The Family Business Consulting Group held a webinar on September 29th titled Developing Your Board of Directors for Maximum Impact. Jennifer Pendergast and Kelly LeCouvie were the presenters and Stephanie Brun de Pontet was the moderator for this program. Below are a few of the questions posed by a few of the several hundred attendees and the responses from the presenters.
Asked: Isn’t the function of a board – whether family business or not – to be supportive and also constructively critical?
Absolutely! The model we discussed during the webinar represents a continuum between the two – and boards that behave at either extreme will not add the same value as a board that can be both. Fiduciary responsibilities demand constructive critique; a board that sends a message to management that says “we believe in you and want to navigate with you to a mutually desired end result” is also a necessary act in any partnership.
Asked: What are the essential attributes of a successful Board Chair….i.e. competencies, experiences, skills, etc.
A successful board Chair brings a mix of skills, experience, expertise and attributes that is appropriate for a specific board, so there is some variation. However, in terms of attributes, good Chairs typically will:
- Demonstrate excellent listening skills
- Exhibit empathy to directors and management
- Foster creative and constructive dialogue among directors
- Extract the most value from each director
- Summarize discussions and share the primary conclusions during board meetings
- Manage dissention effectively
Asked: Is there an ideal term for directors? 2 or 3 years? overlapping?
Ideally, directors will remain on a board for at least three years. Part of the reason for that is because it typically takes at least a year (which is often only four meetings) before a director feels really equipped with appropriate knowledge about the company to contribute in a meaningful way. So given that searching for, recruiting and orienting directors requires a significant investment, at least three years is optimal. Having said that, many boards have one term limits and vote directors in annually. Ideally, you would not have turnover of more than 20% of your board in any given year.
ASKED I have a family that thinks the “executive committee” can make the CEO accountable-v.s the Board. They see the committee as all the C roles. Your thoughts? We have an urgent situation in that 4 key people have left a company and the son and father are in disagreement as to the next best steps. How will a board sort this out without being involved day to day?
This is an interesting concept, and perhaps one that can work under your circumstances. However, the two primary roles of the board are to contribute to strategic decision making and to ensure the CEO is doing his/her job. They are also somewhat connected. So if the board is enhancing the strength of both the construction and execution of the strategic plan, part of that process will involve evaluating the CEO’s performance. Typically the Compensation Committee will do this, and will certainly solicit input from other C level executives.
If four key people have left the company the first question to ask might be “why”? It sounds like there is perhaps more going on than just four, more attractive employment opportunities emerging for four individuals at once. People do not like to work in an environment of conflict – it’s stressful and unrewarding. That source of conflict should be addressed within the family, or with an outside facilitator if need be, before directors participate in such a process.
Asked: Can you please address how a) family members in management who also sit on the board and b) family members not in management who sit on the board are compensated?
Family managers acting simultaneously as board members can be tricky. They can often find themselves in a conflicted situation where the area or division for which they are responsible is discussed at the board meeting. Directors will likely feel uncomfortable discussing this with a shareholder who is also the manager of that area. If a family manager is VP of marketing for example, then marketing plans, budget approvals, and critique should not really take place at the board level while that family member is in the room. That said, we do see family shareholders who are managers (non-CEO) sitting on the family business board. They must excuse themselves from any discussions that might pose a conflict. Typically, the CEO is the only voting board member. Other family members who are in management often attend various parts of the board meeting but do not have a vote.
In terms of compensation, there are a few options: 1) in some cases family members who serve as directors are not paid at all. The rationale is that they receive distributions from the company and therefore do not require or merit board compensation; 2) other families pay family directors the same amount as independent directors. They have to prepare for meetings in the same way, attend meetings, and there are opportunity costs to do so; 3) finally some families pay a percentage of independent fees to family directors (50%) for example.
Asked: We currently have 8 directors on our board (5 family owners who work for the company and 3 outside directors). We are looking at the right number and whether or not to stay at 8, add or subtract. Any advice?
The 8 member typical board size shown in many board studies is not really tied to a company size. That said, smaller companies may have a smaller board, in the 5 to 6 range, but larger companies don’t necessarily have a larger board. We find that the size of the ownership group is one of the main drivers of board size. If all owners feel a right to be on the board, then that can drive board size up. As we said yesterday, we believe 3 independent directors is a good number of outsiders. So, if combined with 4 to 5 owners that gets you to the 7 to 8 range. Many families have a problem with giving a majority of seats to independents, although we don’t think it should be an issue. The degree of control given up is small, since the owners can always unseat the board if they don’t like their contributions.
ASKED: Is a board more effective if the CEO is not chair of the board ?
The answer is – it depends. There are pros and cons to splitting the chair and CEO roles. The negative is that the CEO has a handle on the strategic issues facing the business so is in the best position to set the agenda for the board to ensure he/she is getting the input required from the board. That said, the board is also responsible for overseeing the CEO, so when the CEO is chair, he/she is essentially his/her own boss. And, sometimes the CEO is not the most qualified to facilitate the board meeting. If the job is split, the key is to ensure the chair and CEO coordinate appropriately.
ASKED: Please comment on board interaction with management outside of board meetings. Frequency/Time
The board’s job is to oversee management at a high level, not on an operational level. So generally the board would not have a great deal of interaction with management outside the board room. This can encourage the board delving into operational issues and perhaps subverting the authority of the CEO. Contact with the level below the CEO should be with the CEO’s knowledge and approval. That said, board members may have expertise that can be valuable to that layer of management. And, if a board member has experience in a particular area, market research for instance, that may be valuable to a particular manager in the company, then getting together to share that expertise would be reasonable. Typically, most of the out of the boardroom interaction for a board member would be with the CEO. This may be a couple of phone calls a month at most, but would most likely be originated by the CEO asking for the board member’s input.
ASKED: How long should we expect search process for independent directors to take?
With respect to timing, we find that an independent board can be put together in 6 months or less. Three variables that affect timing are whether or not you have to take time to get all owners on board with the value of independent directors, how much support you will have in searching for candidates (if you use a search or family business consultant, they can source people quite effectively) and how many owners will be involved in the process (the more people, the more time it takes, but also greater buy-in so having more involved can have value).
ASKED: How do you review operations and financials without raising issues and asking questions?
My response would be that the board’s job is to raise issues and ask questions. So, that should be happening. The board is there to be supportive of management but also to oversee them and ensure they are running the company well….. That said, questions should be not be overly critical or challenge management’ authority or competence.