Why Your Family Business Needs Family Members on the Board
Written by admin on September 22, 2022
In the wake of the pandemic and rising geopolitical tensions, many family business owners have woken up to the reality that the absence of a competent and engaged board undermines the resiliency of their family enterprise and poses a significant risk in an era of greater turbulence and uncertainty. What’s more, if family representation is missing from the board, it is difficult to align the interests of the owners with those of the company in a sustainable way. Understandably, boards often focus the bulk of their attention and oversight on what’s happening “below” them with respect to strategic planning and execution. In family companies, however, boards also need to track what goes on “above” them, among the owners. That’s what makes having a family director on the board so important — they’re ultimately accountable for aligning the competitive strategy for the business with the continuity strategy of the owners. The resilience of the family enterprise hinges on getting that alignment right. A strong set of family directors can buttress the board’s linkages “upwardly” and ensure that the owners remain united and committed to the success of their enterprise.
Imagine that your family owns and controls a fifth-generation multinational conglomerate that’s a leader in the food manufacturing industry. You’ve recently been appointed to serve on the board as a family director from your generation. Early in your tenure, Covid-19 hits and suddenly, fundamental questions that challenge the very viability of the enterprise confront a board that’s dominated by a non-family CEO and a majority of independent directors. Faced with the prospect of plant shutdowns and severe disruptions to the supply chain, management proposes an emergency plan to protect the company’s cash reserves by immediately initiating historic layoffs, a shutdown on all dividend payments to family shareholders (75 of whom depend on dividends for their livelihood), and the possibility of selling shares to the market at a deep discount, threatening the family’s control of the business.
At this juncture you, along with your other cousins on the board, are called upon to ensure that whatever plan is ultimately adopted protects not just the viability of the company and management’s agenda, but also the family’s unity and its commitment to the enterprise. Within the subset of emergency measures that need to be taken, some are more compatible with the family’s purpose, values, and vision than others. Your role is to help the board to tease these strategies out in a way that the CEO and independent directors can appreciate and hear. You then need to turn around and face your family shareholders, confronting them with the sacrifices that need to be made for the sake of protecting the family enterprise. Manage this challenge badly, and your company stands to lose the good will that your family has cultivated for generations with employees and customers. Worse, you may stand to lose the loyalty and support of devoted family shareholders. Manage it well, and you can bring along these key constituencies to align behind the emergency measures and, in so doing, take full advantage of the long-term view, the expediency, and the deep reservoir of trust from which long-lasting family companies derive so much of their resiliency.
As the fulcrum between the family owners and senior management, the board is the place where these dilemmas come to a head. Directors are ultimately accountable for aligning the competitive strategy of the business with the continuity strategy of the owners. The viability of the family enterprise hinges on getting that alignment right.
Buttress Your Board and Enhance Resilience
Family company boards are often an underutilized resource — they operate somewhere along a continuum between a rubber-stamping group subservient to the owners and a de facto executive committee accountable only to themselves. Some have never been formally convened, let alone staffed, or empowered to provide adequate strategic and continuity oversight. In the wake of the recent pandemic and rising geopolitical tensions, many owners have woken up to the reality that the absence of a competent and engaged board undermines the resiliency of their family enterprise and poses a significant risk in an era of greater turbulence and uncertainty.
In this new context, enhancing the capacity of family company boards with independent and family directors capable of collaborating effectively to add value for both shareholders and senior management has become a strategic imperative. Many family business owners have consequently moved to upgrade the function, composition, and processes of their boards. Oddly, while the governance literature has paid a lot of attention to the role of independent directors on family enterprise boards, the role of family directors has been largely ignored.
Select and Groom Family Directors Carefully
My firm’s recent analysis of the world’s largest family companies (including many of the largest family-controlled public companies) suggests that family directors constitute on average one third of the boards of these enterprises globally. Unfortunately, very few family companies have programs in place to develop, vet, select, and assess them.
While, technically, all directors are equally accountable to shareholders, family directors are often called upon to fulfill a unique set of functions that only they can typically play — precisely because they are members of the owning family. These functions require a particular set of competencies, like the ability to integrate the family’s values into strategic conversations or the communication skills to explain difficult board decisions to the family (such as reducing dividends), or the capacity to confront leaders of the senior generation with challenging ideas, such as the need to revitalize product lines in ways that are more compatible with the needs of younger consumers. As the young family director in the opening example asked the chairman of his board, “Lucrative as it may be, why are we putting out a product that I wouldn’t want to feed to my kids?” These skills help to preserve the family’s unity and commitment to the enterprise, a unique and powerful source of organizational resilience.
Effective family directors who understand the history of the enterprise can serve as an institutional memory for the board. They are also uniquely positioned to be ambassadors of the owners and stewards of the enterprise’s culture. Most importantly, when they know how to earn the respect of the independent directors and management, they can elevate the family’s priorities and values so that these can be legitimately and unapologetically integrated into the company’s strategy and the board’s long-term deliberations about risk, growth, and leadership. They’ve earned their directorships on their merit and understand that they serve on the board to represent the interest of all shareholders and not just those of their family branch. These skills are always essential on the board, but are particularly powerful when confronting the kinds of post-pandemic decisions that may easily polarize relationships and undermine trust among the owners, the board, and management.
Consider the case of a fourth-generation family business board that was wrestling with how to attract and retain top millennial and Gen Z talent in the post-Covid era. The non-family CEO, with the backing of several independent directors, advocated for a fast return to pre-Covid work schedules, insisting that everyone physically return to the office. Aside from increasing infection risk, this stance made recruitment of badly-needed younger employees much harder. After considerable debate, it fell on the family directors to propose a more nuanced post-Covid policy that differentiated jobs that could be productively performed virtually from those that required in-person attendance. These family members also openly acknowledged both sides of the dilemma and reminded everyone on the board of how critically important the safety and fair treatment of employees was to the controlling family. They also brought forth compelling examples of the long-term benefits derived from the family’s decision to reduce everyone’s salaries and pause the dividend, sharing the family’s commitment to employees and their families during the Great Depression — an important source of pride to the owners and a wellspring of loyalty for employees.
Few family companies have programs to proactively develop family directors with these unique and valuable competencies. Fewer still have processes in place to select, onboard, and assess them that have rigor and integrity. Instead, family directorships are too often viewed as prize appointments to be handed down to branch representatives only when senior branch members retire, with little attention to the competencies needed to perform these essential governance functions. This naturally undermines the resilience of even the healthiest family enterprise.
Build a Strong Bench
Continuity requires steadily building a bench of family members with the potential to serve effectively as family directors. To accomplish this, leading family businesses develop mentoring programs for which they specifically recruit their most trusted independent directors to coach and nurture high-potential family candidates. These companies also build designated “learner seats” to expose aspiring family directors directly to board deliberations. Those families that have holding companies carefully rotate family director candidates through the boards of operating (or partner) companies and, in so doing, expose them to the governance and strategic issues that play out in different segments of their business portfolio. These families also require director candidates to invest in their ongoing governance education, insisting that candidates enroll in the best programs on family business governance and on boards in their respective communities. A key component of their development is helping them learn how to manage the boundaries and dilemmas that come with simultaneously serving as shareholders, directors, family members and, for some, as executives in the business as well. When done effectively, in addition to adding a youthful perspective and voice in these fora, it also furthers their understanding of the whole enterprise.
Recognize the Importance of Family Representation on the Board
If family representation is missing from the board, it is difficult to align the interests of the owners with those of the company in a sustainable way. Understandably, boards often focus the bulk of their attention and oversight on what’s happening “below” them with respect to strategic planning and execution. In family companies, however, boards also need to track what goes on “above” them, among the owners. This is especially so in uncertain times, when boards are called upon to make tough decisions under duress.
A strong set of family directors can buttress the board’s linkages “upwardly” and ensure that the owners remain united and committed to the success of their enterprise. Unfortunately, these initiatives often get denigrated as “touchy feely” or “kumbaya-ish.” However, consider that investing in the development of thoughtful and competent owners (especially, those likely to serve on the board) safeguards the most cost-effective source of capital for the enterprise and its long-term continuity. Many, if not most, family companies fail not because they didn’t perform in the marketplace; they fail because the owners failed to engage thoughtfully and proactively with the governance of their enterprise. What could be more important to supporting resilience?