Fredda Herz Brown is a founding partner of Relative Solutions. Sam Davis is principal at Relative Solutions.
Fredda Herz Brown and Sam Davis begin our focus on family business boards by explaining how resistance towards external advisors can damage the success of the board and suggesting ways to overcome it to ensure a harmonious business
Advisors to family enterprises continually cite the development of governing boards as the key to multi-generational success. No one can argue that such boards, with their outside members, can be of significant benefit to shareholders. Yet, family members and outside board members must develop effective working relationships if these boards are to be successful. For many families, this means overcoming their resistance to the institution of governing boards.
In fact, governing boards are only one of several structures that are necessary for family enterprise success. Many successful families have separate governance structures for family, shareholders, and the business. In our experience, while boards serve to represent the family/shareholders, they experience the greatest degree of resistance compared to the other structures. It is for this reason that families and their advisors may be better off honouring the family's resistance and progressing through a number of steps before instituting a governing board for their shareholders. Families resist the institution of governing boards for a variety of reasons. First- and second-generation families seldom see the need for governing boards with outside members because a relatively small group of founders and siblings are able to resolve ownership and management issues among themselves.
It is common in such cases for family ownership and management to be entwined and led by the founder or a sibling partnership. Typically, such family leaders favour flexibility and entrepreneurship over formal governance structures. Often, such families resist the creation of governing boards during the tenure of a senior family member whose ownership and leadership provides family members with the stability and security they desire.
Some families resist governing boards because they are not prepared to expose family relationships and financial information to outside scrutiny. These families may value privacy, especially when it comes to family relationships, and they view board governance structures as potentially intrusive. In addition, such families see governing boards as requiring time and financial resources they don't have.
The leadership of one family was adamantly opposed to sharing information about the family's holdings with outsiders other than their lawyer and accountant. Instead, they agreed to share financial information about their operating company with two outside members of an advisory board. Over time, they saw the value the strategic insights provided by these advisory board members brought to the business. Later, this experience made it possible to convert from an advisory to a governing board.
Other families rely on key outside advisors to represent family members and provide them with information and direction. Such families may resist boards with outside members thinking that their lawyers, accountants and financial advisors serve that function.
In these instances, both family leaders and their advisors fail to separate issues related to management with those related to ownership and family. Advisors will do their clients a great service by clarifying their roles in representing the business and by encouraging their clients to consider additional means for providing the shareholders and family with objective advice.
One family we worked with had its tax and estate attorney on the family advisory board without understanding the conflicting roles the individual was asked to play. When the family added two truly independent members to its board, those members questioned the difference in roles between board members and professional advisors. Only then did the family learn the difference and ended up only having outside directors who had no other professional ties to the family.
A wonderful place for a family to start overcoming resistance is with the creation of a family governance structure like a family council. Such family structures offer opportunities for engaging members in leadership development, education, and family connectedness. Families may find little resistance to creating a structure that ensures representation across generations and branches. In this way the family gets comfortable hearing different viewpoints and making decisions together.
One family that was fearful of exposing potentially negative family dynamics to outsiders focused instead on creating a family governance structure to enhance communications and education within the family. Their family council, representative of three generations of family members, initiated family retreats, a family newsletter, and a forum for educating younger members about the privileges and responsibilities that come with their family legacy. Years later, when the family created a
governing board, there was almost no resistance to exposing outside board members to the intricacies of the family's relationships.
With the broader viewpoint provided by the family council, the family may seek to define some shareholder/owner goals or mission for the business. It may become clear to the family about the kinds of assistance they need from advisors and what kind of information is necessary to enact their goals or objectives for their ownership interests. Our experience suggests that in this transition, the family shareholders begin to realise that family business advisors may assist the working family members and non-family executives on business and sometimes even ownership challenges, but they tend to do so without a shareholder viewpoint in mind.
Families need not see governance structures as forcing a choice between their capable, loyal advisors and other sources of input and oversight. Attorneys and accountants that provide services to the family business serve the family quite well by defining their scope to the business and should limit their scope to that domain. Similarly, the scope of work of financial planners and investment advisors is often limited to wealth management outside the business. The roles played by these advisors are valuable, but they tend not to address the needs of shareholders for oversight support and advice regarding the strategic direction of their business asset.
The family may want to consider the creation of an advisory board. The purpose of advisory boards is to provide an impartial view of the family's assets in both the industry and the family holdings. To provide the family with this objective oversight, board members must be free to offer viewpoints unencumbered by their relationship to various family constituencies. The creation of an advisory board is another step in the family's development and demands a systematic process that engages all of the shareholders and family. While stretching into the realm of independent advisors who are not being paid already by the business or friends of the family, advisory boards do not yet move into the arena of financial accountability and responsibility. Instead, they leave the ownership group to make those decisions in a less transparent manner.
To establish an effective advisory board, family members and shareholders need to take a number of prudent steps. Engaging both family members working in the business and those who do not, the shareholders can begin to define what is needed to best meet the company's and their own needs. These family members need to define how the advisory board will relate to the family, the shareholders and management. The family may want the advisory board to assist as objective advisors in leadership transitions, the selection or family executives, and in mediating disagreements born of family relationships. By clearly defining the roles of the advisory board members, strategic objectives and policy issues can be differentiated from management and operational issues.
The family's corporate attorney or other legal advisor can develop a set of by-laws that define principles that guide the functioning of the advisory board and the terms of its members. Family members, shareholders and management can define a process for finding and selecting board members, beginning with the establishment of criteria for board membership and terms of service. This process permits the family shareholders, working and non-working, to become more familiar with the business and its needs. The process of building an effective advisory board can provide families with a good deal of experience in working together and often many valuable lessons.
Enterprising families who resist the institution of a governing board my find success in pursing the steps identified here. By clarifying the roles played by professional advisors, creating family councils to facilitate family communications and education, and instituting advisory boards, families can enhance their functioning as family, shareholders and leaders in the family business.
Perhaps the most important benefit is that these steps permit families to deal stepwise with the resistance that all ownership groups tend to experience with regard to governing boards. On there own, these steps offer alternatives to governing boards that may be better suited to many families while still providing them with simple, low-cost structures necessary to ensure long-term success. By taking these steps, the relationships between family members and independent board members are likely to be enhanced and the family's advisory or governing board is much more likely to be effective.
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