How Non-Executive Board Members Can Help Improve Family Firms

Family enterprises are either extremely satisfied with their boards or want to abolish them. What is the underlying reason?

How Non-Executive Board Members Can Help Improve Family Firms
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Some family business owners say that they would never ignore the recommendations of their non-executive board members – especially when they are non-family members. For them, the independent board members are often seen as external specialists serving in a role of authority that they can approach for advice and guidance. Others say that the board hinders them in a fast and efficient decision-making, leading to averse repercussions to the business.

Why is this so?

With a sole entrepreneur, it is easy: He or she will often have a clear expectation on the role of the non-executive board members. In a sibling partnership or in a cousin consortium, it becomes more difficult because the entire group of owners should be in agreement on the benefits of having independent board directors. Further, they should not forget to determine what is expected of the board.

Some entrepreneurs expect their board to ensure succession in the cases of temporary absence or death of the business owner. This was recently the case with a first generation family business when the sole owner of the business died in a plane crash. The non-executive board members were crucial for the continuity of the business and in transitioning the leadership to the next generation. The board members helped to manage succession in a professional manner, which in this case meant deciding which of the two brothers was most suitable to become the next CEO of the company.

In another instance where a sister and brother led a company as a dual leadership team, there were often differences in opinions leading to many stalemate situations hindering the growth and operations of the business. They decided to bring in non-executive board members who would have authority to make decisions in times of disagreement between the brother and the sister. This also formed part of the corresponding shareholder agreements.

The board takes on the role of a sparring partner

An entrepreneur once explained that he established a board of directors and appointed three non-family specialists on to the board so that he could put his thoughts on paper and then consult the board when making important decisions. He wanted to ensure that the most suitable people were appointed to the right positions and that they would always do what was in the best interest of the company. As a result, non-executives got the power to decide the selection of the top-management team, including family members from the owning family who wanted to work in the business.

The right people from outside the family

In order to have an effective board, it is important to find the right people from outside the firm to serve as non-executive board members. Many family firms have only family members on the board in both executive and non-executive roles. They often tend to miss out on the fact that outsiders can bring in new ideas and professionalize board meetings.

Though it is not an easy task, the selection of board members ultimately becomes a crucial factor for success. The board composition should therefore be regularly re-examined because the business tends to evolve over time as it enters into new phases. Consequently, the skills and qualifications needed from the board also tend to change.

There are some boards whose members are over-aged. In many instances the owners often do not have the courage to replace them. But the position as a non-executive is not a lifelong one – it can be considered a mandate as a consultant who is called in for help as long as he is useful, but not beyond that.

Shareholders must agree on the type of person that fits their board best. Family owners often consider personal attributes such as integrity, responsibility, willingness to work together constructively, leadership experience, and openness when selecting board members. Beside these, the technical background is also important.

Entrepreneurs, finance specialists, and succession experts on the board

It can be advantageous to have entrepreneurs or CEOs of other family enterprises on the board as independent directors. Those with a family business background often demonstrate greater commitment, a down-to-earth approach, and an entrepreneurial spirit.

The work of the board increases the quality of the business when the family seizes the opportunity to import ‘know-how’ that they may not necessarily possess. The board often needs industry and functional experts from outside, such a finance expert who specifically analyzes and comments on the figures. For a successful generational transition, a succession expert with family business know-how would be an advantage for the board of a family business. They can moderate between the generations and act as a coach leveraging their own experiences.

Facilitate fruitful discussions with participation from independent board members

Fruitful discussions are key for successful board meetings. Unfortunately, board members sometimes beat about the bush during meetings – everyone talks but is afraid to bluntly raise real issues. These can be topics such as the succession of the 75 year old chairman or the ambitious investment of the family-CEO. In most cases, it is a topic that is crucial for the company’s success. Addressing these controversial topics often needs the assistance of a facilitator that can help open the room up for discussing the real issues. If the board members can get to the heart of the issue, they are more likely to find the suitable solution.

Though the role of the advisory board is not always pleasant or easy, their ability to help solve problems, prevent wrong decisions, and to be critical sparring partner for the management ultimately works in favor of the family business and can help it maintain stability that allows it to achieve long-term growth.