How to develop a deep bench of family directors

By Meghan Juday

 

Sometimes it seems easier to leave the running of the family business to professionals who earned their stripes working in the industry. But the most effective family businesses are those where the family, the board and the management form a true partnership. All three do their part in ensuring that the business strategies are being executed and are part of the important conversations taking place in the boardroom.

Most of the negative stories you hear about family businesses involve families who are not being good partners with the board and the management. The result is behind-the-scenes dealing in which the families put pressure on board members or management to pursue family members' agendas. Sometimes family members without the right skills or experience are placed in business leadership roles. In a worst-case scenario, the family gets mired in legal battles.

Many of these problems can be eliminated once a family develops a clear understanding of what it means to be a good partner with the board and management. A solid partnership aids in the smooth execution of the business strategy because the family, board and management are all working toward that as a common goal. Instituting a family director readiness program is an important step in developing unity among the three key stakeholder groups.

The role of family directors

Family directors represent the family's interests to the board; act as stewards of the business; ensure that the values of the company and family are aligned; and assist in succession planning for the family, the chairman and board members. They serve as a bridge between the board and the family. Most of all, family directors are tasked with ensuring that the business and family strategies are aligned and support the overall direction of the business.

Family directors must be prepared to participate in family governance by working with the family council and other bodies, in order to appreciate the family's needs and concerns. Directors should understand the family's intentions with respect to keeping the company family-owned, along with the steps the family has taken to manage the risks of continued family ownership, such as estate planning and buy-out policies, and share transfer restriction agreements. Family directors will keep the board informed about potential problems within the family that might affect the business. If family directors perceive that the family has started to get out of alignment, they can alert the board and then kick the family council into gear to get them back on track, thereby ensuring the family can continue to act as a good partner.

If the family can't appropriately manage its concerns, the board and management will start to focus on the family. This is a big risk to the business. If the board and management team start doubting the family's ability to be a good partner, they might change the business strategy to hedge the risk and accumulate more cash for possible redemptions. Also, and even more likely, a good board and management team will leave a company if the family is in chaos. Board and management focus on the family puts the business at risk.

The challenge of family director development

The qualifications of family directors must complement those of the company's independent directors. Outside directors are qualified because of the vast expertise they bring to the table. They have relevant industry experience, a background in acquisitions or technology, or experience in globalization or other new markets the company wants to get into. Independent directors provide the talent that the family needs. Few families have members who have served as executives in companies outside the family business.

Independent directors lack an inside perspective on the family. That's what family directors bring. However, a clear understanding of the family is not enough. Family directors should also have enough experience at the board level to effectively bring the family's perspective to that dialogue. Family directors must understand the will and the intent of the family, and they also need to understand the business and its operational complexity.

Developing qualified family directors

Once the role and competencies of family directors are clearly defined, it's time to develop a family director readiness program. The first step is to determine where the family is going to be and understand where the business is going to be in ten years. This information will enable the family to map out where the board needs to be, and work to develop those capabilities in prospective family directors. All training programs should be developed not for what you need today, but for what you need ten years from now. It would be a disaster for the skills of new directors to be obsolete just as the directors are reaching peak effectiveness.

Succession planning is an important element of any family director development program. If you're anticipating a lot of turnover in the next ten years—family directors retiring, or even a family chairman retiring—that should be taken into account. In instances of high turnover or a change in governance structure, family directors must be of a higher caliber, because they will be carrying a larger burden.

The path to director readiness

The family should form a Development and Education Committee (DEC) to oversee director training. The key to having a deep bench of qualified family leaders is to not turn anyone down who indicates interest. As people move further along the path to director readiness, they become better stewards of the company. That path to director readiness can be very long, and sometimes people will lose enthusiasm or realize they're better suited to another role. Even if they never complete all of the prerequisites for becoming a director, everyone in the family will benefit when people work their way further along the path.

That's why it's important that the path to director readiness be planned to include natural stopping-off points. A family director training program should be designed so that participants can qualify for other roles along the way. Everyone in your family, including all shareholders and their spouses or partners, is part of your family assembly or family enterprise. And there are many important roles besides family directors. The DEC can define roles with different levels of complexity -- family council member, family foundation member or chair, committee member or chair, council or assembly chair, family director, voting trustee and family employee. The DEC can even go beyond that and work on developing people for the role of board chairman or non-executive chairman.

An effective development path is based on clearly defined competencies for each leadership role. It's important not to think of the different roles in a hierarchical way. The family chairman can't do his or her job effectively without family members who excel at being family directors, family council members, committee members and family employees. It's easy to fall into the idea that one role is more important than another, but each role helps the family and the business achieve their goals—and all of those roles are necessary for success.

Role competencies should include objective criteria, such as attending family business conferences or completing online business or finance courses. But subjective criteria are also important, such as whether the person is viewed as ethical and whether she has the trust of the family. Subjective criteria can be very difficult to measure, but they shouldn't be neglected. You can accomplish every item on your checklist of objective goals, but if you don't have the trust of the family or lack good communication skills that work for the family, then you won't be productive.

The role of the Development and Education Committee

The committee's responsibility is to help all individuals become good stewards, and to encourage the whole family to become the best possible partner with the board and management. Their role is not only to provide education and assistance—which may include sourcing educational opportunities or resources for the group. The DEC is also responsible for supporting individuals as they move along the role complexity path.

The committee should have at least two or three members. This avoids giving the impression that the committee is anything other than impartial and supportive to the whole family. If one person is responsible for education and development of the whole family, someone might suspect that nepotism or other favoritism is at play.

The DEC can use a lot of tools to help individuals meet their role objectives. A psychological assessment provides a nice baseline of an individual's strengths and opportunities for improvement. Professional coaching helps people realize their maximum potential. Although mentoring within the family has its challenges, it's really important. As people get farther along the continuum, they might move from having a family director mentor to having an outside director mentor.

It may also be useful to assess individuals' competencies—where a family member is today, and what he or she must do to meet the competencies of a desired role. This might include a 360-style evaluation of individuals in their current roles to determine what they need to work on. Evaluations should be handled with care, and an outside professional should be hired to conduct evaluations. Otherwise, 360 evaluations might become an opportunity to "get someone back" for old grievances.

All of these elements can be captured in an individual development plan, which clarifies to the committee and the family how far someone has progressed on his or her path, and how the person is moving forward.

Personal development is not a light task. It's critically important for the individual's sense of self, and to the success of the family and the business. Family members should have support during the process to hold them accountable and to make sure they're going to hit their goals on the desired timeline.

Few families have this level of formality in their family governance system or practices. But as the company and the family grow more complex, it becomes essential to build a deep bench of qualified family leaders and directors. In order for the family to be the best possible partner with the board and management, it is critical to have the right people in these important roles.

Meghan Juday is chair of the IDEAL family council and a member of IDEAL Industries' board of directors. She is the founder of Family Business Strategy Group, a consulting firm (www.familybusinessstrategygroup.com).

Copyright 2014 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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November/December 2014

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