Those of you who read my many Blog articles, know I have a soft spot for Family Businesses. Hence why yet again I find myself writing about them. Family-run businesses can experience serious complications for a variety of reasons, including family conflicts and poor management. How can an independent director on the board help in all this?
I was recently reading the conclusions of a research done in the beginning of 2020 through over 160 different family-owned companies across Europe which focused on understanding on how the board of directors of family owned companies operate and what they focus on. The findings show that a concentration of board power among family owners can pose a great challenge to the business itself. Having board directors being all family members means that there is a high possibility that agendas and discussions may not be as nonpartisan as they should be. Yet I still meet various family businesses who do not really understand the huge risk for the family ownership itself to stay isolated when evaluating strategic options. The importance of unbiased advice, which is not tainted by the existing boards views and politics is many times not fully appreciated, until its too late.
So what is the real value that an independent board director can bring to a family business?
First of all, an independent board director has a pivotal role to play when it comes to decisions about future leadership. The presence of independent board members, who are neither part of the family nor too close to it, is of vital importance. We all know the recurring difficulty that various family businesses face when it come to succession planning and the readiness of family members currently involved in the management and/or the governance of the organisation to truly hand over power or to step up to the next level. Independent directors play an important role in such a process through active listening to the different members (branches) of the family and sharing their opinions. As a result, they could develop a nuanced and balanced point of view in the interest of the company. Hence the presence of independent directors at family companies is extremely valuable in tackling succession processes with clarity and objectivity. Would the incumbent family generation accept the new strategic swing required to respond to innovation? Would the family member presumed to be the next leader truly be capable in the role; would they be respected both by the board and the company employees? Would the future of the family business be brighter with a leader from outside the family at the helm? As the research indicate, independent directors may well be better positioned to answer these questions than family members might be.
Independent directors must also play a pivotal role in professionalising board operations. Such independent board directors have a good sense of how boards operate, as their professional and board experience has groomed them well. Moreover, such independent directors with these broader boardroom experiences can help family members focus on the right themes and ideally keep family politics out of the boardroom. Independent board members additionally contribute to the resilience of the company by transferring their experience and knowledge to the younger family board members.
Independent Directors also bring an array of other important inputs to the board and the company. First of all they bring different perspective than insiders and so different views to problems and discussions, which is so useful for a family business. Moreover, independent directors have a greater chance of being objective, as they can rely on their vast experience to distinguish between what is normal and what is a true crisis. Independent directors give the family businesses a sense of credibility as it sends the message that this is a serious business organisation which takes (or attempts to take) corporate governance seriously. Independent directors also bring a whole new set of contacts and connections that can be leveraged, which includes introductions to customers, suppliers and bankers or financiers.
So does this mean that appointing an independent director will solve all corporate governance issues that family businesses normally face? I wish I could say yes.
For Independent Directors to be effective they need access to firm-specific information. Without firm-specific information, outside directors can neither question the actions of the management nor give valuable advice. If the adding of an independent director leads a family business to operate with greater secrecy, whereby the owning family operate in a way that they hide information to maintain control or protect their privacy or not to expose their conflicts to outsiders – with the ultimate root reason being that they have difficulties trusting external independent directors, then the real effectiveness of any independent director will be close to zero.
A recent research work by the EDHEC Family Business Center shows how over 400 family businesses in Belgium disclose less information when external, independent directors are present, whereby in many instances only financial information is disclosed to the board. So in these family firms, boards are just rubber stamps set up to fulfill the bare minimum. In fact, the appointment of external independent directors in these firms is just to make it seem that the “house in order”.
So my strong message to family businesses is the following. Make sure to take full advantage of an external independent directors’ expertise as merely appointing them on the board without providing them firm-specific information is not effective. The family owners of the business should have a trusting view and be willing to share information.
As managing a business gets more tough and challenging, family businesses have a much greater need to have a structured governance system aimed at engaging outside directors to exchange ideas with management, express different viewpoints and build trust among directors and managers. An overall commitment from owning families towards using the board actively in strategic decision-making is the prerequisite for good corporate governance. May this be understood by all family business owners once and for all.