A board of directors is the fiduciary arm of a company on behalf of its shareholders. Its purpose is to help guide the company on important decisions, including hiring senior team members and setting salaries; making decisions on investments and dividends, mergers and acquisitions; and setting goals for the team and providing the resources to support those objectives to help ensure a company’s long-term success.
The board also plays a key role in family business governance and oversight – making sure it operates in a professional, fair, ethical, and moral manner.
Whether operating within a small company or a large corporation, a board of directors will face a myriad of challenges from navigating a range of personalities, generational differences, potential conflicts of interest, and corporate politics, among other issues. For the board of a family-owned and operated business, these issues can be even more challenging.
Ed Hart, Director of the First Bank Center for Family-Owned Businesses, who focuses on building partnerships and driving initiatives that further support the growth and sustainability of family-owned businesses, provides his thoughts on establishing a healthy board of directors.
Q. Why is a board of directors important for family-owned businesses?
A. Whether a family-owned business or a non-family business, a board of directors can bring expertise to the company that might not exist within it. The best boards include experts without any emotional or financial ties to the business because they are truly focused on advising the leadership team on issues within their specific area of expertise.
A resource that is trusted and impartial, that has the best interest of the business, the family, and management in mind is a tremendous value to a family-operated business.
These members can provide a stabilizing force when the company is facing uncertainty, turmoil, or internal conflict. They can also assist with family transitions and make roles and responsibilities clear for family business leaders, and leaders of the company, in general.
Keep in mind that it can be challenging to find experts willing to share their time and experience to join a board of directors. Securing buy-in from family members, especially those who are not involved in the day-to-day operations of the business, can also be a barrier for a family-owned business seeking to establish its board.
Q. How do you create a balanced board of directors?
A. In a word, diversification.
When it comes to family board members, it is important to include members of the “current generation” as well as the “next generation.”
Many companies will have their next generation leaders become board observers before officially taking on any official leadership capacity in the company or on the board. This is a great way to give them the experience of seeing how decisions are made and what factors are considered in making them. It also allows them to learn from other leaders, especially non-family leaders, whom they may not know well.
Beyond ensuring multiple generations are represented on the board, incorporating a good mix of family and non-family members is also a good way to increase the odds that all parties are represented.
Q. What is the right “mix” of family versus non-family on a family-owned company’s board?
A. There is really no set standard on a board. It varies based on the needs of the business and the expertise needed, based on the leadership and/or ownership’s skillset.
In some cases, family members may opt to bring in one external board member based on the experience needed, while others focus on an entirely non-family board that has little or no fiduciary responsibility or ties to the business. Other companies may have a rule of thumb or a specific “ratio” of non-family versus family members permitted.
The key to a healthy board is to ensure the business has a mix of non-family members and family members as well as a variety of skills, expertise, and generations represented whenever possible. When one gender, generation, or relationship has a dominating influence on the board, it makes it a lot more difficult to handle big decisions, especially when it comes to succession.
Creating a well-functioning board is as difficult, and important, as creating a well-functioning leadership team and company. It takes time, patience, and maturity.
Q. What are potential pitfalls when a family-owned business engages non-family members to join the leadership team on the board?
A. A family business often seeks external support when they need a specific level of expertise not currently available within the company.
This can lead to significant conflicts if there are next generations within the company, or grandparents or parents with children, who believe they are ready for leadership positions but who were not considered for leadership roles. Older generations may also prefer that non-family members not have a role within leadership because they do not understand the company’s history, culture, values, or the business itself.
On the flip side, non-family members joining the leadership team might have the perception that family employees do not have the expertise, education, or experience needed to successfully run the board, or the company.
This can result in a lack of trust between these two groups of individuals and generate a great deal of turmoil.
Watch the webinar, “Managing Conflict in a Family-Owned Business.”
Another common issue is when a leader from an older generation attempts to handpick board members from his or her social group, friends, or individuals over which he or she has implied, or even true, power.
A business will face major challenges if board members have personal agendas, are doing favors for company leadership, or do not have the true skillset needed to be on the board. A board of directors should not include “yes” men or women if the company seeks long-term success.
Board selection and approval is the most important component of the board process. “Getting the right people on the bus” applies to how a board is constituted just as much as it does in the hiring of people for positions within the company.
When each board member serves a specific purpose, and that purpose is clear to all members, the likelihood of success is much greater. There must be absolute trust, and clarity of roles on the board, to maximize its effectiveness and positive impact on the organization, the family, and their stakeholders.
Q. Are there any specific best-practices that help ensure collaborative, productive, and healthy boards?
A. The most critical element is to ensure the board has a common mission and vision, and every board member is aligned under that umbrella.
Of equal importance is ensuring every board meeting has an agreed-upon agenda and goal while ensuring every board member – whether a family member or non-family member – has equal weight given to their opinions and votes.
This is important for older generations who have deep history with the company and feel they know more based on that long-term relationship with the business as well as younger leadership teams who might have a fresh perspective that could benefit the company but feel their thoughts might not be respected.
Establishing a neutral facilitator is another good practice and can help keep a meeting on track or shift the conversation in a more productive direction when necessary. This is particularly helpful when there are significant differences between board members. In some cases, successful family businesses will bring in a “tie-breaker” board member they trust, in the event that two board members, or two family members, do not agree on an item or a specific direction.
Q. Do you have any tips on conflict resolution between board members?
A. I would recommend establishing a director of the board that its members, and in some cases the family itself, votes as its head. This should be a person who is viewed as a solid leader, one who can keep the board on track, and keep the family issues and emotions out of the boardroom.
I am also a big advocate of taking the board and business leadership teams through conflict resolution training so they are well-versed in how to handle conflict and potential disagreements.
Q. How can First Bank support a family business and its board of directors?
A. The Center for Family-Owned Businesses is building a highly-vetted team of subject matter experts beyond our banking, wealth management, and advisory skills. We continue to build successful partnerships with attorneys, CPAs, insurance experts, family business consultants, and other experts with the skills and expertise that our business clients need.
It’s important to First Bank to maintain a strong bench so when a family business that’s located anywhere in the country has a need, they can contact us. At First Bank, our mission it to serve as a strong and trusted resource for family businesses now and for generations to come.
For more information, visit the First Bank Center for Family-Owned Businesses at www.first.bank/familybusiness.