Category Archives: Business Governance

Why family businesses build stronger boards

Kristi Daeda
Kristi Daeda

Boards in family enterprise can be as diverse as the families they serve. And just as the family changes, the board must change to respond to and stay ahead of new circumstances – both predicted and unforeseen.

In the early stages of the business, a board is often comprised of a founder, one or more other family members, and maybe a key non-family executive or two. Their conversations are often unstructured and decisions may or may not be communicated to other stakeholders, such as other owners or future owners or key management. This “board” may evolve to include paid advisors, like an outside attorney or accountant. Sometimes, close friends, business partners, or other trusted supporters are invited to participate.

As time moves on, a family business may reach an inflection point – a place where the board structure as it exists may not be suited to address the challenges or questions the business is facing. This is where we begin to engage with families in board development, the process of defining appropriate business governance structures for their unique situation.

What brings family businesses to build stronger boards?

  • Professionalization of the business. As the family strives to improve their business approach across the enterprise, it’s natural to look also at improving the board function. Shareholders, employees and the community may perceive the business more favorably that has developed criteria for board service and recruited well-respected leaders to serve.
  • Generational transition. Many founders seek to formalize a board to provide impartial guidance on succession planning, support the successor and provide a structure with which the next generation can effectively interact.
  • Issues with business growth or performance. If a business has plateaued or is struggling, leaders often look to independent directors for a fresh look at strategy.
  • Market opportunities. As with those that are struggling, businesses experiencing rapid growth or seeking to capture market opportunities can seek perspective from independent directors that have done similar things in their own careers.
  • Family conflict or disagreement. Tensions in the family may make board discussions unproductive or impossible. The board development process can be the conduit for better understanding of the role of governance and trust in the board. Plus, the board itself can be an impartial and safe venue for discussing challenging issues.
  • Changes in management. A capable board can provide oversight and accountability through the management transition.

A well-constituted board is an advantage at any stage. When the normal and predictable challenges like those above appear on the horizon, the advantages of a strong board become even more compelling. If you don’t yet have a board, or are unsure of whether your board is functioning as well as it should be, it may be time to begin questioning what that board would look like, and how it can support your family enterprise.

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The Board Chair role: More than navigating through the agenda

Kelly LeCouvie
Kelly LeCouvie

When people think of the Chair’s role during a board meeting, they often think of responsibilities such as introducing each topic on the agenda, asking managers to make pre-arranged presentations, soliciting comments from the directors, and managing the time used for each topic. Those responsibilities indeed typically belong the Chair of the board. However, if that is all the Chair is managing, he/she is potentially missing opportunities to create optimal value from directors’ participation. In addition to those responsibilities the Chair should consider the following questions when conducting his/her own self-evaluation.

  • Am I really listening, in an active, engaged way to what is being said?
  • Am I able to distinguish input that is truly strategic and critical from the many comments that are much less impactful to the business?
  • Can I synthesize the information and comments being shared at the board meeting and distill them into appropriate, resonant themes?
  • Do I effectively share back with the board (and management when appropriate) the meaning or impact various discussions and suggestions may have on the business moving forward?
  • Can I communicate this in a way that is actionable to the appropriate people?

If your answer to these questions is “yes”, then congratulations, you are likely a very effective board Chair! If your answer to some or all of the questions is “no”, then you have some opportunities to strengthen your own performance, and ultimately enhance the value of your board.

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A chairman defines the role

Drew Mendoza
Drew Mendoza

Did you ever hear the expression:  Tell them, remind them and remind them again?

For decades, FBCG has been preaching the value of corporate governance in general and the very special role played by the board’s chairman in particular. This short piece, originally published in The Family Business Advisor in print version in 1993, still captures the essentials of what it means to be the chairman of the board in a family enterprise. It’s worth a review.

A Chairman Defines His Role

We know a thoughtful family business leader who is retiring as CEO, but will continue as Chairman of the Board. (The firm has an active board with for outsiders and two family representatives.) In preparation, he attempted to define the chairman’s responsibilities. We wanted to share it with our readers.

  1. Assure that shareholders are kept adequately informed of affairs of the company, and develop and maintain shareholder relations program of the company. This includes giving thoughtful consideration to shareholder concerns and needs and reporting those concerns and needs at least once per year to the board.
  2. Accountable, with other directors, to shareholders for proper execution of duties and responsibilities of the Board in connection with shareholder rights and interests.
  3. Develop responsibilities to be assumed by the company’s Board of Directors.
  4. Through the President and CEO, (a) offer counsel when asked; (b) assure that Board decisions are understood and implemented; and (c) assure that management has an active and effective strategic planning process.
  5. Keep informed on state of the company’s affairs, and through the President and CEO, assure adequate flow of information to the Board.
  6. Develop Board as dynamic, constructive force in company and guide it in discharging its responsibilities. Propose methods to the Board to help it identify opportunities and means to improve Board functioning.
  7. Ensure Board members are knowledgeable in industry matters.
  8. Propose time and place of Board meetings; call meetings; preside at meetings of shareholders and meetings of family shareholders.
  9. Review reports and proposals of management with officers prior to presentation to the Board.
  10. Lead Board in preparing annual slate of directors and selecting candidates to fill vacancies.
  11. Responsible to secure reliable, certified audit to verify management’s conduct of the business.
  12. Make recommendations to committees of the Board. Present to the Board reports and recommendations made by committees of the Board. Serve on the compensation committee.
  13. Maintain top level contacts with members of the community to ensure that company is properly recognized, dealt with and appropriately represented in community affairs.
  14. Identify ethical dilemmas in the company and report on those annually to the Board.
  15. Consider leading special projects as proposed by CEO.

 Excerpted from The Family Business Advisor, Copyright © 1993.

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Shareholder director selection as a two-step process

Amy Schuman
Amy Schuman

In selecting a relatively small number (3 – 5) of family directors from among a relatively large (25 +) shareholder group, a two-step process can be very effective.

Step 1: Identify family members who are qualified to serve as directors.

Step 2: Select from among the qualified family members.

Although this process  appears straightforward, it’s far from simple.

It can be challenging to agree upon a list of qualifications for family directors. To what extent will those qualifications be different from the non-family directors? Who decides the qualifications? And, even more difficult, who makes the judgment as to which family members meet the qualifications, and which fall short?

Once the desired qualifications have been established and qualified family members identified, how is the selection made? Are there term limits to ensure that a variety of qualified family members have the opportunity to serve? Is any consideration made to other factors besides qualifications, i.e. family branch, generation, geography? Is there a regular and robust board evaluation process to keep the focus on performance of directors?

Although best practices call for qualifications to be the determining factor in director selection, be they family or non-family directors, most families find it difficult (if not impossible) to ignore branch and share percentages when selecting directors. An ideal approach can be to acknowledge the desire for branch/share percentage representation, while agreeing that any seated director must meet the established qualifications. Happily, with larger shareholder groups containing experienced and able members, this is often easy to achieve.

In the sibling stage, it is common that all (or nearly all) interested siblings are able to serve as directors. In the cousin stage, this dynamic changes radically. Not all interested family members will automatically have the opportunity to serve as directors, as their parents did. Resolving this issue is one of the most difficult tasks facing the cousin consortium.

Many successful families in the cousin stage have solved this sticky problem by following a variation on the two-step process described above. They find that it answers many of the tough questions quite well. Dear readers, do you have experience – or wisdom – or tough questions – to share in this regard?

For more information, our book Building a Successful Family Business Board by Jennifer Pendergast, Stephanie Brun de Pontet, and John L. Ward can be an invaluable resource.

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Managing the FUDG factor in a Hold or Fold decision

Norbert Schwarz
Norbert Schwarz

Fear, Uncertainty, Doubt and/or Greed (FUDG) often play a major role in a family’s decision to keep or sell the family business.  Managing these emotions in the decision can have a powerful impact on the success of the process.

Several steps can be taken to manage the first three elements of the FUDG factor to the extent needed to make an informed hold or fold decision. Educating family shareholders on the products, the competitive environment, and the challenges and opportunities of the business is a good starting point. Encouraging family members to be informed on business issues in general can also help those not in the business better understand the current and future business environment in which the company operates. If the company has embraced a comprehensive strategic planning process, management should be well aware of these subjects. The planning process should also clarify the company’s vision for the future and outline its plans to achieve that vision over time.

An outside board I worked with recently had a policy of asking shareholders to discuss and communicate to them their long-term vision for their ownership annually. This was done before the board reviewed and approved the annual revisions to the company’s strategic plan. Building value and growing the company were the focus for many years until the shareholders responded unanimously that they wanted to prepare the company for sale within a three to five year timeline.  A successful, fully priced sale was accomplished in less than three years.

The Greed factor is a bit more problematic. There is a difference between greed and rational self-interest.  The need for individual financial security may become a key driver in the decision process. The question that arises is “what is enough?” When that question cannot be answered rationally, an element of greed becomes suspect and may lead to conflict before, during and after a hold or fold decision is made.

Fear, Uncertainty, Doubt, and to some extent, Greed may always be present in one form or another in every hold or fold decision. The key to success, whether the decision is to hold or to fold, is to manage these factors effectively.

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Who Should be Members of Your Board?

Otis Baskin
Otis Baskin

Often when working with clients to help them form or revamp a board we are faced with a list of qualifications that are strikingly similar to those of the current CEO:  “a current president/CEO of a business in our industry with size similar to ours”.  Of course the challenge is to find people meeting this description who are not direct competitors.  It is easy to understand why an executive would want to have similar experience on her/his board.  If the board understands the challenges and opportunities of a business it takes less time to inform them before a meaningful discussion. 

However, when any group is composed of individuals who are too much alike Group Think can set in and diminish innovation.  Group Think occurs when people are too comfortable with each other or too respectful of each other to challenge ideas.  A “rubber stamp” board cannot test ideas in the crucible of critical analysis.  Sometimes the very differences that cause us to spend extra time explaining an issue before we get to the solutions stage of a discussion can produce the most creative outcomes.  Having intelligent, committed board members from different backgrounds can provide new ways of thinking about old problems.  For example, the president of a company from a different industry whose customers, suppliers, or distribution channels are similar to yours may help you find alternatives your competitors don’t see.  Different points of view help us to look at problems from a fresh perspective and can break the logjam of “we tried that before”.

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Is Good Governance a Waste of Time?

Otis Baskin
Otis Baskin

OK, let’s just admit that productive people almost universally hate meetings – “what we do instead of doing something” is the frequent sentiment expressed to me.  So, too often, the required meetings of corporate boards are simply “formalities” or sometimes an attorney’s creative writing exercise.  I have had business owners tell me the primary reason they decided to organize as an LLC was to avoid the need for a board of directors. If board meetings are just a waste of time, why are they the center piece of any discussion of good governance in business?  As with most things meetings are only as productive as the people who manage them.  If the board chair manages the agenda, the discussion, and the action items well board meetings can be extremely productive. 

If the board chair is thinking ahead to the next meeting well in advance the agenda and pre-meeting information can be distributed with enough lead time to allow everyone to come prepared.  If the chair manages the discussion in a way that makes sure all opinions are expressed and understood but does not allow anyone to “hi-jack” the meeting for their own purpose both the quality of decisions and the satisfaction of members will improve.  Rather than a time waster, good governance can be a time saver by testing ideas before they are implemented and avoiding costly mistakes.

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Power without Knowledge – An Unnecessary Burden

Mike Fassler
Mike Fassler

In my work with sibling or cousin shareholder groups, I often encounter unprepared, or “sudden” shareholders.  These individuals come into ownership of their family’s business as a result of a gift or the death of a parent with little to no preparation for the role of owner.  As these shareholder groups come together to align for the future, a challenge they face is that some of the shareholders who now have decision-making powers have not been equipped with the knowledge on how to effectively manage this responsibility.

Often the “sudden” shareholder becomes dazed and confused about what being a shareholder means.  Questions like: “What are my responsibilities?”; “How much time do I have to commit?”; “Do I have to do real work if I am a shareholder?” “What if I really don’t want to be an owner – what are my options?”  arise in their minds.  They don’t really understand what ownership of the family business means to them or the broader family.

This situation can bog down the governance process and lead to ineffective decisions as the shareholder group seeks a threshold level of knowledge to “get up to speed.”  In addition to the time each individual shareholder may need to wrap their mind around their rights and responsibilities, the group of shareholders also has to learn to collaborate as a team of owners – something that doesn’t just happen by virtue of kinship! The governance process tends to slow to the pace of the family shareholder with the least knowledge.

A critical component of multi-generational family business continuity is a cohesive shareholder group.  The better prepared the family is for transition of ownership from one generation to the next the smoother the transition will go.  A key part is preparation of all potential next generation shareholders through a deliberate next generation shareholder development effort.  By learning about being an effective shareholder well in advance of a triggering event, the family and the business will be better equipped for continuity and will not run into the unnecessary burden of power without knowledge.

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The Board’s Role in Strategic Development

Kelly LeCouvie
Kelly LeCouvie

Most organizations with fiduciary boards have a tradition of management presenting a prepared strategic plan to the board for approval. Management’s role has been to complete the plan before discussing it with the board. There is a clear distinction (and needs to be) between providing oversight of the business and running the business.

At the same time, reaping meaningful value from your board is typically a function of how well they understand the business. And one way to enhance that understanding is by further engaging the board in the strategic process. Some boards will participate in an annual two or three day strategic retreat, where management has developed the core elements of the plan but discusses it with the board as a work in progress, rather than a fait accompli. This engages directors in important discussions about future growth, capital needs, resource allocations, and risk management. The discussions at this earlier stage help shape the plan, and further ferret out the implications of strategic options. There are other ways of getting directors more engaged around strategy, such as interim discussions with individual directors, whose specific expertise can help develop elements of the plan. This is a great board agenda item  – if you think directors can add more value to strategic development, ask them how they feel they might do this moving forward, and develop a plan for their participation!

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Information and Communication: The Challenge of Data Overload

Drew Mendoza
Drew Mendoza

A keynote speaker I heard twenty years ago, who promoted himself as a ‘futurist’, made the point: “don’t worry about the trash, we’ll find a way to deal with all the trash as better recycling technologies arise.  The thing you’ve got to worry about is the data.  We’re all going to be drowning in information.” 

Turns out he was spot-on.

In enterprising families, attention to information flow seems to be on the rise.  So too are family meetings, family councils and boards of directors are becoming more disciplined and more thoughtfully and strategically comprised.  *

The challenge for leaders of families and family firms is building the processes by which family members are educated and enlightened so that they can understand the data they’re receiving and apply it to metrics which indicate the degree to which the family and its enterprise(s) are reaching its goals.  Doing so results in more fully aligned shareholder groups and, as any CEO with multiple family shareholders will tell you, an aligned shareholder group makes the CEO’s job much easier.  In my experience, these are the same families that are more likely to achieve their business goals.

We’d love to hear from you – what steps are you taking to keep family shareholders both aligned and informed?

*For a great read on family enterprise boards read Building A Successful Family Business Board: A Guide for Leaders, Directors and Families

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