Building a Better Board: A Guide for Your Family Business

Posting by Joel C. Susco, CPA

An effective board is essential for the success of your family business, forming the cornerstone of the governance structures that can help guide and direct your company.  A properly formed and functioning board also has implications for the valuation of your business, directly affecting potential exit and succession plans.

Deloitte recently released “Perspectives on Family-Owned Businesses,” a survey of the governance and succession planning practices of family-owned entities across the globe.  This study provides a glimpse into the current governance structures in place for many family businesses, with a particular focus on board oversight.

Results were mixed – while almost three-quarters of family businesses report having a board of directors, many boards are not as involved, diversified, or structured as they should be.  The survey highlights several important takeaways for family-owned entities regarding optimal board oversight.  When it comes to your board, here are several points to keep in mind:

Consider Non-Family Members. A majority of the family businesses surveyed lack non-family representation on their boards.  While issues of trust and compatibility may be legitimate concerns, including non-family members on your board – and throughout the company – can often bring specialized expertise and outside perspective that may not be readily available in the skillset of relatives.

While non-family members can serve important roles on your family business board, it is important to note that you should not bring them on just for the sake of filling that gap.  Any non-family board member should fit pre-established criteria that you have developed for qualifying any new board member.

Create a Formal Orientation Process. Just as onboarding is essential for all new employees in your business, a formal orientation for new board members can help ease the transition.  Unfortunately, less than half of the family businesses questioned for this survey reported having such a process.  Not only does a formal orientation provide key information about the culture of the board and member responsibilities, it can also help new members to feel comfortable and make helpful contributions more quickly.

When creating a formal orientation process, consider the information that new board members will need to know – such as previous meeting minutes, any bylaws or other important governance documents, financial statements, and strategic planning documents.  Include items that will help your new board member not only understand the numbers side of your business, but also your family business culture and the type of company you want to establish.

Conduct Board Member Evaluations.  One finding that I think is particularly alarming is that many family businesses – 82% of the respondents – seem to have lifetime appointments for board members without any formal review process.  This can lead to an ineffective, uninvolved board of directors, with few options for improvement.

Board members should be evaluated on a regular basis using established criteria that is common knowledge to all members.  Both self-evaluations and objective reviews are helpful in this process.  In addition to commitment and participation, evaluate members on their knowledge of board policies and company goals, as well as their follow-through on decisions and tasks.

As with any good review, the process does not have to be one-sided.  This is also a great opportunity for your board members to provide feedback regarding previously unexpressed interests and suggest additional areas for their involvement.

Good governance may not be the most exciting aspect of running your family business, but it is one of the most important for your long-term success.  Talk to your business advisors about the best structure and practices for your company’s board to ensure that you are optimizing this strategic asset.

For more information, or to view the full report on family governance practices, click here.

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