All On Board! Getting Your Family Business Started with a Board of Directors

Posting by Joel C. Susco, CPA, Principal

Talk to any family business owners about their board of directors, and you’ll most likely get a wide variety of questions in lieu of answers.  How large should the board be?  Should the board even exist?  Is a board necessary when the founder or the founder’s child is running the company?  Should a board include non-family members?  Why is that?

Why Sometimes It’s Good to be Board

Some family businesses are good at what they do, but are hesitant to establish a forum that is perceived as a place for conflict, therefore stalling when it comes to establishing membership for a board of directors.  After getting past the fact that a board is a necessary resource for an organization, there is a school of thought that outside members of the board may make a valuable added contribution to the company, bringing an additional layer of perspective that the family dynamic might not come up with.  Their interests are different, their views not clouded in family history or their right of passage.

Balancing Your Board – Including Non-Family Members

Experts agree that when extended family members or non-family members are shareholders, from the start there should be established criteria for board membership.  If this isn’t done, a board could wind up selecting members based on personalities rather than qualifications, and that can become destructive for the business.  The board should serve the best interests of the business, not vice versa.

Of all the criteria for a family board member, the most important is that he or she has something to contribute as far as setting policy and direction.  Board members should not be involved in the day-to-day operations.  Nor should a board position be a training ground for the next generation or a reward just for having the right last name.  Younger family members need to start with day-to-day training in management, not governance, and they don’t necessarily have the experience or expertise the family business wants from people who take the long view of the company’s growth.

More Tips for Your Board, So Your Board Doesn’t Tip

In fact, when looking for effective board members inside or outside the family, you want to find members with the credentials, capabilities and experience to take the company where it needs to go in the future.  Is it important that family members selected for the board be part of the company’s management team?  Not necessarily.  If managers are doing what they need to be doing, and getting their jobs done, the board will likely welcome input from those managers.  The purpose of a board member is to bring additional insight and knowledge to the business.

Among other criteria for membership on the board includes an understanding the priorities of the family and being able to promote them.  Board members need to understand the differences between being a shareholder, a manager and a governor in a family business.  Ideally, the stockholders would vote for  board members after reflecting on where the company is going and which members of the family or non-family have the value-added knowledge or experience that would help the business move in that direction.  The board members would likely have term limits, or the stockholders would make positions rotating so that they would have the flexibility to restructure the board at a given time.

Finally, the rules governing family membership on the board shouldn’t necessarily be different from those governing other board members.  Although families recognize the difficulty in separating family from business, they must also accept that creating and adhering to formal policies when it comes to membership on a board of directors is crucial to the success of the board, as well as the success of the business.

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