Declaring Board Independence
Family business leaders often fear that an independent board will cause them to lose control of their companies.
That fear, says Joe Schmieder, a principal consultant with The Family Business Consulting Group (FBCG), is largely unfounded. He says his firm has seen a significant increase in family businesses forming boards over the past 10 years.
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Shareholders can fire board members, Schmieder notes. “In our time working with hundreds of boards, we have not seen more than a couple of incidents where the owners had to take out their board because they were not compatible with the direction the owners wanted to go.”
Business owners generally appoint board members who have a genuine commitment to helping the company, Schmieder says.
FBCG studies have found that both advisory and fiduciary boards improve a company’s financial performance. The greatest improvement occurred when the majority of board members were not family members or owners of the company.
Family Business Consulting Group’s Joe Schmieder offers tips for getting the most out of a private company board:
• Get the right people at the table. You want a complementary mix of people with different views and perspectives.
• Oversee strategy development with periodic deep dives. Look at everything in the business from a “crop duster” level, then decide what needs a deeper and closer look.
• Be specific about advice you are seeking for each meeting. Sending out a list of questions beforehand leads to much more productive meetings.
• Evolve from “over presenting” to more quality discourse. Have at least a 50/50 ratio of presenting at a meeting to leaving time for discussion/questions.
• Manage family business paradoxes. Make sure stability and innovation don’t clash with each other.
• Conduct executive sessions, as well as independents and family sessions. Smaller groups can lead to better ideas and results.
• Gather top concerns from outside advisers’ businesses. Get thoughts and issues from people not in your business, they can give input into what they’re seeing in the outside world.
• Conduct offline communications and committee work. In-person communications and meetings are crucial (obviously in this current COVID-19 situation, exceptions have to be made).
• Assist with family board member development. Only 10% of family boards have a process in place to improve members’ performances.
• Refresh with new advisers every four to eight years. Crucial to get new blood and new voices in the conversation.
• Conduct evaluations and provide meaningful minutes and notes from every meeting. Check progress from meeting to meeting, to make sure goals are being met and targets hit.
There are several types of advisory boards, Schmieder points out. Some consist of family members and the company’s paid consultants or service providers. Others are made up of family members plus advisers who are truly independent.
“These are people who are not cronies of any of the family members; they’re not the attorney or the accountant or the family adviser; they’re people who have worked in maybe a similar industry, but coming from walks of life that are truly independent.”
While an advisory board can help with long-view strategizing, neither management nor the owners are required to heed its advice. A fiduciary board, on the other hand, has a duty to make decisions in the interest of all shareholders, not just the majority owners.
“An advisory board with independents works extremely well because they are able to look at the big picture in a more dispassionate way,” Schmieder says. “And certainly, a fiduciary board with independents works well because they’re only focused on the shareholders and the company.”
It takes about three or four board meetings to establish good chemistry between independent board members and family members, FBCG consultants find.
Are family members who may have less experience intimidated by their board?
“Yes and no,” Schmieder says. Independent board members generally have impressive résumés and that can spur anxiety, even if the board member doesn’t have an intimidating personality.
“We try really hard when that’s the case to dial that back. Actually, what works very well is having that highly educated, experienced director become a mentor to some of the younger family members.
“And on the other hand, you have some family directors that intimidate the independents. They’re not always sure where the family’s coming from because of the extensive history that they have with the company, which is very valuable.”