Adding independent directors takes your board to a new level
Soon after a family business recruits the first independent directors to its board, the business owners commonly marvel, “I am impressed that such remarkable and accomplished people would join our board of directors.” Within two years the same owners often remark, “Adding independent directors was the best thing we have done in our recent history.” The upgraded board has become an extension of management’s capability and a source of confidence for shareholders.
When asked if they were concerned about sharing control of the company with independent directors, owners say, “It was a concern right up until I started interviewing the candidates. The good ones wanted two things: a chance to help us take advantage of their experience and the opportunity to mix it up with other smart people and learn something they can take back to their own shop. Neither is threatening.”
Family business owners who recognize the value of an independent board and want to establish one have some basic implementation questions. What are the considerations? Are we ready for independent directors on our board? What do we need to change to become ready? What will this mean for family members who currently serve on our board? Will some be displaced? If so, how do we do that without hard feelings? And where do we find independents?
Getting buy-in from the family
Common situations before independent directors are recruited are an inactive board (one that exists “in name only”), a board composed solely of family members or an “all-insider” board made up of family members, non-family managers and/or one or two advisers to the business. The challenge is, how does one convince directors on these boards to step down and make room for new independent directors no one knows? Some business-first family leaders will bite the bullet and directly ask for resignations. Most will want a more family-friendly solution they can sell.
A board chairman and his CEO nephew had successfully served on their board for many years with six of the chairman’s siblings. One was the CEO’s mother. Considering what was needed for the third generation of cousin owners, the chairman and the CEO envisioned a future board configured with three independent directors and four shareholder directors. Rather than focus on who must leave the board, they presented the board with a plan to take the total number from eight to 11.
They requested two things: First, accept and work with independent directors; second, agree to an orderly, honorable and respectful transition to three independents and four owner directors over five years. The plan was, “Let’s get the best independents we can find and work with them for a while. After the experience of their participation and contribution, we agree to reduce our number from eight family directors to four. Assisting us will be natural age-related retirements, making room to add third-generation members, and the development of qualifications to replace current branch representation.” The most powerful influences were alignment on their stewardship purpose and continuity vision, and agreement that an independent board would benefit their children. The plan was called adding without replacement.
Another way to persuade family owners to adopt an independent board is to present it as a way of avoiding threats to the family. For example, independent boards can help prevent:
- Bitterness between generations, e.g., the younger generation wants to apply accountability to the senior generation, whom they see as retaining control and not listening.
- Bitterness or alienation between branches, e.g., one branch of the family feels left out and their solution is to load up the board with their own family representatives.
- Struggles over leadership, e.g., a senior leader dies suddenly without preparing the next generation, all of whom immediately collide with one another trying to fill the leadership vacuum.
Fully preparing for an independent board requires changes the family will be reluctant to accept, such as sharing financials and opening up about private family matters that impact business operations and ownership alignment. Beyond that, preparation for an independent board includes a willingness to consider not-invented-here ideas and the discipline to respect the divisions among shareholders, governance, family and management.
Savvy business leaders take key family members to governance seminars to expose them to other family business owners who might dispel myths, provide perspective and directly address concerns. Some leaders invite speakers to join a family meeting; others individually approach influential family members to persuade them to support an independent board.
Minimizing the perceived threat of independent directors, emphasizing the expected benefits and naming the pitfalls to be avoided can be useful in combination. However, for some business families all it will take is to explain how an independent board will help avoid the regrettable experiences endured by members of the previous generation.
Design the future board and independent director profiles
Adding without replacement is a tactic that works well for high-trust business families. For those with lower trust, what’s needed for the tactic to work is a vision of the board’s ultimate or target configuration. Many owners will enhance trust among shareholders by specifying that the future board will have more family seats than independents. Then, there should be an explanation of what independent skill sets and backgrounds will support the transition to the future board. As a result, more specific profile details are possible.
What backgrounds and competencies do we want our independent directors to have? Many answer this question by considering business needs, the strengths of the management team and what the owner group brings to the table. A young group of business owner-operators may primarily look for independent directors who will add strength in particular areas such as finance or marketing, as well as a CEO who has successfully dealt with deep-pocketed competitors. A business that will soon undergo a leadership and generational transition may want at least one director in a family business that has been through it.
The project of finding good independent directors
An independent director prospectus will be needed for circulation to business and family owner networks. The prospectus describes the business, its history and family owner situation, what is expected of independent directors, how the board will work, what the board is expected to accomplish/contribute, the ultimate vision of the board if there will be transitions, the desired profiles of independent directors, meeting schedules and compensation.
Writing the prospectus is a most valuable exercise. It is not only a candidate recruitment tool but also a family owner alignment and consensus-building tool.
Many family business leaders have learned from trial and error that it is not enough to list only the desired characteristics; also important is a private list of what to avoid. Common on these lists are candidates who cannot in all situations be independent, those with outsized egos, those who will make the board their new job because they are retired and miss the action, and those who can’t handle the mixture of family and business. Culture fit is paramount.
A copy of the prospectus should go to anyone who might know individuals who fit the desired profile. The targets are referral sources. Well-networked sources will need more than a prospectus. They will also need follow-up. These busy individuals won’t read the prospectus carefully, and many won’t immediately interpret what is desired and what is not. Some will have experience with independent directors on family firm boards; most will not.
Recruiters have found that conversations with well-placed individuals are most productive and effective in producing the “I think I might know someone” result. Once a referral source understands, they can be encouraged to tap their own networks. For some family businesses it is possible to circulate a request for candidates from networks within the same industry. Many cannot. Family businesses that are outside of one’s industry, yet share the same strategic challenges, are a potential source of good candidates.
Often after a robust recruiting process, family firms find that if they are looking for one director, they have a choice of three who fit. If they are looking for two or three, they have five or six who qualify. That’s ideal and opens the door to the opportunity to ask, “What if we added more now?” and, “What are the different possible combinations?”
Recruiting, assessing and selling
After initial screening, the next step is a visit and interview. Just as with recruiting talented employees, it will be necessary to recruit and assess at the same time. The interview is also an opportunity to get greater family buy-in by including others. Using the private list of characteristics to avoid along with the desired trait and background profiles, multiple family members can participate.
Homework before interviews involves preparing answers to some questions on the minds of the most perceptive and best candidates:
- What is your business strategy, what goals do you want to accomplish and what tools and processes do you use?
- Can I trust you to take my contribution on your board seriously?
- Are you capable of managing the management, governance and shareholder boundaries?
- What is the condition of the family and its dynamics, and what’s the history?
- What family dynamics present challenges to the success of an independent board?How committed is the family to an independent board?
Not all of these questions can be answered in a first interview. However, the best finalists will want them answered before they accept. Materials available to candidates making their initial interview visit may include the following:
- The prospectus
- Marketing and sales materials
- Written historical accounts
- Public relations materials
- Media mentions
During initial interviews, the task is to give enough verbal information so that candidates may effectively judge whether they can make a valued, engaging contribution. So that those invited will say yes, the interview should also include promoting the family, its culture and purpose, with examples of why the business is better because it is family-owned.
A final consideration
As business owners pursue the steps to acquire independent directors, motivations will differ. Business leaders may want independents to assist with business topics and to help keep the non-operating shareholders confident. Young owners may want independents because it will help their elders listen. Non-operating shareholders may want oversight of management, their voices to be heard and assurances of fair application of power and privilege from those working in the business.
Independent directors can help with all these interests as they keep the peace through their objective positions on all matters and through the support provided by a business family that is committed to the success of an independent board.
Steve McClure, Ph.D., is a principal consultant with The Family Business Consulting Group (www.thefbcg.com).