The real value of outsiders on the board

By Gerald Le Van

Jack is successful, powerful, and wealthy. But he is uncomfortably alone as CEO of JacMar Corp. His two sons, his other employees, his lawyers, and consultants all do his bidding. No one really challenges him or pushes back.

Jack has been right when it counted most. He has managed to live with his mistakes. But how long will his luck hold, without him making that big mistake that will cost him the company he's spent a lifetime building? Jack needs someone whom he respects and trusts to help him wrestle with the big decisions.

Of course, that is one reason family business owners need outside directors. I mean real outsiders: directors who are outside the business, outside Jack's family, and outside the circle of professional advisors to the family and the company. JacMar needs directors who make the board something more than a voting machine and signature society. Such rubber-stamp boards are inflicted on us by lawyers to approve sales of real estate and tack on endless amendments to the company retirement plan.

Now JacMar is not General Motors, and Jack has to find outsiders who won't ignore the family's concerns when deciding policy (see "The Politics of Family Boards," FB, May). But Jack will be flattered at the high caliber of people who would be pleased to serve. What are JacMar's critical needs? Marketing? Finance? Planning? Business contacts? Jack should look for outside directors with useful experience in those areas. All should be risk-taking peers, who have built successful companies.

I recommend staggered terms of one, two, or three years. Offer a three-year term to a real catch; a one-year term to a director you might not know so well. With staggered terms, you can maintain continuity by replacing only one or two directors each year. Some companies require outside directors to rotate off for at least one year after their term expires, to ensure the infusion of fresh blood and to easily remove an unsatisfactory director. A limited term may be more attractive to new outside directors. For them, rotation off the board is less awkward than resigning. And remember: If staggered terms and rotation don't work for your company, you can always change your by-laws.

Outside advisors, such as Jack's accountant and lawyer, should not serve on his board, as they can't give him the perspective he needs. They need to keep JacMar's business. Suppliers and customers have impossible conflicts of interest. Investors (all outside shareholders, related or not) are torn between the company's welfare and fat dividends.

Most insiders, such as key employees and family members, don't belong on the board. They may be unsophisticated. Getting inside directors to leave can be a delicate matter and once off the board — their chief source of company information — they will still need to be kept informed.

Because Jack's sons aspire to run the company some day, they should attend board meetings in some capacity, to witness intense discussion of important issues and to listen to outside directors test Jack's ideas in business language rather than family talk. They will hear their own performance evaluated, knowing that the outside board will later decide if and when the boys are ready to take over.

The head of a family business knows a special kind of loneliness. Many important business decisions become clouded with family concerns. Jack and others like him need clear advice, unobstructed by family pressures.

Gerald Le Van is an attorney, lecturer, and president of the Family Business Foundation, a consulting firm in Baton Rouge.