THE ROLE OF A BOARD IN A FAMILY BUSINESS

Family-owned and individually owned enterprises play a crucial role in the economy. Whether they are a proprietor or part of a family business, they are acutely aware of how the success of the company directly impacts their personal wealth and the prosperity of future generations. Similarly, if they are a non-family executive within a family-run enterprise, they understand that the company's profitability and resilience are pivotal to their job security and financial stability.

Today, there is a noticeable trend among family-owned businesses showing a heightened interest in corporate governance. This is evident in the adjustments they have made to their board structures over the past decade. While some family companies maintain boards primarily to fulfil legal requirements, an increasing number are gravitating towards the more extensive levels of the family business corporate governance model. Ultimately, the owners will decide which model aligns best with the company's needs, and they will be open to transitioning to a different model when changing circumstances demand it.

Understanding that the governance structure within a family-owned company is largely influenced by the desires of the founder or the family members who hold control over the company, the company may have a compliance board or a different kind of board, and these choices may be entirely suitable for its current stage. It's noteworthy that many family businesses have experienced significant advantages by progressing towards a governance model, particularly when preparing for a generational transition.

Distinguishing Between the Company's Requirements and the Family's Interests

Especially during the initial stages of a company's development, founders and family members may regard the company's assets as their own. The removal of assets, such as substantial cash reserves, from the company can have far-reaching consequences on the company's financial well-being and even its sustainability. Additionally, this action can lead to tax and regulatory complications. Board directors have the authority to inquire about the utilization of the company's assets and profits. They can facilitate discussions concerning the appropriate allocation of dividends to shareholders, ensuring that the company maintains a sufficient financial buffer for its continued existence and expansion. Furthermore, directors can draw upon their experiences in other organizations to assist managers in addressing challenges or, preferably, preventing them altogether. Some directors may also possess extensive industry expertise, which proves invaluable in formulating and executing the company's strategic plans. Moreover, directors typically possess expansive networks that can offer valuable support to the company in various ways.

The challenge is that founders often firmly believe that they are the sole architects of their business success. Many entrepreneurs have expressed sentiments like, "I'm the one who envisions and aspires to build an exceptional company, so I must be the one at the helm." This perspective holds a significant degree of truth. In the initial stages, the enterprise exists merely as a concept within the founder's mind, where they hold exclusive insights into the opportunity, the innovative product, service, or business model to seize that opportunity, and a deep understanding of the potential customer base. The founder is the driving force behind shaping the organizational culture, which naturally mirrors their own style, personality, and preferences.

CEOs, particularly within smaller family-run enterprises, frequently become immersed in the daily operational intricacies, leaving them with limited opportunities for strategic contemplation concerning the business. Engaging in strategic dialogues with a board can serve as a valuable means for the CEO to redirect their attention toward the broader perspective, enabling them to discern emerging trends, shifts in the marketplace, and novel opportunities.

Help the Founder/CEO Look Beyond Tactical Issues

Regular board meetings play a pivotal role in instilling discipline within the executive team. These meetings require managers to provide comprehensive updates on strategy, ongoing projects, financial results, and other critical matters. Directors, by virtue of their external perspective, contribute to this discipline by overseeing risk management. They offer diverse viewpoints on the significance of identified risks, motivating executives to allocate suitable resources to mitigate them.

In many instances, a company's founder or CEO champions specific projects and individuals. This dedication ensures that such projects receive the necessary resources and leadership attention. However, it can also become problematic if the management fails to recognize when it's time to discontinue efforts that prove unproductive. External directors, not affiliated with the family or management, bring objectivity that helps management make tough decisions when required. They are often better positioned to deliver candid yet essential messages to the CEO.

Succession planning is crucial because no CEO or founder lasts indefinitely. While an organized and orderly succession is the preferred route, unexpected circumstances, such as sudden illness or death, can create a leadership vacuum. In such cases, a board can encourage the CEO to address succession properly, and an experienced director might temporarily step in as an interim leader. For planned successions, the board can facilitate by aiding the CEO in identifying potential successors and ensuring that internal candidates gain the necessary operational experience to prepare for the chief executive role.

Directors also play a role in coaching and mentoring family members within the business who aspire to leadership positions. Given the intricacies of family dynamics, non-family directors can often identify strengths and areas requiring coaching more objectively than a relative. Younger family members may be more receptive to advice from an external source, enhancing their development into effective business leaders.

Moreover, a board consisting of non-family and non-management members offers a safe channel for employees and outsiders to report concerns, particularly when family members might be involved. The board can then determine whether further investigation is warranted. In the context of family companies, the transition of control, distinct from changing the CEO, from one generation to the next can present challenges. An established board provides continuity and guidance to the younger generation, preserving the founder's vision for the company. Effective directors build relationships with new family members who join the board, fostering a harmonious and successful transition.

Possible Concerns About Changing the Governance Model

Discussions about the benefits a board can offer are important, but it's not uncommon for founders to have reservations about bringing individuals onto their board who aren't either family members or close associates. These concerns are prevalent, and there are potential ways to address them.

In the case of a controlling shareholder, it's essential to recognize that they ultimately retain the final decision-making authority, irrespective of the board's recommendations. To safeguard their desired decision-making power, the company can establish a delegation of authority policy. One approach to avoid diluting this control is by maintaining an all-insider board, comprising family and management members. If the choice is made to introduce external directors, it's crucial to remind them of the necessity to maintain strict confidentiality regarding the company's operations and outcomes, potentially reinforced through periodic nondisclosure agreements.

Establishing a board does entail certain formalities, such as preparing meeting agendas, materials, and maintaining records of minutes. These efforts are justified when the board effectively adds value to the company. In specific situations, these formalities can prove invaluable. For instance, in the event of future disputes over the company's management, having documented meeting materials and minutes can serve as evidence of proper board oversight.

It's important to acknowledge that governance becomes more costly as processes are formalized, and directors are added. If financial resources are limited, considering compensation arrangements resembling equity may be a viable option for directors. Regardless of the compensation structure, a periodic evaluation of the value directors bring to the company is crucial, with the flexibility to make replacements if needed.

While it may not be a primary concern, some founders argue that they don't require a board because they believe they already possess the right vision for their company. However, it's essential to recognize that circumstances may arise where uncertainty surrounds the best course of action. An established board with a profound understanding of the business can provide valuable guidance and perspective when confronting such challenges.

Boards of private family companies have more flexibility in the roles they play than public company boards. Why? Because they’re not bound by stock exchange listing rules that set responsibilities for public company boards and board committees. Directors on private company boards do, however, have legal duties of care and loyalty. There are certain standard responsibilities that boards typically have. Understanding what those are can help them better consider which responsibilities they want the board to take on. The owners of a family company may decide they don’t want the board involved in all these areas. For example, the founder’s strategic vision may be so strong that he or she doesn’t want any input. That said, companies have failed when they missed the implications of a changing business or strategic environment, or were unsuccessful in their expansion efforts. And so, it’s worthwhile for whomever is running a family company to consider getting input before reaching major decisions.

Conclusion

Some boards employ a method of self-evaluation to gauge their effectiveness periodically. Family company boards often encounter unique challenges compared to other organizations when it comes to maintaining effective board dynamics. Why is this the case? Because there are instances where family-related matters become entangled with the company's affairs, and when these aspects overlap, they can divert the attention of both management and the board. Assembling the right individuals is the initial stride in forming a capable board including a suitable board structure, which may involve specialized committees, adequate meeting time to enable the board to fulfil its various duties, access to the pertinent information necessary for informed decision-making and a conducive environment that fosters open and constructive conversations and debate.

Board Academy Br Udo Kurt Gierlich Farias Souza Eduardo Gomes, MBA, CCA IBGC Marcelo Simonato