Tips on finding the right mix of board members

By Mario O. Vicari, Tyler A. Ridgeway

The percentage of family businesses with a board of directors is on the rise. In fact, many of the most successful family businesses use boards. Yet companies without a board tend to struggle with the idea of creating one because the task can seem daunting. Many family companies have never had a non-family member involved “behind the scenes” at their business, and that scares some families. There are also a number of questions that need to be answered:

• How should the board be structured to ensure we’re getting the most out of it?

• Who should serve on the board?

• Where can we find qualified board members?

• How much work will be involved for board members, and how should we compensate them?

A board of directors can serve a vital role in helping a family company navigate its future. Besides the obvious advantage of having access to individuals with expertise in strategy and other high-level business issues, a board provides two additional distinctive benefits. First, a board brings greater accountability to the family owners and executives running the business. This is a significant step for a private company, since the family owners are agreeing to allow others to hold them accountable, for their own good and for the good of the family business.

Second, a board is an essential independent party in addressing difficult issues that could lead to family strife and disputes. Issues such as pay, performance and position are very hard for family members to discuss with each other. Board members can assess these situations more objectively, providing structure and an independent voice to make the best decisions for the business and reduce family conflicts.

Board composition

It is considered a best practice to have both family and non-family board members. Family members are important because they provide the context of the company’s history and legacy. They also often fill key roles in the business and are owners, so it’s appropriate for them to have representation on the board. “Representation” is the key word, however, since it is unwise and impractical to have all family members on the board. Additionally, it is healthy to have more outside board members than family board members. Because they are not biased by family issues or the history of “how we have always done things,” outside board members add significant value to the company.

The number of board members can vary depending on the size of the business, but in our experience, most boards have five to seven members. A smaller number raises the question of whether the company is getting adequate input. A board with more than seven members can be hard to manage and costly to administer.

Board committees in family firms can also vary, and there tend to be far fewer committees in private company boards than in their public counterparts. However, we very often see committees that address compensation and family employment issues. Non-family participation in these decisions eliminates family bias and tension and leads to better decisions.

What to look for in a board member
In most situations, a family company seeks outside board members for one of the following reasons:

• To add expertise in helping the company sell to a new industry.

• To add expertise in M&A or international expansion.

• To add bench strength to the existing board.

• To provide strategic advice and a fresh perspective to aid the CEO in critically analyzing the business.

• To add technical expertise without having to hire a full-time executive employee.

Once your business has made the decision to hire board members, you must determine the skills, background and personality traits you’d like those board members to possess. Studies have found that the most important attributes for board members in family businesses include:

• Integrity.

• Commitment to making an impact and a passion to serve.

• Not allowing their ego to influence advice.

• Willingness to speak the truth to management.

Beyond these essential traits, there are a few additional considerations. Family business boards should be competency-based boards. Accountability is an essential quality and usually defines a board member’s ultimate success. Several “soft” skills are also critical. For example, is the candidate able to communicate openly and honestly? Will he or she be able to truly understand the business and collaborate effectively with management? Can the candidate provide advice and guidance to the CEO regarding strategic business matters? Does he or she understand family dynamics and have an ability to navigate family politics, while still providing concrete strategic and tactical advice?

Finding the right fit

After you’ve identified the ideal profile for your board members, your task turns to locating the right candidates. When hiring non-family board members, we recommend consulting your most trusted business advisers first. After all, these individuals know your business and your needs well. These advisers could include your accounting firm, law firm, banker or insurance agent.

In addition, many of the top retained executive search firms are plugged into the best board member talent available. It is highly recommended to network with these firms as well, especially those that serve family businesses.

Once you have completed the due diligence process and retained a new board member, here are a few tips to ensure a smooth transition:

1. Consider having the board member complete a personality profile to see how his or her characteristics align with yours as a business owner.

2. Be open and transparent regarding organizational challenges and the company’s financial standing. Lack of trust will negatively affect a board, so it is essential to be candid with your board members.

3. Both the CEO and the board member must check their egos in order for the process to be effective. The owner must be able to objectively listen to critical comments and the board member must be comfortable with providing feedback openly.

Compensation for outside board members

In most family businesses, the level of board member risk is not as great as it would be in a public company. As a result, private company board members usually receive lower retainers than public company directors do. However, there is still some level of risk and an expected time commitment for which your board members must be compensated. You may also be looking to your board members for strategic guidance and advice, which can result in activities that generate a lot of profit for your business. Therefore, your board members deserve to be adequately compensated for their contributions.

Board member compensation should take into account roles, responsibilities, time commitment, seniority/experience level, geographic location and committee involvement. While there are no specific compensation guidelines that apply to all family businesses, at a minimum you will want to consider:

1. How many times per year do you meet? Most companies base a yearly retainer on the number of meetings. Each meeting might pay anywhere from $500 to $5,000. Accordingly, if you have four company board meetings each year, you might be looking at an annual retainer of $2,000 to $20,000 per board member.

2. Is committee work involved? Board members usually receive additional compensation for service on committees.

3. What is your company size? Larger companies generally provide higher compensation to their board members.

4. Do you have business challenges that necessitate higher-level experience? Individuals with deep expertise generally command higher compensation. For instance, we recently ran a search for a family business that was seeking a Fortune 500 executive to join their board. The business was prepared to offer higher compensation to gain his strategic advisory services.

5. Are there other methods of compensation you can offer besides cash? Some family businesses get creative, offering company stock, vacation trip reimbursement or vehicle allotments. We even have a client that created a pension plan for board members that vests after five years of board service.

While fairly compensating your board members for their service is essential, data have shown that paying more money does not necessarily lead to better advice. We have found that the most successful board members are those who have a passion to serve (i.e., they’re not just in it for the money). Look for individuals who want to make a positive impact on your business and demonstrate a vested interest in your long-term success.

Compensation for family board members

Determining how to compensate family board members can be tricky. As a general rule, we advise companies to treat each board member the same. After all, if you are on the board, it means you are qualified and you are being asked for your candid and strategic advice, whether you are a family member or not.

However, we work with many business owners who feel that only outside directors should receive compensation. They believe that as a family member, it is your duty to serve the company and you have an inherent, vested interest in the outcome.

Keep in mind, though, that family members who are paid employees of the company do not usually receive additional compensation for their board service.

Mario O. Vicari is a director with Kreischer Miller and leads the firm’s family business practice. Tyler A. Ridgeway is the director of Kreischer Miller’s Human Capital Resources group (www.kmco.com). Kreischer Miller is an accounting, tax and advisory firm serving private companies in the Greater Philadelphia region.

 

 


 

 

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

 

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September/October 2012

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