Peter Breen is a Senior Partner in Heidrick & Struggles' London office and is a member of the European Board Practice. His work in executive search has covered a wide range of executive and non-executive appointments, from small entrepreneurial start-ups through medium-sized businesses to large global corporations.
Many family businesses may feel they are insulated from the current pressure on improvement of corporate governance but could benefit from the wisdom, experience and family detachment that a non-executive director has to offer
Post Enron, WorldCom, Vivendi, Ahold, etc – there has never been more concern and emphasis on the way that companies are run. And the epithet of 'well managed' has never been more sought after by businesses.
With the ever-intrusive behaviour of the media, coupled with the all pervasive nature of internet communications, no business these days can operate under a cloak of secrecy – transparency is the order of the day. And the family business is no exception.
The family business in changing times
In today's uncertain world, possibly the only certainty that businesses can factor into their planning considerations is change. And here's a paradox – it was Winston Churchill who said "to improve is to change, to be perfect is to change often". How do family businesses the world over adapt to change? The one constant as far as family businesses are concerned is the constancy of family involvement – either as owners or as owners/managers, but all family businesses want to see the perpetuation of the family name, involvement and reputation – so that is one change that they don't want to see. In previous issues of Families in Business we've read with interest some of the things family businesses can do and are doing to foster and implement change. It is the central tenet of this article that one of the least painful and one of the potentially most effective means of facilitating change is to reinforce the board of the family company with outside 'independent board directors' (an expression that we prefer over the potentially pejorative 'non-executive', although this article will refer to non-executive directors (NXDs) throughout).
The contribution of the NXD
One enduring benefit that has come out of the post-mortems on various corporate scandals is the ubiquitous awareness of the need for good corporate governance. And we're not just talking about box-ticking or compliance with the latest requirements of a Sarbanes-Oxley or Higgs Report, but rather the effectiveness of the way boards operate. Enron complied with many of the 'box-ticking criteria' before it slid calamitously to its collapse. No, boards are increasingly challenging the value they get from the totality of their top people – not just executive management but NXDs too.
So, while family businesses may believe that they are insulated from – or at least independent of – the present pressure on improvement of corporate reporting and governance in the public domain, they can benefit from looking behind the headlines and seeing what is occurring in public companies.
The recent Heidrick and Struggles Corporate Governance in Europe Survey paints a picture of boards that have become more independent and more hard working with audit, remuneration and nomination committees on the board and rising board compensation to reflect increased responsibilities and work involvements for NXDs across Europe. And although the survey registered the most significant improvement across Europe since the original survey was undertaken in 1999, concern remains. Companies from countries that have been the slowest to embrace best practice, such as Spain, Portugal and Italy, have by far the smallest proportion of non-national board members and could be criticised for being too insular. Boards of family businesses that comprise a majority, if not a totality, of family members can be similarly fairly criticised for being too inward looking.
Enlightened chairmen and CEOs are putting large amounts of effort into further developing the 'soft' factors that make boards efficient working teams. These factors include a balance in terms of background and experience; encouraging open and participative discussions; using board reviews to make boards aware of their blind spots and hidden agendas; and defining steps to overcome these weaknesses while taking responsibility for both board and senior executive succession planning.
The attractions and downsides
Of course, attractions and downsides will all depend on the relative stage of maturity of the family business.
However, for the family business seeking to diversify or to bring in outside expertise – from similar or complementary businesses – recruiting relatively heavyweight NXDs is an ideal way to address all issues.
Although there is pressure, post Higgs, to bring a younger genre of NXDs to the scene, there is a limit as to how much external involvement a busy executive has over and above 'the day job' and so a significant number of NXDs are older. And with age comes wisdom and experience – two talents that can be of incalculable benefit to a board. Equally, with the maturity of age, NXDs are less likely to be fazed by family squabbles or sibling rivalries and be able to help the business focus (or refocus) on the relevant business issues.
They may – and very often do – bring from their industry knowledge the potential to create, with the board, a new vision for the business and a new strategy for growth that ensures family control, increasing wealth, benefits and enhancement of the brand (the family name).
The family members of the board, however, must be open to the NXD's input. One of the best ways to ensure this is a carefully prepared and worded job description for all board members, including those from outside the family, before such moves are made and for the Chairman (family member or not) to firmly remind all board members of their duties and responsibilities until the smooth conduct of the board becomes second nature.
How can independent directors create value for a family business?
Typically, contribution of NXDs to a company they serve comes through a combination of roles that they play on the Board:
Objective outsider: Complement the vision of the family running the business with an objective external perspective.
Strategic advisor: Contribute to the quality of strategic decisions by sharing relevant knowledge and experience.
Mentor: Serve as a 'sounding board' and a source of candid evaluation and mentor advice to the executive team.
Ambassador: Be instrumental in strengthening the company's reputation within its industry or vis-à-vis its target clients.
Check & balance: Help balance interests of various stakeholders in the decision making process, oversee performance of the company against key financial indicators and help monitor business risks.
A review of the current supply of directors' contribution in these roles as well as the future demand, given the strategic priorities of the business, can be most helpful. Such a review will be useful both at the outset, in drawing up the 'ideal', most complementary profile of a new independent director, and later, in selecting the most appropriate individual out of a range of alternative candidates.
Here in the UK, post Higgs, continuing pressure for transparency and objectivity in the selection process for NXDs is more likely to result in new appointments to the board being based primarily on skills.
Boards of many businesses today are still a product of their past, rather than a reflection of their future but the remedy is within easy grasp.