April 11, 2018
Questions to Ask Before Taking a Board Seat - Boards Can Quell Family Disputes - Boards Make the Best Dance Partners
When Cooler Heads Prevail
Independent board members can quell family business disputes by reminding family directors to ‘wear the right hat’ in the boardroom.
Chris Vernon, fourth-generation president and CEO of The Vernon Company in Newton, Iowa, has an immediate response if his siblings request a raise: “Write it up, present it to me, and then I’ll present it to the compensation committee for you.”
Vernon’s company, which manufactures and markets promotional materials, has a majority-independent board, with five outside directors and two family members (Vernon and his father, who is the chairman).
Independent directors serving on the compensation committee review and approve pay recommendations for family members and top officers at the company.
“Frankly, that’s one of the conflict reducers for me,” Vernon says.
In family companies, personal and business issues are often inextricably intertwined. Independent directors — if they’re the right people for the job — can help prevent or manage some family disputes, such as those involving conflicts of interest. When it comes to family compensation, for example, the issue on the table is extremely personal.
Decisions about pay or promotions for family members “should be approached dispassionately, based on merit — and that is easier for an independent director to do than a family director,” explains Doug Baumoel, founding partner at Continuity Family Business Consulting. “You want to make sure that the decisions are not compromised by preexisting relationships.”
‘Board hat’ or ‘family hat’?
In some family companies, particularly those just beginning to think about governance, independent directors must “educate family members about the whole notion of what it means to be a fiduciary,” says Pascal Levensohn, managing director of Dolby Family Ventures and a corporate governance adviser to family offices and institutional investors. (Fiduciary boards are tasked with protecting shareholders and voting on decisions that are binding for company management — in contrast to advisory boards, which are more informal and play no binding regulatory role.)
In these situations, independent directors should lead by example, Levensohn says. His advice to directors: “Be the voice of what’s in the best interests of all the stakeholders, and make sure people understand that that’s the position you’re taking.”
Independent directors must be scrupulous about maintaining neutrality, Levensohn cautions. “In order to be effective and remain effective, an independent director needs to aggressively self-police in order to maintain a perception of independence.” Directors, he advises, must “try to be friends equally with different factions.”
Phil Clemens, retired chairman and CEO of The Clemens Family Corporation — which is based in Hatfield, Pa., and has holdings in pork-processing companies (including Hatfield Quality Meats), real estate and transport — now serves on the boards of three companies and eight non-profit organizations. Clemens says he often reminds family directors to be aware of “what hat they’re wearing.” In the boardroom, Clemens notes, directors must wear only their “board hats,” not their “family hats.”
“This comes up a lot,” Baumoel observes. “Sometimes families sort of devolve to silos of ownership. The presumption is, ‘My brother is representing our branch on the board.’ And when that brother sits down at the board table, he’s got to cleanse his mind of that. He’s got to say, ‘I’m not here to represent my branch; I’m here to represent all branches.’ And in that role, he should be able to make decisions for the benefit of all shareholders.”
In a family business boardroom, it’s often hard to separate family decisions from business decisions.
“Let’s say the issue is selling the family business,” Baumoel says. “If I’m the next-generation leader, I have a stake in that outcome that’s personal. And maybe the independents can decide if now is the right time to sell better than I can.”
The key is fair decision making, Baumoel stresses.
“With every decision you make on a family business board, you have to consider if you’re in a conflict-of-interest position,” he explains. “And you have to always ensure that you’re using objective data and that the right decision makers are at the table.”
Vernon says occasions do arise when he must recuse himself. “There have been times when I’ve stepped away from a conversation and just said, ‘Look, I can’t vote on this matter, or I can’t be a decision maker on that matter, because I’m too intimately involved,’” he reports.
Limits of the role
Family members should understand the limits of independent directors’ role. While their objectivity can help stave off disputes, they shouldn’t be conscripted as family business consultants.
“My view is, the best way to resolve the conflict issues is to bring in a specialist consultant — someone who is paid to resolve the issue who is not a corporate fiduciary,” Levensohn says.
Experienced independent directors will speak out when boundaries are being crossed.
“I oftentimes tell people, ‘Don’t bring me into your family disputes. I am not here as a psychologist, or a psychiatrist, or a family counselor. If you have a family issue, it needs to go outside of the boardroom,’” Clemens says. “‘That’s not why I came on [the board]. If it has to do with the business, let me help you there. [The board] can help you make the business run as successfully as possible and drive shareholder value.’”
On the other hand, Clemens points out, if a recalcitrant family member is disrupting the business, it’s within a director’s purview to recommend the removal of that individual from the company.
While it’s true that independent directors come to the table without family baggage, those who view their role as peacemakers rather than decision makers can actually enable a family director’s bad behavior, Baumoel notes.
“Not everyone is going to be happy all the time,” Levensohn points out. “You can’t please everybody, if you’re trying to steer the right course for the overall organization.”
Effective independent directors help family business leaders think things through clearly from a business standpoint. “They try to take all the emotion out of the decision, because oftentimes those decisions become extremely emotional,” explains Clemens. “Independent directors can really help family members on the board to act on facts, not on feelings.”
They do this by asking the right questions. When Clemens joins a board, he tells family leaders, “‘My job is not to come in and give you answers. My job is to come in and ask you questions. And I’ll be asking you questions that you either can’t or won’t ask yourself.’ And in fact, some of those questions actually help solve the family conflicts that are happening.”
Clemens cites examples of such questions: “This doesn’t seem to make business sense. Why are you doing it?” Or: “This manager doesn’t seem to be performing well. Are you keeping them on just because they’re a family member? Do you see something in their performance that we don’t see?”
Before engaging independent directors, the family must clearly identify a shared vision for the company, Levensohn says. “Once you do that, you can keep coming back to it, saying, ‘Hold on a second. I think we all signed on to do the following. And let me explain to you why X is not consistent with achieving that shared goal.’”
It’s essential to ensure that prospective independent directors are the right fit for the family culture.
A soft-spoken individual likely won’t fare well among directors who debate like street fighters. Families who shy away from confrontation need an independent director “who is willing to confront, but able to do it in the right way,” Clemens says. If the fit isn’t right, he predicts, the family will shift their focus to the director’s personality rather than the issue at hand.
At The Vernon Company, even though Vernon and his siblings don’t always see eye to eye, everyone understands the independent directors are committed to making good decisions in the best interests of the business and the family, he says.
“I’ve actually had family members, after we’ve had disagreements, who have said, ‘You’ve really chosen a great board,’” Vernon says.
Should You Take That Board Seat?
Questions to ask before becoming a private company director.
An invitation to serve on a board of directors of a private corporation can be an interesting, even flattering opportunity.
Before accepting an appointment to a board, however, a potential director should engage in an in-depth review of the corporation. They should also ask pointed questions of the corporation’s management and the other directors on the board to obtain a complete picture of the state of business and operations, including any potential legal and business risks that may expose the director to unwanted liabilities.
Here is a checklist of questions to ask before you accept a position:
• Why is there an open seat on the board? Was the size of the board increased or is there a current vacancy? If the latter, why did the former director leave the corporation?
• Are there existing conflicts? Are there any areas of conflict or disagreement among the controlling or major shareholders, the directors or between the board and the senior executives? If there have been any such conflicts or disagreements, how have they been resolved? Do these conflicts relate to a systemic issue or does it appear as though the conflicts have been addressed and will not arise again?
• What is the financial condition of the corporation? Have there been, or are there expected to be, any significant changes in the finances of the corporation? If so, why? How often does the board receive information relating to the finances of the corporation? Does the board have a meaningful opportunity to review and ask questions about those materials? In addition, one should ask to review the financial statements of the corporation.
• Is there a succession plan in place? What is the plan for dealing with a corporation’s loss of a key member of the board or a senior executive?
• What is the corporation’s ability to indemnify its directors and what is the strength of its director and officer insurance coverage? You should consider the corporation’s financial ability and legal commitment to indemnify the directors and advance expenses for defending litigation. Indemnification agreements should be in place for all directors. Adequate director and officer insurance coverage can fill the gap left by a corporation’s legal or financial inability to protect directors through indemnification.
• Does the corporation comply with its corporate governance and other policies? Do any shareholders have significant influence over the decisions of the board or does the board have independence with respect to its decision-making? Are any shareholders (such as preferred stockholders) entitled to appoint a designated director? What is the dynamic between the board and the senior management of the corporation? What types of committees does the corporation have (e.g., audit committee, compensation committee). Does an independent committee deal with decisions regarding insider transactions?
• Are there any pending or threatened claims against the corporation or any directors? If so, what is the nature of the claims? What was the outcome of any past claims? Did the corporation fully indemnify the directors for such claim and advance expenses to the directors on a “pay as you go” basis? Was insurance available to defend this claim?
• Has the corporation adopted exculpatory provisions permitted by state statute? These “opt-in” provisions generally prohibit suits based on acts or omissions that would constitute negligence, but would not protect against claims based on breach of the duty of loyalty, intentional misconduct or bad faith.
Getting a clear understanding of these issues is critical to a decision to join a private company board.
Allan Grauberd is the Chair of Moses & Singer’s Securities and Capital Markets Practice group, practicing primarily in the corporate and securities areas, including corporate governance issues. David Lee Kovacs is a partner in Moses & Singer’s Corporate/Mergers & Acquisitions group, practicing in most areas of corporate law involving complex business transactions. Lindsay R. Kaplan is a partner in Moses & Singer’s Corporate/Mergers & Acquisitions group, representing both buyers and sellers with regards to mergers, acquisitions, and divestures across an array of industries.
Editor’s Letter: Boards Make the Best Dance Partners
Business disruption is becoming ordinary.
Airbnb’s latest offering goes beyond just renting out homes to travelers. Its new program — “Experiences” — offers customers an array of local adventures such as Latin dancing in Philadelphia and crepe cooking classes in Paris.
Kodak is investing in blockchain, the technology behind the popular cryptocurrency Bitcoin, to create KODAKOne, an image rights management platform, and KODAKCoin, a photo-centric cryptocurrency “to empower photographers and agencies to take greater control in image rights management.”
And the disruption master Amazon is looking to cut out the delivery middleman with plans to launch a delivery service for businesses, going head to head with the likes of FedEx and UPS Inc.
There’s hardly a day that goes by without a headline about another new business model, product, service or technology that’s going to “change everything.”
It’s enough to make business owners and managers want to book an Airbnb rental off the River Seine and go make crepes.
But before you put on a beret and pack a bag, consider how a board of trusted and knowledgeable advisors could help you navigate disruption.
To that end, this issue is focused on business disruption and how a board of directors can guide private companies through the constant change and find ways to capitalize on it.
Julia Klein, the CEO of C. H. Briggs Company, one of the nation’s largest independently owned distributors of specialty building materials, and a veteran private-company board director, shares her thoughts on how boards can keep private companies ahead of the disruption curve.
Klein will also be a featured speaker at our upcoming Private Company Governance Summit, Boards & Business Disruption, in Washington, D.C., this May. (Check out pages 19-21 for details.)
This issue also includes a piece by senior editor April Hall on the value women bring to private company boards; an article by Family Business Magazine editor Barbara Spector on how independent boards can quell family conflict; and a piece by me titled “The Tech Tumult: Good governance can filter out the noise & unearth real opportunities.”
We also share private company governance best practices from past winners of our Private Company Boards of the Year award. One tip that kept coming up from our past winners was that private boards benefit from using the rigorous standards of public boards as a roadmap.
In the end, it’s all about having someone who can really challenge the status quo.
As Roger Nanney, the national leader of Deloitte Growth Enterprise Services, puts it: A board can bolster private company’s success in the midst of changing conditions by challenging owners and management and “asking the right questions.”
Boards are valuable partners; and it takes two to Tango.