This piece originally appeared in Private Company Director.
CEO succession planning is an enormously critical responsibility. As an independent director for a family-owned company, it's imperative to expand the definition of succession planning to include the development of qualified family directors in the next generation.
For family-held businesses, making it to a second generation can be a challenge. Many of the companies that succeed at becoming multigenerational enterprises are run by nonfamily executives, which can sometimes lead to a reduced focus on the family values and culture that helped to create success. A pipeline of strong family directors is an effective way to ensure that the company's cultural foundation remains intact.
Of particular importance is for the board (and family council) to have an effective plan to develop the next generation of excellent family directors. Having great family directors is one element proven to help a company succeed beyond the second generation. Another element is a board consisting of a majority of independent directors (but that's a different article!)
In my experience as an independent fiduciary director on more than 10 family boards, three questions are the basis of successfully developing effective family directors:
- Are shareholders and current family directors truly committed to involving the next generation in board and company governance?
- Are they willing to let independent directors lead the process?
- Do interested NextGen shareholders have the time to commit to becoming effective directors? Are they open to being mentored or coached? Are they truly coachable?
Shareholder commitment to the next generation. Current shareholder directors must want their offspring to be part of the future board leadership. The distinction of board leadership vs. company leadership is important. Not every NextGen wants to work (or is qualified to work) in the family business. And that's OK; they shouldn't have to. But it is important to have effective family representation on the board to ensure management understands the shareholders' cultural and financial guardrails. The current generation of family board members must actively support bringing their child on to the board and treating them as an adult for a NextGen director to succeed.
Independent directors lead the NextGen process. Independent directors are in the best seats to help lead the process of identifying and on-boarding NextGen shareholder directors. They can help to identify candidates without letting parental emotions get in the way of good decision-making. Everyone thinks their kids are the best. In boardrooms of multibillion- or multimillion-dollar businesses, there's no room for parental emotions. Independents can more easily and objectively discern the interest level, business acumen, raw intelligence and ability of a NextGen shareholder to be a potential director. The process should include the same elements used to hire independent directors, along with a detailed email as to why a NextGen shareholder wants to be a director.
Time, ability and egos (or lack thereof). NextGen shareholders can be incredibly effective, even if they lack direct (or any) business experience. However, they will not be good directors if they allow their egos and last names to get in the way of listening, being mentored and being coached. Based on my experience, here's a summary of the characteristics of effective and ineffective shareholder directors I've worked with. Recognizing these characteristics will be helpful as you embark on the journey of developing effective NextGen directors.
Winners
- Devote significant time to learn more about the company, care about the employees and brand and desire to take care of the company for the next generation.
- Want to make an immediate impact but temper that desire by working with a mentor to achieve a deep understanding of board dynamics and company culture.
- Have invested the time to truly understand the business and effective board governance, well beyond attending a conference or two. These individuals fully engage with independent directors on an ongoing basis to build business and governance knowledge.
- Do not let a title or ownership status get in the way of learning or listening.
Losers
- Are imperious, put the last name first, do not listen and are unwilling to be coached.
- Have the ability, but no commitment. These individuals have big egos and have never invested time to learn about the business or governance. They do not read board books in advance; they prefer to “wing it.”
- Lack commitment to the business. Their only goal is to disrupt board meetings.
- Have an inflated sense of self-worth and expertise and an inability to engage or converse.
Building an effective NextGen board member takes time. It is better to begin early to educate and expose NextGen directors to board meetings via observer or advisor programs.