Family Business Boards: Interest Is High, but Founders Have Their Concerns
We see more family companies interested in corporate governance today than we did a decade ago, as shown in changes theyâve made to their boards. While some family companies have a board only to satisfy legal compliance requirements, more are moving toward the outer rings on the family business corporate governance model. Ultimately, owners will choose which level best suits the companyâs needs and when changing circumstances mean the companyâs governance should transition to another ring.
We recognize that governance at any family company will be determined almost exclusively by what the founder (or family members who control the company) wants. You may have a compliance board or an inner circle board â and those may be entirely appropriate for where your company is at present. Weâve seen numerous family companies that benefited greatly from moving toward the outer rings in the governance model, especially when anticipating a generational transition.
Itâs all well and good to talk about the value a board can bring, but itâs not unusual for founders to have concerns about adding individuals to their board who arenât either family members or close friends. Here are some of the common concerns and possible ways to address them.
1. I donât want to give up control: If youâre the controlling shareholder you still get final say, regardless of what your board might suggest. You can also draft your delegation of authority policy to preserve the decisions you want to take.
2. I donât want to share confidential information with outsiders: One way to avoid doing so is by having only insiders (family and management) on your board. If you choose to add other directors, you can remind them that theyâre expected to maintain confidentiality about the companyâs operations and results. You may consider reinforcing the expectation by having the directors periodically sign a nondisclosure agreement.
3. I have no time to go through the formalities of having a board: Having a board does require certain formalities â like preparing meeting agendas and materials, and recording minutes. And yes, these activities take time. Hopefully, your board is effective at bringing value so this time investment pays off. In some situations these formalities can prove valuable. For example, if at a future point in time some family members allege that the company is not being run properly, having copies of meeting materials and minutes can help demonstrate that there was appropriate board oversight.
4. Itâs expensive: Governance usually costs more as you formalize processes and add directors. If cash flow is a problem you could consider equity-like vehicles for director compensation. However you choose to compensate directors, you can assess whether they are bringing the value you need. If not, you can replace them.
Although itâs not a concern, per se, we also commonly hear from founders that they donât need a board because they already know whatâs right for their company. However, there could be a time when youâll face a new situation where you are less certain about which direction to take. An established board that understands your business may help you respond to such challenges with sound advice and perspective.
Catherine Bromilow is a partner, and John Morrow is a director, in PwCâs Center for Board Governance. This article is an excerpt from the Centerâs June 2014 report, âFamily Business Corporate Governance Series: What Is a Boardâs Role in a Family Business?â The report was produced in conjunction with PwCâs Private Company Services Practice. A copy of the full report is available at http://www.pwc.com/us/centerforboardgovernance.