Ask the experts

Should a NextGen observe our board?

Would a 21-year-old family member who is an MBA student benefit from attending a board of directors meeting as an observer? Would the NextGen’s presence in the boardroom be disruptive?

ADVISERS’ REPLIES:

I assume this question comes from an elder family leader who presumably serves on the board. I would like to strongly suggest that any concerns be put aside.

First, a young person who is attending an MBA program is a mature adult, and as a student is participating in all manner of business events. MBA students are learning to ask questions, look at challenges and be helpful in business. The family business represents the legacy of the family, and whatever this young person does in life, he or she should learn about the family business as a likely owner and board member.

What message would the family be sending to this person if he or she were not invited to learn about the family business? The family should be looking to create an educated and prepared next generation to become involved in the family enterprise. The family should encourage young family members to learn about the family business, and one way to do that is for them to attend and observe board meetings. The family itself would benefit by having informed members of the rising generation learn more about the business.

Of course, the board will likely be addressing some confidential matters, and those parts of the meeting should be closed to outsiders. But most of the board process should be open. Inviting a young family member to observe is an opportunity and also a responsibility. As part of learning to be a family steward, a young person invited to attend a meeting should be informed about the importance of confidentiality, and about proper behavior. It would not be out of line to ask a family member attending as an observernot to participate in discussions. Observers could ask questions after the board meeting or at other times.

The greatest challenge and goal of a family enterprise is to develop a capable and motivated next generation who are able to be responsible owners and stewards of the family business. One clear way to make that happen is to invite young family members, when they are on the edge of adulthood, to learn about the family business by seeing it in action.

Dennis Jaffe, Ph.D.
Research Fellow
Wise Counsel
www.dennisjaffe.com

First, kudos to you for thinking about creative and meaningful development opportunities for your next generation!

Many families offer younger family members the opportunity to observe the board. There are a number of reasons why this may be worthwhile. Exposure to board matters can be a powerful way to cultivate an understanding of the enterprise, model good business behavior and encourage an ownership mindset.

Sitting in on board meetings can also encourage the next generation’s interest in the business, build business skills, foster transparency around board process and lay the groundwork for future roles in management or governance. Meeting attendance may open dialogue about strategic priorities, ownership goals and how decisions are made.

Families preparing future directors may designate a standing board observer or junior board role. Someone in this role might attend every meeting for a specified term to build deeper skills and knowledge over time.

Your goals will suggest the best way to manage the process. To support learning, families may assign a mentor — often a director or executive in the business — to review the board materials with the observer in advance and offer an opportunity after the meeting to follow up and answer further questions. You might want to provide further context by having an orientation session to explain the role of the board and its relationship to management, family and ownership.

It’s also important to consider whether others in the family will be offered similar opportunities and, if so, on what terms. Families with an ongoing observer role may create an application/selection process to support it. Some rotate observer opportunities among all next-generation family members. The right approach will depend very much on your family’s culture and goals. Keep in mind that you’re creating a precedent for the future. Clarity on both process and qualifications (age, education, etc.) will support fairness across the family and reinforce the purpose behind the invitation. You can minimize any potential disruption by (1) having criteria for participation, (2) discussing the observer role and your goals for participants in advance with the board, (3) sharing with observers expectations for appropriate participation and (4) clarifying in advance any sensitive discussions for which observers should not be present (such as those involving performance management and compensation).

In short, discussing openly within the family the purpose of welcoming board observers and being clear about how that experience will be handled is the best way to tee up a positive experience for all involved.

Kristi Daeda
Vice President
The Family Business Consulting Group Inc.
www.thefbcg.com

All family members, not just MBA students, should attend their family business board meeting.
Meeting attendance is critical to understand the fiduciary role that the board plays on behalf of the shareholders. Before any family member attends a board meeting, there are several key considerations:

  • Confidentiality: Clarify the confidential nature of the boardroom discussions and dynamics, and why this is important.
  • Seating arrangement: Organize the seating so attendees can observe the meeting without disrupting the flow of the conversation.
  • Executive session: Provide an executive session on the agenda at every meeting so highly confidential matters, such as compensation or succession, can be discussed without visitors present.
  • Debrief: Conduct a debrief post-meeting session with the CEO, chairman and/or lead director so observers can better understand the dynamics in the boardroom and so they have an opportunity to ask questions about the business and the board. At this session, attendees should be clear on what discussion points are public knowledge and what must remain private.
  • Social time: Provide an opportunity for attendees to talk with directors before or after the meeting at an informal meal or over a meeting break. This is meaningful, as it provides another window into the family and helps build trust with the family.

Extended board observation can be a useful development tool for family members working toward board readiness. If a family member is interested in board service, he or she should have proactive discussions about what “readiness” looks like and how family directors are selected and are evaluated. Family members who aspire to board service should understand what’s expected of a family director, as well as a director’s fiduciary responsibility.

The board is a critical component in business success. The integrity of board proceedings should be preserved, but board observer status can be one of the best ways to ensure that the rising generation sees the value of the board and wants to participate in corporate governance.

Meghan Juday
Non-Executive Vice Chair
IDEAL Industries Inc.
www.idealindustries.com

Attending a board of directors meeting can be an extraordinary opportunity for a young person being trained in business to gain an understanding of governance and how businesses operate. For enterprising families with well-functioning professional boards, the ability to offer this kind of on-site, real-world training to members of the rising generation can be a transformational event and an enormous advantage for them in their career planning. Most students in an MBA program would not have a chance to observe a board meeting; rising-generation members should be encouraged to take advantage of this unique opportunity afforded by their relationship with the family business.

Being a student provides the right context for being an observer at the boardroom. It sets the expectation that the purpose is truly educational and is not conflated with concerns about corporate politics and power among family branches or within the hierarchy of the business. But what if a request for observer status comes from that same MBA once that person enters the business? As part of the corporate hierarchy, being invited to a board meeting can have significant impact on others who haven’t been invited (for example, that young person’s manager) and can lead to feelings of nepotism and distrust.

Observer status also gives the board a chance to consider the demeanor and character, in a professional context, of a potential rising-generation member who may be coming into the business one day or who may soon be an owner.

To avoid any threat of disruption or misunderstandings, set clear expectations for the observer’s behavior and communicate to all involved the educational purpose for including them.

For a family business whose governance is in its early stages, things can be trickier. Think carefully before exposing a rising-generation member to the growing pains associated with early attempts at professional corporate governance. If a family enterprise has yet to sort out the processes, roles, standards and purpose for its board, bringing in the young person could backfire. He or she may lose interest or confidence in the business or find it impossible not to opine on board process.

The worst scenario is when family conflict or diverse family branch interests are played out in the boardroom. If the family hasn’t already found alignment in purpose or hasn’t developed alternative pathways for family communication to keep family issues from distracting the board from its mission, a rising-generation member may witness family disharmony and even be sucked into its vortex.

A family business provides much more than economic opportunity. It can provide valuable professional development opportunities for all its stakeholders, and especially its rising-generation members. Whether a rising-generation member is destined for family leadership or not, helping develop the young person’s professional skills and experience is always beneficial.

Doug Baumoel
Founding Partner
Continuity Family Business Consulting
www.continuityfbc.com

There could be benefits for this visitor and the board, but only with sufficient preparation.

Potential benefits. This student might value seeing interaction between directors and company management on critical matters like strategy assessment, capital planning or risk assessment. He or she might gain appreciation for the role of the CEO and the skills and experience that outside directors bring. Sometimes, the presence of a sharp NextGen family member can be encouraging for the board, reminding them of the family’s long-term commitment. The interest of a talented family member could inspire board members. 

Risk of disruption. When sensitive or contentious issues come before the board, the presence of an outside observer can be disruptive, even if the observer remains silent and pledges confidentiality. In effective boards, the directors and CEO have developed a culture that enables them to be direct and candid. They have an underlying respect for one another that enables them to “process” challenging comments and move forward. The presence of an observer at such times can inhibit free expression. This could result in less clarity about the true questions management is bringing to the meeting, or about specific directions the board wants to provide.

Preparation. The first step should be a conversation with the board chairman. He or she is responsible for managing the meeting to see that the priority work of the board is getting done and that the culture of the board enables effective discussion and clear direction. The chairman will be alert to agenda topics that could be interesting for this student, as well as topics that may be too sensitive for the presence of a visitor. The chairman may recommend a mentor, such as one of the independent directors, to help the student prepare for the meeting and debrief afterward.

Preparation should include advance notice to the directors with an opportunity for their comment. The student should have a chance to preview the meeting agenda with the mentor, identifying topics of interest and anticipating the kinds of interaction that might occur. The mentor could also help the student understand the larger issues and context for what will happen at this particular meeting.

The visitor should prepare a brief statement introducing himself or herself, including why he or she wants to observe the meeting and professional aspirations for the future. This statement, along with a pledge to maintain confidentiality, would be sent to the directors in advance to eliminate the disruptive effect of a surprise visitor and enable directors to comment to the chairman if they wish.

Benefits that this well-prepared student might reap from observing the board meeting could include gaining greater understanding of the company, the role of directors and how the board utilizes multiple perspectives to improve decisions. A further benefit could be that board meeting observation will become an important reference point in preparing to become a family director candidate, or for encouraging another family member on that path.

Allen Bettis
President
The Legacy Associates LLC
www.legacyassociates.com

Issue: 
July/August 2018

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