CEO and chairman of STRATCO Inc., a family-owned international engineering and equipment design company, has used an advisory board. "My advisory board members have always asked tough questions, reviewed financial information and counseled on potential joint ventures and acquisitions," Graham says. "Without an advisory board, I believe it is more difficult for employees and officers of a family-owned company to speak freely. With an advisory board, the owner, family and employees are privy to the cumulative effect of years of experience of people without an agenda."

Fewer strings attached

A family firm can create an advisory board to obtain outside advice without either the major expense or the liability concerns involved with a corporate board. Unlike corporate boards, advisory boards make non-binding recommendations and have no fiduciary or legal responsibilities; they also are more flexible in size and composition. Members' skills and expertise are more important than their rank, and each can serve a one-year term (which provides the family with leverage to change advisers as needed). Advisers generally receive smaller honoraria than fiduciary board members do, and advisers are often more open and forthright.

Some family businesses, such as Bama Companies (the largest supplier of McDonald's pies around the world), use an advisory board as precursor to a board of directors. The advisory board provides a training ground for executives to begin sharing information and management decisions with outside parties.

When family members try to resolve more contentious issues among themselves, they can become suspicious of each other's motives. Disagreements can turn personal, and it becomes difficult to keep the focus on the issue at hand. If there is an advisory board in place, family members can look to the counselors for their objective take on difficult situations.

Addressing sensitive issues

An advisory board can assist in facilitating communication between generations, taking emotion out of decision making, realistically assessing family members' skills and strengths, and monitoring the succession and ownership transition process.

In any family business, there is a delicate balance between maintaining harmony among the individual family members and running the company in the most efficient and strategic way. Issues that may arise include:

• Whether a family member in a key position has the right skills to fulfill his or her current and possible future responsibilities.

• Who will be the future chief executive.

• Conflicting views about the strategic direction of the company.

An advisory board can discuss important policy decisions in a professional setting, promoting an open dialogue among all members and helping to avoid confrontational situations. An advisory board can offer a realistic assessment of individual family members' ability to contribute to the health and growth of the business. The board can help management make decisions on who should hold what positions based on skills rather than issues of personality.

Coming from different businesses and industries and having had many years of management experience in their respective fields, advisers are in a unique position to visualize who in the family is the right fit for a particular position now and in the future. Often, executives at family companies that are growing quickly do not take the time to formulate either a strategic plan or a succession plan. Too much is assumed, no strategy is drafted and there is a lack of foresight.

Usually it is up to the CEO and the board of directors to choose a successor, but if there is no set decision-making or oversight process, succession planning fades to the background until it is too late. All of a sudden, owing to death or incapacitation, the CEO is no longer able to fulfill his or her responsibilities. The result can be confusion and arguments that can lead to the demise of the company. Even when the CEO has chosen a successor, the selected executive may not have been sufficiently trained to take over the business. Entrepreneurs are often reluctant to relinquish control. Creating an advisory board can help establish a forum for introducing the next generation to the many aspects of the business and to provide them with mentoring and training to be the future leaders of the company.

Paula Marshall of Bama Companies says about Bama's advisory board, "I was looking for someone who could help me with the family side, the family ownership piece, because I didn't have a dream to get a monetization. I had a dream to stay working until I was 'in the grays.' My mother stayed chairman of our company until she died about a year and a half ago, so I kind of had that in my head."

Looking toward the future

The advisory board can also be a strong ally for the younger generation. A board that has been in place and operating effectively for a significant period provides stability and continuity. The business owner feels secure in the knowledge that there are committed people who can, after his or her retirement or death, help steer the company and advise the new company leaders.

As a family business grows, company executives will want to get the best possible talent, even if it means going outside the family. Advisers can identify and evaluate candidates and assist in mentoring new members of the management team. Having an advisory board can enhance the firm's networks and provide access to a wide range of qualified individuals. An advisory board, generally an indicator of a maturing and expanding family business, can ease job candidates' concerns about how non-family members will be treated.

Today's business environment is marked by rapid globalization, questions about governance, a barrage of risks and the urgent need to be ahead of the moment. Good thinking and sound judgments are key to providing appropriate road maps and to ensure that family business leaders don't "under-imagine." An advisory board with a diverse membership can be a competitive advantage.

Susan Stautberg and Edward Stautberg are leaders of PartnerCom, which assembles and manages boards for businesses globally. Susan is also CEO and co-founder of WomenCorporateDirectors, an organization for women directors (www.partner-com.com).

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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July/August 2015

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