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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