As we face the choppy waters of rising inflation, rising interest rates, supply chain issues, human resource shortages and a likely economic downturn – governance in a family business assumes paramount importance.
Governing a family business is like sailing a ship. Indeed, the term governing itself comes from the Greek word for “guiding or steering.” Any family that owns a family business must not spend time just down there in the operational engine room but must find time to assess where their family business is heading.
That’s determined by who is steering the business and in what direction they’re headed. If you wish to have a business that is resilient and has a positive impact on all stakeholders, you must make sure that your board of directors is intact, competent and functioning optimally – as the board of directors determines the company’s direction, as a collective group, similar to the way that a captain steers a ship.
As family business struggle in these turbulent times, here are some questions for you to consider and suggestions to help you develop best practices for your board.
Do you have a board?
Unfortunately, when asked whether their family business has a board, many owners reply “no.” The response is many times meant to indicate that a board legally exists but that board is not functioning at all. Sometimes I am also told that a formal board is not needed as the family business leaders or owners meet regular, albeit informally. It is often the case that family business owners cede control to the founder or other dominant family members who may or may not actually be on the board. This creates an unnecessary gap in corporate governance that will cause strategic complications at some point in the future, if not today. I always find that boards of family businesses made up of just family members is a very tricky and slippery slope. Independent, professional and competent external directors are every much needed on any family business board as they are likely to push such boards to exist and operate in a professional way.
What’s the purpose of the board?
While there are a variety of formats for boards, depending on where the business was created and/or where it operates, all boards serve the purpose of providing oversight, guidance and representation of the owners’ interests. By definition, a board should operate at the strategic level and not get caught up in the day-to-day administration. Clear delineation between the big picture questions that a board must consider and the practical, tactical work of management is essential. In a family business, the board must also ensure that the business operations align with the values and goals of the owning family. That’s because, in the end, the ultimate fate of a business is determined by the owners and not management.
Who should be on the board of a family business?
Many family business boards consist solely of family members. While this might provide some comfort to family members that their interests are being represented, especially when there are different groups or branches of family members, it’s rarely advisable. Indeed, it might end up harming their interests — the opposite of what they are seeking to accomplish. This is especially true as industries are being transformed at increasingly rapid rates and when disruption is the name of the game for many business models. Board members must collectively possess knowledge, skills, and experience ranging from finance and law to industry trends and operational challenges.
How should a family business board operate?
Some family owners have a board that meets every day or once a week. In these cases, the distinction between management and governance is likely being ignored. Just as the captain of a ship can’t reconsider the direction every minute (it’s better to set the direction and head for it without making too many adjustments), a board needs appropriate space and time to focus on key strategic priorities. A board that meets too often inadvertently takes away precious management time and risks micromanaging issues that are not the board’s responsibility. Quarterly meetings are often the norm, though in the start-up stage or times of crisis, more frequent meetings may be advisable. The chair of the board must lead the meeting with a combination of structured time for key presentations and decisions, while ensuring that all voices can be heard. The best board chairs understand how to use time between meetings to get input on agendas, air difficult questions and issues, and identify hot topics that could derail not just a meeting but, worse, the overall direction of the board.
Most of the world’s businesses are owned by families. The board is at the helm of the business, and where the board heads the business is the direction it will go. Further, the nature of business, and the duration of businesses, is changing rapidly. In the future, businesses will need to be nimbler and more open to fundamental changes that are existential in nature. A board must be willing and able to consider when, whether, and how to change the business it is leading – whether to change the industry or sector it is competing in altogether or whether to arrange a sale of the business. Family businesses increasingly face challenges that require more than managerial expertise, but rather governance structures and processes that ensure a resilient family business.
In Session 3 of the recent Family Business training – I spoke extensively about the importance of governance in Family Businesses and the crucial role of the Board. Click Here to view this Session.