A number of family businesses are not utilizing a potentially valuable resource for both the business and the family. Whether they are founders or successors, owner/managers should consider including independent directors on their board. This can be especially valuable if they are considering transitioning the business to the next generation.
As an example, I worked with a Michigan lighting company that had been in business for 25 years but was having trouble defining the roles for the new generation of leaders. As a result, we assembled a team of three individuals, unrelated to the family or business, to assist in identifying how the operational, financial and business development functions needed to be performed. From there, they looked at the prior experiences and strengths of each successor and put together a management plan for promoting each of the new leaders. The team stayed in communication with “mom and dad” and tweaked the plan as things progressed. As a result, today, each of the successor children plays a vital role in the success of the company.
Research indicates that only 10 to 15 percent of mid-sized family-owned companies have significant independent director representation on their boards. After considering the benefits of having independent directors, it’s hard to conceive why a large portion of family businesses avoids this avenue. Independent director representation on a well-structured board can benefit the family business in the following ways:
- As a vehicle to establish a more permanent and professional form of corporate governance.
- As mentors and confidants for next-generation managers in the business.
- As a networking source.
- As experienced executives.
Additional advantages of an independent board include its service:
As a sounding board. Qualified outside directors offer management a dedicated body of experienced executives to bounce ideas, problems, solutions and opportunities off of in a highly confidential setting.
As strategic consultants. Independent directors are a valuable source of constructive challenge to management’s thinking on a wide range of strategic issues. In my own family business, we used a small number of known trusted resources that understood our family norms and business challenges. Over time, they became our independent directors.
As a source of added credibility. A well-designed outside board can add an element of credibility to the existing credentials of the company. Bringing in someone well known in the community who understands your business will help with your immediate problems as well as provide contacts and insight to other local resources.
For an independent board to be a valuable asset to the family business, the right people have to be in place. Selecting appropriate candidates can be difficult but very rewarding down the line. Read my next blog entry to discover some of the keys to establishing an effective independent board.