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Building a Successful Family Business Board
A Guide for Leaders, Directors, and Families
By Jennifer M. Pendergast, John L. Ward, Stephanie Brun de Pontet
Palgrave Macmillan Copyright © 2011 Jennifer M. Pendergast, John L. Ward, and Stephanie Brun de Pontet
All rights reserved.
Independent Boards of Directors and Family Business: Introduction to a Powerful Alliance
When Robert Rodale, second-generation CEO of Rodale, Inc., died in a car accident, his wife, Ardath, was thrust into the leadership role. Current CEO and third-generation member Maria Rodale says, "When my father was alive, he never would have used a board. At the moment he died, we put a board in place—to educate our generation, give us insights into the business, and support our mother."
Rodale's first board was comprised of Ardath, Maria and her siblings, and several nonfamily managers. Maria continues: "As we got our sea legs, our generation started to get more involved and active and become true board members." The board faced its first challenge when the most senior nonfamily manager announced he would retire in two years. "We were worried his departure would be very disruptive. As family members, we came together to address the succession." They decided to do a full, widespread search for the next CEO. As a result, two internal candidates for successor left the company, and Rodale hired a new nonfamily CEO from the outside. "At that point, we also decided that adding independent directors would be crucial to our success going forward. The presence of independent, objective oversight for our new CEO gave us confidence in transitioning to nonfamily leadership."
Challenges such as the one faced by Rodale—and the integral role played by the company's board of directors—are nothing new to businesses, particularly family-owned businesses. They illustrate an essential, yet powerful, truth—that an active, independent board of directors is a most valuable tool for family businesses of all types. There is substantial value added when the objectivity and experience of independent directors combines with the legacy and commitment of family ownership.
The Family Business Boards Study conducted for this book bears this out in numerous ways. We will be referencing findings and the specific demographics of our study throughout the book (summary in appendix 9). A few central results are worth noting at the outset of our discussion, including:
An active board is perceived as a very valuable tool for managing complexity in a family business.
Boards with independent directors are viewed as being more effective than boards comprised only of family members.
Nonemployed family directors play a pivotal role on family business boards and should receive formal preparation to fulfill this role.
Despite the perceived value of an active board, particularly one with independent directors, boards are still underused by most family businesses.
These and other findings further substantiate the value of an effective board for family businesses and the need for a better understanding of how to build and use boards. To be clear on meaning at the outset, when we use the words "active board," we refer to a board that meets three or more times per year. Further, when we refer to "independent directors," we mean individuals with no other ties to the business or family (not employees, not advisors, not shareholders) who serve on the board. Finally, when we use the term "independent board" this indicates a board with meaningful independent representation, preferably three or more independent directors, the number we believe is required to have a meaningful impact on governance.
Although all companies are required by law to appoint an official board of directors—at least on paper—owners decide whether they wish to create an effective board that adds value to the business.
A well-constructed, energetic and involved board of directors can prove essential to family-owned businesses of all types, providing direction, feedback and oversight on a variety of issues and challenges. To better understand how family businesses actually use their boards, we have conducted extensive research to break down the structure, use, and value of family business boards, particularly examining how these indicators vary based upon the maturity and complexity of the family business system.
Importance of Boards in a Family Business
By law, a board must be named to fulfill the responsibilities of selecting and removing corporate officers, setting officer compensation and declaring dividends. Most functioning boards take on a more expansive role, reviewing and approving budgets, strategic plans, and policies; overseeing the audit process, and approving significant capital expenditures.
While these board responsibilities are common to all types of businesses, the board of directors of a family business can contribute in unique ways. For instance, independent directors can play a valuable role in ensuring all shareholders are equally represented, setting compensation for family members in management, reviewing the performance of family members in the business, and ensuring that family dynamics do not create conflict in business decision making. By emphasizing professionalism and objectivity, a strong, independent board of directors can help keep family issues and business issues as separate as possible. A 2005 study of family businesses throughout the United Kingdom by the banking concern Coutts found that an independent board of directors decreased the impact of emotions in the family business boardrooms.
The leadership-succession process is one where the board of a family-owned business can play a crucial role. Due to the relationships and emotions involved in family business, succession is often a difficult task. A 2007–08 survey of family businesses by Price Waterhouse Coopers bears this out. One-quarter of the family businesses included in the study were due to change hands within the next five years, yet roughly half the companies that participated in the study had no succession plan in place. A board with independent directors, serving as an objective steward, can oversee the development of a succession plan that makes sense for the business and the family.
Beyond succession planning, a board can help the family business focus on long-term planning and goal setting. The 2007 Laird Norton Tyee Family Business Survey identified a lack of formal planning. Families have the opportunity to think in the long term because they are often committed to a broad family legacy and willing to invest capital with a longer time horizon. Making the most of this potential strategic advantage requires the presence of a long-term plan for the business. The board can help in ensuring that a viable plan is in place.
When is a Board Useful?
Some readers may feel their business is not big enough to leverage the benefits of an active board. In our experience, a board can help almost any family-owned firm that seeks continuity.
Ideally, the board should be in place before the company reaches major—and sometimes predictable—transitions. For instance, a company often hits an "entrepreneurial plateau" when the business outstrips the owner's—or owners'—ability to run it alone. At this point, the energy and expertise of board members are often needed to take the business to the next level. This expertise may include implementing systems or processes to ensure consistency in the business, including budgeting, strategic planning, or performance evaluation and management. These changes to the business may be very challenging for the owner to accept, which underscores why a board needs to be very highly respected by the leader in order to successfully encourage these significant changes that will enable the business to grow to the next level.
In addition to business growth, growth of the family and of the ownership group can also make the role of a board that much more critical. Larger ownership groups make decision making more complicated, requiring a more formal decision making structure and clear delineation of roles among owners, management, and board. The board provides a channel for ownership involvement and concerns, and it facilitates the separation of ownership and management issues. As this separation of ownership and management becomes increasingly complex with a growing ownership group, independent directors are an increasingly crucial part of the mix to make a board effective. In fact, our research establishes that the larger the business and the larger the ownership group the more likely a business is to have independent directors.
Throughout the following chapters, we will make the case for developing a strong, involved board of directors that leverages the skills of independent directors. By focusing on the unique issues, challenges, and opportunities present in family enterprises—and on the role the board plays in addressing them—we will show how a board can be a valuable resource for companies of any size, age, or ownership structure. We will also address the crucial role that qualified, prepared family representation plays on the board. Finally, we will provide detailed advice on how to select board members, both family and independents, and use a board effectively to get the most value for your business and family.
In particular, individual chapters address the following issues:
In chapter 2, we look at various truths and misinformation that can surround a family business board, and we outline the ways a board can contribute.
Chapter 3 describes the special value independent directors can bring to a family-owned business board, including succession planning, mentoring of family members, ensuring appropriate compensation levels, and providing strategic perspective from other businesses and industries.
Chapter 4 begins to go into detail regarding the role of an independent board and how it functions best.
Chapter 5 details how an independent board can help direct the various sorts of planning necessary for a business to grow and undergo smooth changes in leadership.
In chapter 6, we look at where to begin in setting up the board—deciding the appropriate mix of owner, management, and independent directors; determining the qualifications and characteristics of independent board members; and developing a board prospectus. This chapter also addresses the practical issues of how many meetings to hold and how to structure them; how to compensate directors; how to create meeting agendas; and how to make the best choice for board chair.
Chapter 7 shows how to identify and select board members—roles for family and management in the search and nomination processes; determining which owners will sit on the board; how to approach candidates; and what to do if an improper choice is made.
Chapter 8 addresses strategies for managing the board in and out of meetings—determining what issues are discussed at board meetings; use of the board secretary and board minutes; and the importance of ongoing evaluation of a board's involvement and performance.
Chapter 9 covers the varied roles a board can play when working with a family business, including mentoring, development of business vision and goals, and making certain that shareholder opinion is considered.
Chapter 10 discusses how a board that includes independent directors can help address issues and challenges faced by older, more complex family businesses in the second generation and beyond.
Chapter 11 is targeted to the directors of family enterprises, helping them determine how they can add most value to the enterprise by asking the right questions, supporting the CEO and helping draw a line between family issues and business issues. This chapter also helps director candidates determine if a position is appropriate for them.
Chapter 12 is our "Call to Action," summarizing our perspective on the value and contributions of an active, independent board.
Finally, the appendices provide examples of specific documents family businesses use to develop and manage their boards.
Examination of these and other issues is augmented by profiles of real life family businesses and their boards of directors. These profiles highlight how boards have supported family enterprises in a variety of ways, from goal setting to problem solving. They serve as vivid and provocative examples of the value a carefully constructed and active board of directors can bring to family businesses of all sizes and levels of complexity.
With all the advantages apparent in the presence of a board in a family business, why are so many family businesses unwilling to commit to a strong, effective board? We'll begin considering that question in the next chapter when we discuss the truths and myths that surround a board's makeup and function.CHAPTER 2
Truth and Myths about Boards: Meeting the Challenge
Every business must name a board to meet legal requirements. In our survey, we found that many family businesses stop there. Only 48 percent of respondents have a board that meets more than two times per year. Boards that meet no more than every six months cannot effectively support management during challenges, nor can they provide maximum value to key strategic decisions.
We commend families that have taken the first step to formalizing governance by organizing a board that meets regularly to oversee the business. But it is important to take the next step further, adding independent directors who bring objective oversight and perspective, which significantly enhances board value. Independent directors play a crucial role in holding management and owners accountable and by injecting fresh, unique perspectives into strategic decision making. They bring a level of objectivity free from familial relationships or history with the company.
While data and experience support the value of independent directors, our survey shows that only 25 percent of companies with active boards (those that met three or more times per year) had two or more independent directors on their boards, and 21 percent had three or more independent directors. Even for companies of sales greater than $100 million, only 58 percent had active boards and only 33 percent had three or more independent directors.
In our experience, independent directors are the richest resource available to family-owned companies. So, why do so few companies take advantage of this resource? We have seen that fears about relinquishing control, admitting weakness, or finding directors who truly understand a family's situation limit use of this valuable tool. Examples in this book show that most business owners' fears about independent directors vanish in the light of experience.
For many family businesses in our study, owners and CEOs felt that independent directors brought new ideas, perspectives, insights, or self-confidence. In many cases, independent directors acted as catalysts for important strategic, financial, and succession planning. Almost universally, owners and CEOs reported strategic insights or organizational suggestions that were invaluable.
Independent directors served a critical role as a confidential ally to the chief executive and/or owners in grappling with knotty succession or family issues. Almost unanimously, these owners reported that independent directors have improved the quality of decision making at their companies and increased their chances of perpetuating private ownership, should they choose to do so.
Here are two real-life examples:
One entrepreneur credits his board with helping his specialty baked goods concern develop an upscale image and a brand name for its new line of cookies. While the board members did not name the products or come up with the packaging design, they really pushed management to define the image they were looking for and asked questions that helped management clearly identify their target customers. "You can see the influence of the board here," says the owner, proudly showing off an array of attractive products.
Another family-held concern says its independent directors correctly refocused top management's attention toward strategy and long-term planning and away from day-to-day operating details. One director cites a specific board conversation: "Management asked for our input on a decision to invest in new equipment for the plant. The board members asked management their long-term plan for the product categories that would be produced with the new equipment. We had a concern based on some earlier conversations that this product line may be phased out in the next few years." The board encouraged management to identify a three-year plan, including projected product volumes by category to aid in capacity-planning decisions. The board "has really helped us to move the company forward," says one family member.
Excerpted from Building a Successful Family Business Board by Jennifer M. Pendergast, John L. Ward, Stephanie Brun de Pontet. Copyright © 2011 Jennifer M. Pendergast, John L. Ward, and Stephanie Brun de Pontet. Excerpted by permission of Palgrave Macmillan.
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