How engaging an outside board helps an owner step back and work on the business
It always starts with an idea — a spark, an aha moment or a solution. Most businesses begin with an entrepreneurial effort and a founder whose focus is on building and growing a company. This founder assumes the risk to launch a business. Over time and after initial success, the founder must make decisions about the long-term future of the business. Should they plan for an exit strategy that will provide a liquidity event, or would they like to see the business continue to grow so they can pass it on to future generations of the family?
Too often, the founder does not address these options until it’s almost time to retire.
Whichever scenario the founder pursues, success is most likely once they recognize the significance of the governance process in achieving a desired outcome. Most leaders of early-stage companies view governance mostly as a formality to meet state and federal regulatory requirements for an incorporated business. However, good governance plays an essential role in helping ensure the growth and long-term sustainability of the enterprise. A well-established governance process is a critical requirement for those who choose to create a successful and sustainable multigenerational family business.
Implementing proper business governance involves a number of steps that take time to complete. If the business leader commits to an independent board of directors, the likelihood of achieving their objectives for the company improves. Here’s proof: A 2014 study by EY and Kennesaw State University found that 90% of the largest global family businesses have an independent board of directors. In addition, evidence shows that most family businesses that choose not to invest in an independent board end up proving the age-old adage: shirtsleeves to shirtsleeves in three generations.
I learned the value of an independent board of directors during my career in our own family business, Seaman Corporation in Wooster, Ohio. This business was started by my father and mother in 1949 with two sewing machines in our basement. I joined the business after my graduation from Bowling Green State University in 1968. I worked with my father for the next 10 years before his untimely death from lung cancer at the age of 55. In my subsequent 40 years of leading our family business, we grew to $200 million in annual sales, manufacturing high-performance industrial fabrics in the United States for a variety of outdoor applications such as truck tarps, architectural fabric structures, environmental applications and single-ply roofing. Many of our American-made fabrics are shipped into China.
While I evaluated and adopted many business processes to develop this organizational capability, a key reason we were able to achieve this growth was my early commitment to develop an outside board of directors after my father passed away in 1978, when our annual revenues were $10 million. At that time, our board of directors was typical of family businesses of our size; it consisted of my father, our attorney, our sales manager and me. My father would call a board meeting as an annual requirement or when he wanted to make a large capital investment.
My decision to professionalize our governance process and build an independent board was an unusual step, given our size, but doing so has brought us five decades of success and enhanced the potential of passing the family business on to future generations.
A turning point
When my father passed away, we elected my mother to replace him on the board. I increased the frequency of board meetings to quarterly and began to formalize the board agendas, but I did not make significant changes to the board until Don Noble, then CEO of Rubbermaid, introduced me to Dr. Léon Danco, a family business consultant and author of Inside the Family Business. Dr. Danco had a wide range of experience and scholarship devoted to creating outside boards focused on the unique governance requirements of a family business.
In his writings, Dr. Danco clarified the roles of shareholder, governance and management leadership in a family business. In the early stages of a business, these roles are filled by the same people. As a family business grows, these roles need to be filled by different people to create structure, enforce accountability and combat entitlement. When I began to create and enhance our governance structure, I looked to the boards of public companies, seeking to replicate their level of professionalism and accountability in order to reap the maximum benefits of outside governance.
Dr. Danco also gave me a framework for evaluating potential board members. They were to be experienced business professionals whom we might not otherwise have access to for counsel. In other words, do not select someone whom you are already paying for services or advice, such as your lawyer, your accountant or a senior manager. While I had many close relationships with my Young Presidents Organization (YPO) colleagues, Dr. Danco convinced me that I could basically get their advice anytime, and I should pursue candidates beyond that circle. I further decided to select candidates that had both a sincere interest in our business and in the Seaman family.
Creating the board took some time, but I ultimately assembled a diverse set of directors, including an industrial psychologist, a manufacturing officer of a leading home appliance company, a strategic planning consultant and, eventually, following his retirement from Rubbermaid, Don Noble himself.
Meaningful board meetings
If you have asked a group of respected and busy businesspeople to participate in your governance process, you must be well prepared for the board meetings. We conduct our meetings quarterly and schedule them 18 months out. Because I was willing to submit my CEO leadership to a group of respected businesspeople every 90 days, I became a better business leader. These quarterly meetings also offered senior management the opportunity to make presentations, providing a more objective perspective on the qualities of the management team. This transparency and accountability also shows your senior managers that you as owner/CEO are willing to submit yourself to a quarterly performance review, proving that your leadership decisions are not being made just for the benefit of the family.
An independent board’s guidance is especially relevant when long-term capital decisions are being made. At Seaman Corporation, we have relied on our board in several key instances where we would make a significant investment in technology that expanded our production with a long-term view toward growth. In one particular case, my management team and I made several presentations over many months to evaluate a multimillion-dollar, long-term capital investment in manufacturing technology. Ultimately, the decision was confirmed when one board member said, “Richard, you only have two choices. You either make this investment or you sell the company!”
As I mentioned earlier, board members must have an interest in both the business and the family to be most effective at understanding and upholding the unique culture of a multigenerational family business. To cultivate family familiarity and to support a family culture at the board level, we include social activities with our board meetings, such as dinners the night before a meeting. Once a year, we schedule a multiday offsite board meeting with activities that support the interaction of board members, management, family and accompanying spouses. These meetings will include presentations by and time with our grandchildren, the youngest Seaman family generation, as a way of beginning to educate them on the responsibilities of family business stewardship.
An outside board can be an excellent resource when there are challenging family dynamics related to business ownership. Ten years after my father passed away, we began to experience some typical family business conflict at Seaman Corporation. Our board was very engaged and became valuable in keeping the management team insulated from these family dynamics, thereby allowing management to remain focused on the business. The board ultimately played a role in enabling several family branches to sell their interests and exit the business.
Help with succession planning
One of the most critical responsibilities of a board of directors is to prepare for leadership succession, which is more challenging in a family-owned business. How long should the owner/CEO continue in the leadership role? Should the next CEO be a family member or a non-family member? Do you select an internal or external candidate?
There are two perspectives on a family versus non-family CEO. On one hand, having a family member fill this role can help preserve the values and culture that are fundamental to sustaining the business. On the other hand, in all likelihood most of the family’s wealth is embedded in the family business enterprise, so it is critical to select the best candidate for this leadership position — which may not be a family member.
The first step in effective succession planning is to help define next-generation leadership needs. The board must spend significant time with both the business and the family to have a nuanced understanding of those needs. For example, it is not realistic to believe you can directly replace a founder-CEO who has run the business for 40 years. The board needs a different leadership strategy to take the business to the next level.
In our own case, while our three children play an active role as steward shareholders, none of them have their careers in the business. So, on my retirement, the board selected a non-family CEO with the intention that a family member will continue to be the chairman of the board to ensure our family values and culture are preserved.
If outside independent boards are so important to the survival of a family firm, why are they not a ubiquitous feature of family businesses? When I discuss governance with other family business owners, the objections I hear can be grouped into three general categories.
First, most owner-CEOs wonder how anyone outside their business can know more about their business than they do. Although it is true that no one can know more about your business than you, outside board members bring different perspectives that will challenge your thinking and inspire better leadership performance.
Second, many family business leaders assume an outside board is too much work. Boards are an investment of time and resources, but I believe that engaging an outside board helps an owner step back and work on the business rather than just working in the business.
Finally, some family business leaders think an outside board is too expensive. An outside board does have associated costs, but it is an investment that will provide an invaluable return. While a fair level of compensation is necessary, the first criterion for a board member should be their level of interest in the business and the family. If the board candidate is overly concerned about compensation, they will likely not be your best choice.
Building an independent outside board of directors takes time. The evolution of our effective 10-member board took many years. Begin with two to four independent directors and build on that foundation as your family business continues to grow.
An independent board of directors represents a significant investment of time, money and other company resources. However, without one, your business will struggle to achieve your multigenerational vision. Boards are a protective layer of governance that clarifies people’s roles, combats entitlement and pushes both the business and business leadership to better performance.
Richard Seaman is the author of A Vibrant Vision: The Entrepreneurship of Multigenerational Family Business. Seaman is the former CEO and current chairman of the board of Seaman Corporation, a multigenerational family business that grew from $10 million to $200 million in annual sales under his leadership (rseaman.org).