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Creating a Board of Directors for the Family Firm: When Your Own Advice Isn't Good Enough!

BOARDROOM – July 1994, Volume 2, Number 4

(No one) requires the formation of a working board (for the family firm). It only comes about if the owner/manager desires effective help to ensure the long-term viability of his company and this requires outside directors who can stand up to the business owner's flak long enough to give him the advice, support and help he needs.

– L. Danco and D. Jonovic,
from Outside Directors in the Family-Owned Business

"All those who disagree, please signify by saying, I resign!" reads the caption for a cartoon showing a company chairman at a board of directors meeting. That scenario may not be applicable to privately owned companies because most such companies don't bother with meetings. Boards of privately owned companies usually consist of family members and the companies' lawyers, and usually exercise little of the authority vested in a board.

The principal challenge to board members is to affix their signatures in the proper place to signify that a legally ordained meeting was held although the meeting never took place. It's just a formality to comply with legal requirements. Such boards have been referred to as phantom boards.

Should it be any different? After all, the boss generally is the controlling share-holder. Why would the founder or lead participant want an outside board of directors or any type of review council to which he or she would be accountable and which would question his or her operation of the business?

Many chief executives of privately held companies reach a point where the complexity of conducting business, coupled with the changes resulting from growth, strains their capacity to operate the enterprise. They had the vision to start the company, but now have encountered a new set of challenges and are no longer comfortable making all the decisions on their own. In many instances, they must expand on the counsel received from other professional advisers. Recently, one owner told me, "If we had a board, they would have told us not to do the outrageously risky things we did to become successful." This just reaffirms the notion that CEOs of privately held businesses usually are accountable to no one. Many would not have it any other way.

Other CEOs have found it beneficial to establish a truly independent working board. Those in favour of active outside boards say their advantages range from bringing expertise and empathetic counsel to providing accountability and credibility. My own experience suggests three benefits.

First, properly chosen outsiders on a board raise the business owner's aspirations and confidence. They help to shape and inspire vision, and they increase commitment.

Second, effective boards open communications and stimulate effective action on sensitive but normal family business issues. Too often, subjects such as estate planning, succession planning, family compensation and benefits, authority of family members, and dividend policy (which is loaded with family consequences) are set aside for later, "more proper" or "more comfortable" consideration.

Third, an excellent board raises expectations and makes conduct more efficient and effective for all members of the organization.

The mere presence of the board of respected outsiders signals a commitment made by the owners to employees, who may be uneasy about the owners' intentions of keeping the business or of remaining interested in the business. Reporting to the board and meeting its expectations bring momentum and professionalism to all the managers. The presence of respected directors can help resolve many disputes or disagreements among family members connected with the business.

Board members need a mission and a mandate. They need clearly defined boundaries to set off their responsibilities from those of the shareholders and management. They need managers and a CEO who realize that by sharing power, they gain power. In turn, outside directors have to appreciate that family firms are different - and sometimes impose special demands on board members.

Outsiders appointed to the boards of family firms (keep your accountant and lawyer away; you already have their advice) should be free to carry out their valuable role as a highly principled body by providing insight and discipline to top management. But they must also know something about the needs, values, and culture that the family deems important in operating the business. It is the family's job to forge a consensus on values without involving the board, and then to give members of the board a clear mandate that, in turn, enables them to work together with the family as a team. In the long run, a board cannot function without family consensus, and perhaps the company can't either.

Outside boards can be effective only when the CEO is emotionally secure and confident enough about his or her stewardship to relinquish voluntarily a degree of control to gain the benefits that an outside board can provide. He or she must be convinced that the benefits of an outside board justify surrendering some control.

Unless owners believe in this concept and are willing to submit to board recommendations, the outside board cannot succeed in helping to develop the business. This does not mean that the CEO must relinquish all control. There may be times when he or she will find it necessary to exercise the prerogative of a major shareholder and make decisions contrary to the board.

An effective working board should probe, challenge, and offer recommendations in an atmosphere that is supportive rather than adversarial. This balancing act can exist only among mature people who are willing to be respectful and considerate, and who subordinate their sensitivities to the good of the company. This means that the CEO must terminate the aura of secrecy common to many privately owned companies and be candid with the board. Most, if not all, of the skeletons must come out of the closet.

The board members have a final weapon if they believe that the CEO is not willing to accept direction. They can resign. They never asked for the job in the first place!

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