Privately held companies — especially those owned and operated by families — often have no formal boards. Even if the board exists, many hold a “board meeting” once per year at which the family shareholders and the CEO provide only general business updates. A family business CEO once explained, “Why do I need a board? I look at my board every morning in the mirror.” Adding to that resistance is the mindset “Blood is thicker than water,” suggesting only family members can be trusted with information about the business.
A high-functioning board sets the strategic direction for the company, establishes annual goals and provides oversight of the management team. Many private company boards never do this. The owners may be too embedded in the day-to-day business to commit time to think strategically. Family-owned businesses also have complicated power dynamics from sibling, cousin or multigenerational ownership. Owners of private companies can get stuck, and the board is not created or never functions the way it should. As a family business advisor, I recommend constructing an advisory board and electing independent advisors to join the board.
Here are three reasons why taking this approach is valuable for your private company.
Industry expertise. One key function of a board is to provide independent expertise on a company’s operations and wider industry. Private company boards that include only owners often struggle to fulfill this role, making it difficult to gain valuable insights. Creating an advisory board comprised of independent industry experts can provide vital insight into company performance and industry trends. Additionally, independent advisors can broaden relationships within the industry that can create business opportunities and enhance the profile and reputation of the company.
Professionalism and governance. Private company boards have a unique role as custodians of closely held businesses where governance can become blurred with personal relationships and bloodlines. An advisory board can stand outside these circles and provide needed advice, accountability and strategic oversight. While the advisory board role is not fiduciary and advice is nonbinding, the independent advisors help elevate and sustain professionalism and recommend appropriate governance scaffolding, especially for companies for which regulations like those for public companies do not apply.
Interim management and succession. In the event of an owner or appointed CEO becoming incapacitated or needing to be removed without a succession plan, the advisory board can provide vital support. Advisors with deep knowledge of the organization, industry expertise and independence can temporarily step in to run the company, ensuring smooth operations until new management is chosen. When new leadership is selected, the advisory board’s knowledge, relationships and positions of trust with company stakeholders can provide CEO support through the transition.
Successful private family-owned businesses have implemented advisory boards in various ways to help navigate governance challenges. These advisory boards often consist of independent advisors with industry expertise who can provide valuable insights and advice to the company. By having an outsider’s perspective, family-owned businesses avoid conflicts of interest and receive unbiased guidance on strategic decisions.
Overall, advisory boards play a crucial role in helping private businesses overcome governance challenges and achieve sustainable growth. By providing independent expertise and guidance, these boards can contribute to the success and longevity of the business.