How can establishing a board help a family business?
Establishing a board in a family business significantly enhances its governance by ensuring accountability, ethical practices and transparency, which are crucial for long-term success and credibility. Board members, often bringing diverse skills and extensive experience from various industries, provide invaluable outside views that lead to innovative solutions and better decision-making, helping the business remain competitive and adaptable. Additionally, a board fosters healthy debates and challenges family decisions, ensuring that choices are made based on business needs rather than personal biases.
Example: A family business in its second generation without any independent directors wasn't considering expansion through acquisition. However, when an independent director with experience in growth through acquisition joined the board and offered guidance, the company took a new direction and began to grow exponentially.
Family business leaders are often wary of having a board tell them how to run their business. What should a board's role be?
A family business board must have clearly defined roles and responsibilities, ensuring that each member understands their specific contributions and boundaries. These roles should be established with the buy-in of the family, aligning the board's functions with the family's vision and values. The board's primary function is not to “run” the business but to advise and offer diverse perspectives that can be taken into consideration for strategic decision-making. Board members provide guidance, identify opportunities and risks, and foster innovation without interfering in daily operations — the concepts of “nose in and fingers out” and “high-level oversight.” The board is not the decision-maker but serves as a strategic partner, helping the family make informed, objective choices that support the business's long-term success.
Example: A board member shared a story about a chair who wanted an independent board, but it turned into a “check-the-box” exercise. Without defined charters or roles, her contributions were eventually ignored, leading her to leave the board despite proper vetting beforehand.
Who should serve on the board? How often should members be changed?
Ideally, a board for a family business should have a mix of internal and external members. Internal members, such as family executives or senior management, bring deep knowledge of the business's history and culture. It is nice to have the head of the family council, if one exists, as one of the internal members in order to ensure the family has a “voice” at the boardroom table. External members should be selected for their expertise. They should possess strong industry experience, a proven track record and the ability to offer unbiased perspectives. Selecting individuals with experience in family businesses can be beneficial, as they understand the unique dynamics and challenges involved.
Board members should serve staggered terms to ensure continuity and fresh insights. A typical tenure might be three to five years, with the possibility of renewal based on performance and the evolving needs of the business. I have seen one-year board tenures, which I think is too short. Maintaining a balance between continuity and renewal is crucial, so not all members should be replaced at the same time.
Example: A family business owner and chair recently recognized that their board tenure of 10 years was too long and prevented fresh perspectives, a lesson learned from peer family-run businesses.
What are some ways to keep board members active and engaged and to ensure that meetings are productive?
It's essential to start with clear agendas and objectives, distributed in advance to allow for preparation. A good approach is for the chair to set up a call with the board members before the meeting to walk through the agenda, identifying anticipated discussions where they can add value and ensuring there are no surprises.
In addition to the board meetings, regular, timely committee meetings help maintain momentum and keep members engaged with ongoing developments. Providing up-to-date, relevant information about the business ensures members are well-informed. Monthly updates, including financial performance, can also be very effective.
In addition, offering professional development opportunities keeps members motivated and informed about industry trends and governance practices. Having a minimum number of hours devoted to ongoing training throughout the year is recommended. Inviting board members to visit factories or other relevant areas of the business to see operations firsthand can also be beneficial.
Example: The chair begins by stating the objective for the meeting and checks with the board at the end to determine whether the objective was met.
What's a key mistake to avoid when assembling a board?
One of the most critical mistakes to avoid when assembling a board for a family business is selecting members based solely on personal relationships or familial ties rather than on expertise and strategic needs. This approach can lead to a lack of objectivity and diverse perspectives, which are essential for effective governance and decision-making.
Choosing board members should be a deliberate process focused on identifying individuals who bring the necessary skills, experience and independence to provide valuable insights and guidance. It’s crucial to seek out professionals with expertise in different areas who can complement the strengths of the family and contribute to the business’s long-term success.
Example: Discussions at the 2024 Private Company Governance Summit highlighted second-generation family businesses in which the owners' “best buddies” served on their boards for years, resulting in missed growth opportunities.