How to Develop a Diverse Board & Pick the Right Chairman
By Jennifer Muntz and Andrew Keyt
Our natural tendency is to surround ourselves with people whose backgrounds, experiences and viewpoints are similar to ours. But in order to achieve the true power of a board of directors, you must take a different approach when considering director candidates.
Boards hold management teams accountable for developing and executing a dynamic strategy. The strategy must be aligned with the values and needs of the family shareholders and must address the competitive challenges faced by the business.
Research has shown that boards make better decisions, leading to higher company performance, when they include independent members as well as directors who are diverse in terms of gender, ethnicity, skill sets and opinions.
Diverse boards are in the best position to help a family company with strategic planning, succession planning and managing family dynamics.
Here are some additional advantages of a diverse board.
• It provides greater objectivity and a wider variety of perspectives. Directors of wide-ranging backgrounds ask better questions and are more willing to challenge the prevailing view and offer new insights.
• It makes better decisions on behalf of all stakeholders.
• It eases the difficulty of working through sensitive issues that can divide a family, such as succession planning, executive compensation and dividends.
• It is better able to ensure that the needs of the family are met, the business strategy is optimal and the family’s interests are protected.
• It mentors the successor or next-generation leadership group and introduces them to role models and influential business leaders.
Despite these advantages, many business owners fill their boards with family and friends. Family members may become directors without understanding the role and its legal responsibilities. Many lack the knowledge and skills required to be an effective overseer of the company’s strategy.
Sometimes, family owners who work in the business dominate the board. When this happens, often the board fixates on day-to-day operations instead of focusing on strategy. Family owners who don’t work in the business may think their role as a director is to represent their family branch or their generation, overlooking their legal and fiduciary responsibilities to all shareholders of the company.
It’s also unwise to name your friends or advisers, or others who have a long-term relationship with the family, as directors. These individuals tend to be ingrained in the family culture and thus act more like insiders. They often are reluctant to challenge a strong CEO or family leader.
Boards with a preponderance of insiders or friends are highly susceptible to groupthink. The desire for harmony and conformity leads to flawed decision making. Members of these boards go along with the strongest voice in the room even though their gut tells them otherwise.
Things to consider when seeking board candidates
• Look for individuals you don’t currently have access to. You shouldn’t put your attorney, accountant or banker on your board; these people have a financial relationship with you and thus are not independent. It’s also not advisable to appoint a member of your YPO group to your board, since you already have access to YPOers at the group’s regular meetings.
• Find candidates with broad business skills and unique experience that will help you tackle current strategic challenges and those that are coming your way. For example, if your company will be going through a CEO transition or restructuring in the next five years, find someone who has led a company through that strategic challenge. If you are planning acquisitions, seek out someone who has had that kind of experience in business. Reach across industries to find candidates who have achieved goals similar to yours.
• Look for gender and ethnic diversity wherever possible.
• Business skills are important, but character and personality are also critical variables. A director may have all the right business skills, but if that person can’t work productively with other board members and management, and can’t challenge people’s thinking in a productive way, he or she could be a disruptive force and create distractions.
• When building a relationship with a candidate, assess his or her enthusiasm for and interest in both the business and the family. A candidate who is authentically excited and eager about the family and business can be more powerful than a candidate who is “a professional board member” or whose main selling point is that he or she would bring prestige to the board.
The role of the chairman
When thinking of board diversity, also consider the importance of the chairman’s role. An effective chairman encourages diversity of viewpoints and healthy debate.
Typically in family businesses, a family CEO becomes the chairman of the board upon his or her retirement. Many families are in favor of this because they have already established trust and know what to expect from this person. From the family’s perspective, the move from CEO to chairman represents a minimal change.
In other cases, a family member is selected as chairman based on the individual’s qualifications, career experience, track record and leadership skills. A family chairman can ensure that the family’s values and vision are represented in the business’s strategy and direction. Many families who plan to have a family chairman in perpetuity tend to be more willing to hire top non-family professionals to serve on the management team, rather than filling the C-suite with family members.
On the other hand, a family chairman who lacks the necessary qualifications or leadership skills can be disruptive. It’s tempting for a family chairman to pursue an agenda that serves the interest of his or her own family branch rather than the interests of all the shareholders.
Increasingly, we are seeing families elect non-family members to chair their boards. These non-family chairmen offer skill sets and experience not found inside the family pool and thus are better able to address the strategic challenges facing the family enterprise.
An independent chairman can critique a family CEO’s performance or personal style in an objective way. And a non-family chairman, who provides a third-party perspective during times of conflict, can help ease tensions and build bridges between family factions. Greater family unity results in stronger emotional connections to the business.
A non-family chairman must have the confidence and credibility to hold family managers accountable. The chairman must also be empathetic and understand family dynamics.
If you’ve decided it’s time to search for a non-family chairman, the first place to look might be within your current board. Your independent directors already understand your business and the competitive landscape, your strategic plan, your family and business history, and your family culture and relationships.
Things to consider when seeking a board chairman
• The chairman must have the skills to work with management and facilitate an effective board process.
• The chairman must be trusted by the family and by management.
• The chairman’s values must be aligned with the family’s values. For example, if the family is conservative and the chairman is a risk taker, friction is likely to result.
• The chairman must have the skills to foster family unity and cohesion.
• The chairman must have high emotional intelligence. He or she must understand the complexity inherent in all family enterprises and the dynamics of the specific family ownership group.
In order to develop a strategy that will enable your business to last for generations, it’s essential to form a diverse, independent board. Directors who bring objective viewpoints and a broad range of skills and resources can greatly improve communication and decision making. They also can help develop family members for future leadership. The result will be better business performance, which will lead to a satisfied family ownership group.
The best time to tackle a challenging project like diversifying your board or removing an unproductive director is when things are going well in your business. The tough work a family does during the good times enables them to unite, persevere and prevail during the down times.
Jennifer Muntz is the executive director and Andrew Keyt is the president of Family Business Network-North America, the North American chapter of an international learning community for families with medium-sized to large businesses (www.fbn-na.org).
Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact firstname.lastname@example.org.