A recent survey of family businesses by Deloitte Growth Enterprise Services (see Openers, page 6) found that 28% of the respondents don’t have a formal board of directors. Advocates of good corporate governance will be dismayed at the news that more than a quarter of the family firms in Deloitte’s sample lack a fiduciary board, especially given the size of these enterprises. (Deloitte polled companies with annual revenues of $50 million and up.)
Why are so many family business owners reluctant to form a board? One commonly cited reason is the fear of losing control of the company. But this fear is unfounded, family business advisers note. Shareholders retain the power to vote directors out of office if they think the board members are undermining the family owners.
Instituting a fiduciary board is a major step in the life of a company. And for some family businesses, unfortunately, the work appears to stop there. In a Family Business Magazine survey conducted in 2011 (see Family Business Agenda 2011), 22.8% of the family business owners with boards said they convened less than one board meeting per year. How can a board be of any help to a company if it never actually meets?
The most effective family business boards are those with a majority of independent directors. Experienced business leaders from outside your company provide a perspective that not only guards against groupthink, but also can help diffuse family conflicts. Yet Deloitte’s survey found that only 39% of the family firms with a formal board had a majority of directors that were neither family members nor company executives.
There are many important ways in which a board can add value to a family company. A board can help business owners separate family issues from business issues. Directors can aid in succession planning—for example, by offering objective opinions on successor candidates and mentorship programs. They can sound the alarm when day-to-day issues that should be the purview of key managers are diverting the CEO’s attention away from strategy and long-term planning. Board members can help the company negotiate unfamiliar turf—such as moving to the next stage of growth or transitioning to a new generation of ownership. And a board can depoliticize sticky family issues like compensation by “taking the blame” for decisions that a family faction won’t like.
Well-connected board members who are strategic thinkers and have led their own successful family companies can help maximize value for the shareholders. And that’s one of the surest ways to keep family members happy and foster harmony.
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