The independent chairman
Although more and more privately held family companies are electing independent directors to their boards, a non-family chairman is still a rarity. Here's how an independent chair can help a family business achieve its goals.
In most privately owned family businesses, the chairman of the board is a family member. But for some family ownership groups, an executive from outside the family is the best choice for the chairman's job. Several multigenerational families, for example, have found that a non-family chairman can best manage the boundaries between the family and the business, while meeting the needs of both.
"The independent chair brings a broad perspective that the board is working for the shareholders who elect them," says Ann Pelham, a director of Canal Insurance Co., Greenville, S.C. "If the company is not providing a return for the shareholders, then the board isn't doing its job."
Pelham, a third-generation member of the Timmons family, which owns Canal, adds that an independent board with a non-family chairman is well equipped to maintain a separation between executive and governance functions. This can be challenging for a family-dominated board. "Experienced independent directors know they have to think strategically and have to make sure management does the same," she says. "They know they can't run the company and second-guess management decisions and get into the nuts and bolts."
An essential role
As Stephanie Brun de Pontet, senior consultant at the Family Business Consulting Group, points out, "The chairman of the board is not a symbolic role. The chair is the person who runs the board meetings, develops the agenda in conjunction with the CEO and facilitates the board processes."
The National Association of Corporate Directors' publication The Board of Directors in a Family-Owned Business notes, "The chair is the leader of the board of directors and the liaison person between the board and the family, as well as between the board and management."
Among other responsibilities, the chairman determines what items the board will discuss (and, therefore, what issues will not be discussed at the board level), the order in which agenda items will be presented, and how much time will be allotted for discussion before a vote is taken.
"Just as you want the person who has the best skills to be the executive leader of the enterprise, you want the best-qualified person to chair the board," Brun de Pontet says.
"There is nothing worse than having someone who is unqualified or incapable shoved into a spot just because they are a family member," asserts Dave Juday, retired family CEO and chairman of IDEAL Industries, which is based in Sycamore, Ill., and makes products for a variety of markets including electrical, automotive, telecommunication and industrial. "That's a source of misery for the individual and failure for the company," adds Juday, whose successor is a non-family member. "If you're picking someone just because they can appease warring factions or just because he's the oldest sibling, that's a recipe for disaster."
A combined chairman/CEO has long been the norm in public as well as private companies, but that trend is changing. Executive search firm Spencer Stuart reported in the 2014 edition of its Spencer Stuart Board Index that the CEO was also the chairman in 53% of the S&P 500 companies. While less than a third (28%) of the S&P 500 had an independent chair in 2014, that number is a notable increase from 2009, when just 16% companies had an independent chairman, according to Spencer Stuart.
In a family business boardroom, an independent director or chair is one who is not a member of the controlling family, in addition to having no professional ties to the company. While private family companies are adding independent directors to their boards, the idea of an independent board chair has been slower to catch on.
In a survey of 431 family companies conducted by Family Business Magazine in 2011, 94% of the respondents said they had a family member as CEO, and 73% said their CEO also held the title of chairman. In one-fifth of the companies, the chairman was a family member other than the CEO. (It is common, for example, for a retired family CEO to retain the chairman's post.) Only 3.9% of the Family Business survey respondents said the chairman was a non-family member.
Brun de Pontet says most family businesses with a non-family chair are later-generation companies. "By the time you get to the third or fourth generation, you've already had to evolve your board structure," she points out. Many ownership groups at this stage recognize that the perspective of experienced independent directors will help the company grow.
Canal, which provides insurance for truckers, created an independent board in 2008. "Once you make that decision, electing a chair from that group is quite logical," Pelham reflects.
"Having a non-family board chair makes it easier to build a board culture that provides independence and neutrality," says Canal's independent chairman, Lansing Crane. Crane, the former family chairman and CEO of his family's business, Crane & Co. Inc., also is the independent chairman of Wells Enterprises, another family company.
"When a family-owned business makes a choice to put a majority of independent directors on its board, that is a big signal it wants to hold itself to the highest standards of accountability," says Brun de Pontet. "Having a non-family chair conveys the same idea." A wide range of company stakeholders—including suppliers, lenders, employees and customers—will get the message that the company has taken steps to professionalize its governance, she notes.
"Sometimes there is an insurgent branch of the family raising broad concerns about governance," Brun de Pontet adds. "The [independent] chair may answer a piece of that."
An interim solution
A non-family chairman is the logical choice for a company when the current chair is ready to retire and no family members are seasoned enough to become that person's immediate successor.
That was the situation at Saulsbury Industries, which is based in Odessa, Texas, and provides engineering, construction, fabrication and other services to heavy industrial markets, primarily in the energy industry. When company founder Dick Saulsbury decided to retire, three of his children were working at the company, but none of them was qualified to lead it. When the founder stepped down from the CEO and chairman posts in 2010, the company hired a non-family CEO and recruited independent directors to join family executives on a newly constituted board. One of those directors was Phil Chambers, who then was president and now is CEO of Townsend Corporation, a third-generation Muncie, Ind., company specializing in vegetation management and power line clearance. In 2011, Chambers succeeded Dick Saulsbury as Saulsbury Industries' chairman.
"When the Saulsbury family members formed their new board," Chambers says, "they had never served on a governance committee, a compensation committee or an audit committee. It's taken three or four years for them to get comfortable and to grow into those shoes."
Along with revamping their board, Chambers says, the Saulsbury family "spent a lot of time talking about their visions and goals for the company and themselves." He adds that the learning process has continued as the family directors have grown into their roles. "The questions become, â€˜What industry should we be in? How are going to fund that? What are the returns on investment?' Those are the kind of discussions that would not have happened five years ago."
Since the new board was formed, Chambers says, "There has been tremendous growth in all the shareholders. It's very likely that at some point in the future one of the shareholders could end up as chairman." One family director, Bubba Saulsbury, was recently elected vice chairman.
IDEAL Industries found itself in a similar situation. When Dave Juday was planning to retire as chairman, no family member was qualified to take his place. Non-family member Jim James, who had succeeded Juday as CEO in 2008, was named vice chairman in 2012 and took over as chairman when Juday retired two years later. (Because he is also IDEAL's CEO, James is not actually an independent chair, though he is the non-family chairman of the company.)
James says that when he accepted the chairman's job, he made clear his intention to prepare a next-generation family member to eventually take the gavel. "I really believe a family member should chair the board—maybe not [at] every company, but this one for sure," James says. Having a family chairman, in his opinion, "links the family to the company even more closely and makes them better stewards."
The advantages of impartiality
A chairman from outside the family, however, can help the ownership group put aside family history and move the company forward. "Because the independent board and chair doesn't have an emotional stake in difficult situations," Crane explains, "they can make sure the right thing is done without people feeling like it's agenda-based."
He offers an example of family shareholders who think the family CEO's compensation is too high. "If you have an independent board and chair saying it's the right thing to do, that's helpful," he explains.
Crane notes that impartiality is particularly important when sticky personnel issues must be addressed. "One of the values an independent board chair brings is neutrality and credibility when having candid conversations," he says. "If the people on the other end know you don't have a family agenda involved, it takes some of the personality out of the situation. It makes it a little easier to be more direct about what needs to be done and what the consequences are of it not being done."
With the guidance of the independent board, Canal reduced the number of family members in senior management positions, Crane says. "Those were decisions that the family recognized needed to be made and supported," he says. "At the end of the day, the neutrality of the independent board helped people understand that this wasn't personal."
An independent board can provide expertise that family members lack, Crane notes. "As companies grow and become more complex and global," he says, "they need leaders and managers who come from a broader business experience."
At Saulsbury Industries, according to Chambers, the independent board helped company executives in their drive to diversify revenue sources, an important step during a time of change in the energy industry.
Crane points out that naming a non-family member to a high position such as chairman or CEO demonstrates the company's commitment to hiring based on merit rather than nepotism. "If you are going to attract the best talent possible," Crane says, "you need to have a reward system based on performance and results and not on family relationships. Executives that you want to hire from the outside must see that their opportunities to succeed and to be rewarded are just as great as those of family members."
Because Crane was chair of his own family company, he has additional insight into the potential of the position. "It's a great advantage to have the experience of being a board chair of any family business," he says. "You are tuned in by experience to the issues that are peculiar to the family culture: Issues of respect and communication. Issues of fair treatment. Issues of boundaries between family and business. If you've lived that, you know how much it matters to family owners. It gives you an ability to emphasize what the family wants or needs and to help the board appreciate the special nature of the family culture."
Making the transition to an independent chair
Ann Pelham recommends that the family business owners work to get their house in order before a non-family chairman is elected. The Timmons family shareholders are 14 third-generation cousins who began to work together as their parents left the picture. "The family stayed well-connected," Pelham says. "We met and had retreats with some good advisers." They concluded that Canal Insurance needed an independent board with an independent chair. "It was a big step to take, but we had a consensus," she recalls. "If you don't have a united ownership base, these other things aren't going to work very well."
Juday says IDEAL Industries' board had three criteria in mind as they began their search for his successor: (1) broad experience in multiple industries; (2) a sense of the family business as a legacy; and (3) respect for the work the family was doing to preserve that legacy.
"You obviously want to have the best-qualified people leading the charge," Juday comments. "You better be sure the person you're picking is the one to do the job for the next generation." Executive search firms can help family companies find top-level independent directors and board chairs.
Once the independent chair is in place, the real work begins. A need for significant changes in strategy may have prompted the leadership shift in the first place. Hundreds of years of family history may underlie policies and practices that are now open for discussion. The transition in the boardroom, in other words, can be a minefield.
"You can't do it by yourself," Crane says. "There has to be a commitment by the family to an independent board. As a non-family member, you're bringing outside leadership experience to a business that more often than not has an insular background."
At the same time, IDEAL chairman Jim James notes, it's important for a non-family chair to "share the same philosophy as the family" on issues such as the company's strategic direction, treatment of employees and community involvement.
The best results for the family and the company are achieved when the CEO and the chairman work as a team, Crane points out. "One crucial role is to build a trusting, constructive relationship with the CEO, whether that person is a family member or not. There needs to be a partnership." Removing family history from the equation can often make it easier to forge a congenial professional partnership between the CEO and the chairman, Crane notes. "The neutrality of an independent chair is helpful both for the CEO and for ownership," he says.
It may take effort to achieve an effective boardroom dynamic when independent directors first come aboard. "It's just natural for family members who have been employed by the company and are now directors to believe they have a better understanding of the business than executives who have been hired from the outside," Crane says. "I don't think you can change that dynamic. But you can encourage it to be voiced in a constructive way so they have an opportunity to draw on their experience but will respect the views of outside directors. As long as there is respect, they can voice their opinions as often as they like."
The family must be committed to open communication about financial results, management challenges and other relevant information that affects company performance. "There is an instinct of family ownership and leadership to keep information close to their vest," Crane observes. "Everyone is much better off if there is robust information sharing with all shareholders."
Crane and the board brief Canal's family shareholders four times yearly. The annual meeting and a less-formal in-person (or phone-in) meeting six months later are opportunities to keep them up to date and engaged. This year, he initiated teleconferences during the other quarters to discuss the company's extensive financials, which have been distributed in writing to the shareholders since 2008 along with a report from the CEO.
Crane has invited the family council to nominate two family members to attend Canal's board meetings as observers. Last year, two fourth-generation members served as observers; this year, it's a G4 and a G3. "It's an opportunity for them to serve as ex officio board members," Crane explains. "They get all the materials and sit in on all the meetings. With the exception of some executive sessions, they participate fully." It's an idea he brought to Canal from Crane & Co., which was founded in 1801 and has hundreds of family stakeholders. "Fewer and fewer family members are employed in the business, so if we're going to develop educated owners and future directors, there has to be an opportunity for them to learn," he says.
When James took over as chair of IDEAL, he prepared a written charter that defines the function of each of the board committees. He also works with the family on shareholder development.
"A couple of years ago, I implemented a training program for family shareholders," James says. "Each year, we spend time with them on financial acumen or business strategies. This helps keep them aligned with what management is doing with the company."
In addition to his address at the annual shareholder meeting, James says, he often speaks at family gatherings on an informal basis.
Like any family business transition, making the change to an independent board chair requires effort and compromise on the part of all affected parties. But the result is often improved company performance and thus better returns for the family shareholders.
"The chair is there to build a culture of trust," says Chambers. "Having a fully operational and functioning board gives the shareholders the resources and framework to make the strategic decisions they might not have made on their own."
"It's all about having the different players in the company manage their roles and work together in a respectful and courteous way," Pelham says. "In the end, we all share in the success."
Dave Donelson is a business writer in West Harrison, N.Y., and the author of the Dynamic Manager Guides and Handbooks.
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