May/June 2016 Openers
How directors can help family business owners.
No matter how big or how small a family company is, its leaders can benefit from the perspective of experienced independent directors. Joseph H. Astrachan has been serving in that role since 1997, when he joined his first board.
Astrachan, the Wachovia Eminent Scholar Chair of Family Business and Professor of Management and Entrepreneurship at Kennesaw State University's Coles College of Business, has served on 14 private family company boards; currently, he is a director of eight family firms. These companies' revenues have spanned from $30 million to $12 billion. The number of family members involved in these companies has ranged from six to 38. Industries have included logistics, real estate development, automotive, heavy equipment, retail and distribution, health insurance, building materials, chemicals and floor covering, as well as a family office.
Astrachan is also a leader of the Cox Family Enterprise Center at Kennesaw and a founder of the Executive MBA for Families in Business at the university. He recently spoke with Family Business about the relationship between a family business board and the family owners. An edited transcript of that interview follows.
Family Business: You have been a director of a diverse group of companies. Did they have any issues in common?
Joseph Astrachan: Obviously, they've all had family issues in common. And they've all had issues about how to balance family and business needs. But [regarding] operational issues, or strategic issues, I wouldn't say there's any great commonality.
FB: How can a board help companies to balance family and business needs?
JA: I think the biggest [issue] is helping them—from the board perspective, and also maybe a little bit from the family perspective—determine what their needs for payout are, and balancing that with their needs for growth in terms of where the family's going to be in the future. That's fairly easy to get through, but sometimes it takes a little while to get the family to agree on exactly how to do that. In one of the boards, for example, the business wasn't doing so well, but the family decided that they needed to continue taking a lot of money out, which was not good for the business and really set it back a long way. And it took about three years to get the family to see that.
FB: So what finally gets a family to realize that?
JA: It was more a question of the bank saying, "Hey, you guys need to figure something out here." It was externally driven. Even then, there were still family members who were saying, "Oh, no no no, we don't need to do that. It'll all work out." And then I made one of those statements: "You know, it's OK if your strategy is, 'We have eight things, and if any one of them goes right, we're going to do well,' vs., 'We have eight things, and they all need to go right for [the company] to do well.' " And that kind of helped them see that 'Hey, our main strategy, which is luck, is not really a strategy.' "
FB: What is the role of the board?
JA: The biggest thing that I and other board members are doing is educating the family on what the likely results of the actions of the company are going to be, and how it's going to impact the company financially in the long run, and providing some perspective as to what outside sources of capital are going be thinking. And, to the extent that suppliers are also outside sources of capital, what suppliers are going to be thinking, in terms of how the company's operating. As well as little cues that suppliers might look at to say, "Hmmm, maybe this is an iffy situation," that a family member who hasn't been in the business, or in business, wouldn't necessarily see. Things like stretching out payables, changing order amounts, that kind of stuff.
FB: What other family issues have the companies faced?
JA: When you have outsiders who really don't understand what business is about, and what's going on in the business, and the family has typically said, "Let's keep them at arm's length, so they don't interfere with the business," that's tended to increase tension rather than decrease tension. Whereas if you bring them in and spend the effort and the expense of educating them as to what's going on in the business, they tend to turn around really quickly. In one of the boards, it started with the family that were inside basically saying the outsiders were going to kill the business, and I as a board member said, "Nope, I want them to come to board meetings, I want them to be educated." And after two years [the family members not in the business] were saying that their brothers were underpaid. It was a really good use of the board for the family side of things. Basically, I've found that the more you bring family members into the discussion and allow them to express their opinions, even if their opinions aren't necessarily the best way to go, if it's handled with a lot of respect and a lot of care, it tends to bring the family together and make them stronger in terms of their support of the business.
FB: Describe an optimal working relationship between the board and the family council.
JA: It really helps when you have a family member who is on the council and also on the board, who is trusted by the family and also is capable of explaining what's going on in the company to the council. And it also helps a lot if at least once a year the board gets to meet with the family council, if not the whole family, at family assembly time. Because if the family doesn't trust the board, then one of the major benefits of the board just isn't present, which is enabling the greater family to support what's going on in the company.
FB: What's the dynamic like during the shift from an advisory board to a fiduciary board? Have you seen the family coalescing around the idea of letting go a little bit?
JA: That's the big issue. First is going from nothing to having a real board, which is, "Oh my God, I'm going to lose control." And that feeling goes away within a year. You know, as people realize, "Oh, I didn't lose control, and the board is here to support me in this business. And they're not here to denigrate my activities and our actions in the business." And there's the whole thing of holding people accountable. Initially, the board members might say, "Did you do this, did you think of this, did you consider that?" And occasionally that's met with a little bit of defensiveness. But generally speaking, the defensiveness, at least in my experience, goes away real quickly as people [realize] that these questions are designed to help; they're not designed to make you feel like you're not doing a good job.
FB: What's different about the dynamic in the first- and second-generation boards you've served on, where there is no family council?
JA: Well, it's actually really nice, because you get to have all the family members in the room on a regular basis. Particularly if the family's living close enough that they're all willing to attend board meetings. It's really pleasant to have them in the room, especially if you can manage the discussion such that they're not taking things off task and understanding their role as observers rather than full board members. One of the boards I'm on even occasionally has spouses sit in. They get to hear and understand what's going on, which is good, because they're raising the grandchildren.
FB: What are the challenges of managing family issues in larger families, where there are more inactives and family members are geographically spread out?
JA: Bringing the family together tends to be a bit of a task—trying to get them together annually to meet with the board. And it doesn't always happen. And in those boards, I at least try to make it a point at every board meeting to have some discussion of what's going on in the family. Because that's one of those contextual factors that can really whipsaw a company, if you don't have some sense of it. So in that sense, the board takes a role not just in holding the company accountable and holding the leadership of the company accountable for what's going on in the board, but also for helping hold the leadership accountable for what's going on in the family. And in one of the boards I'm on, after about two and a half, three years, I and a couple other board members strongly urged the family to form a council, which they've done.
FB: What problems are avoided by having an independent chair?
JA: It takes the emotions among family members out of the board meeting, which I think is of enormous benefit. You know, when family members get emotional with one another, the board meeting can grind to a halt. Typically the first three or four meetings family members keep it down, but once they get comfortable, if there's an underlying issue, it can really rise to the surface.
FB: Family members have to know which hat they're wearing: family member, owner or manager.
JA: Right. And for most people, it's pretty hard to do that. You know, if you're mad at your sibling, and they just cut you off in a board meeting, the chances of you yelling at them are pretty high. Or at least feeling like you need to yell at them.
FB: I've read several studies that found there's a lack of turnover on family business boards. Has this been your experience?
JA: There's been some good turnover. In a few boards that I'm on, there haven't been any changes. [But] one of the boards that I'm on started with two outside board members and now is up to five outside board members. And in the meantime there have been three that are no longer with the board. So there was some good turnover. And a lot of that is generated not just by me, but by some of the family members saying they've been here too long, or they're not effective any more.
FB: How do you encourage an ineffective, long-tenured board member to retire?
JA: I've never seen it where they've been encouraged to retire. [Laughs.] Typically the way it happens is, "Thanks for your service, we really appreciate it." One person on one of the boards recently was moved into a consulting role: "We really need you to consult; here's what we'd like you to do, and therefore we don't want you on the board, since you're going to be consulting." Which he took very well.
FB: That was a non-family director.
JA: Right. In terms of family members leaving the board, I don't know that I've ever really seen it. I've seen them give up their vote willingly, as long as they can continue to attend [meetings]. But I haven't seen it where they've stopped participating in board meetings. Except in the cases where it's a family council obligation, so when the family council changes its chair, the board member from the family council changes.
FB: Have the boards you've served on used term limits or age limits?
JA: Term limits, yes, but the term limit isn't a limit as much as having a term, which has been helpful to a little extent. But none of the boards I'm on have like strict rules like, you can only serve for ten years and then you're gone, or even age limits. Not yet.
One of the boards has a guy on it who's just a superstar, who's in his mid-70s. He used to be a board member of several public companies, and now he's aged out of those, because they do have age limits, whereas on the family business board he's very happy to participate and be a superstar board member. I feel bad for the public companies he's no longer a board member of.
FB: Do your boards use board evaluations?
JA: Three of them do. And they're really pretty good evaluation processes, where we evaluate the board as a whole, and evaluate each individual board member. And in two of the three we have the CEO do a 360 every other year.
FB: So has that been used to effect turnover?
JA: I would say it has been used as a developmental tool. Meaning weaknesses are uncovered and people then see that they do have those weaknesses and then have the choice to improve, or just say, "You know what, this is a weakness, and if you want me on the board, this is what you're going to have to deal with." I think the biggest help has been when individual board members get the feedback that they take the board off track too often. And then for the next few board meetings, they're pretty precise and don't do that anymore, which is nice. When you're covering the business and the operations and the strategy of a decent-size business, and you're trying to do it in a day or even two days, going off track just kind of throws a wrench into everything.
FB: What advice can you offer on conducting a board meeting?
JA: There's one pitfall that I'd say needs to be avoided in most every circumstance. And that pitfall is that the CEO is the only person reporting on the company. Boards tend to work much better when people one level below the CEO do the reports and tell you where they're going and have direct interaction with the board, rather than everything going through the CEO as the conduit.
The way in which most of the boards that I'm on work is that it's a regular group of three to six people who report, with one or two that rotate in. So, for example, you might have all the division heads report, and then maybe once or twice a year you have the head of HR, the head of technology or the head of marketing and sales come in and report.
Even when the CEO telling you [what's going on at the company], it's different than hearing it directly from the [division head]. Because it's not couched at all. It's very direct, and they're telling you their point of view on things. Whereas I have seen CEOs either lean toward saying things are better than they actually are, or they're worse than they actually are. And it's rare that you have a CEO that's just, you know, completely objective about their people. And it also helps because if the CEO has somebody that they like for reasons that you know or don't know, and they're not performing well, after they've presented a few times, if the board says, "That person might be on the short list for not being here anymore," it gives the board a whole lot more credibility in making that kind of a statement. After all, one of the things the board is there to do is to help the CEO do their job, too. So having some objective or near-objective opinions about their people can be very helpful in terms of figuring out how to develop them and how to manage them.
How to professionalize your board of directors
Veteran family business researcher, adviser and director Joseph Astrachan offers these tips for family business leaders who want to add independent directors to their boards.
1. Develop an in-depth board book. "This is essentially a dossier on your company, its people, its strategy and the market, including not just customers but competitors. In the process of [creating the board book], much is learned about the company, even for people who have been in it for decades. When you are recruiting board members, you can see if people are going to be committed, because they have to read the thing; and also whether they have an affiliation for your family, your company, and the market that you're in."
2. Consider whether you should try to get the perfect board members at the outset, or whether you should add new directors immediately—but be prepared to remove them quickly if they're not working out. Neither alternative is ideal. "If you are trying to get the perfect board member, you could be waiting an awfully long time. And if you don't try to find the perfect board member, you could put a real dud on your board."
3. Really understand the chair role, and have somebody who is capable of being a good chair. "If you're a family member and you want to be a good chair, understand what that means: in terms of agenda setting, in terms of being in constant contact with management, in terms of managing shareholder relationships and—perhaps the most important role—managing the meetings themselves." —B.S.
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