Michael Eisner, former CEO of Walt Disney, said it best that “management is not a science, it is an art.” But, not all art stands the test of time—and the composition of the board, and the way the directors manage a family owned business may very well determine whether that business even exists in the next 10 years.
The masterpiece that can be a family owned business often includes an expertly crafted board of directors. A business would do well to consider the board of directors on a macro scale, such as its overall size and regular schedule, s as well as its micro composition, such as the strengths of each of the individual members. These aspects, if carefully considered, can produce an effective board of directors that is able to lead a company prosperously into the unknown future.
When reviewing the board through a wide lens, there are tried and true principles a family owned business should consider—principles that, like fine art, have stood the test of time. The board of directors should be a small collection of people who meet infrequently. This allows for more efficient and nimble meetings as well as ample time allotted to each person and topic on the agenda. Keeping the frequency of meetings to a minimum allows the board to focus on high level strategic concerns and final decision making. Boards that meet too often tend to discuss small updates that could just as easily be resolved through an email.
Managing a board on a macro scale is fairly formulaic, whereas judging the micro is more nuanced. Because every closely held business is different, the makeup of each board of directors will also be distinct and should reflect the business’ unique challenges and opportunities. There is often a lot of discussion about the proper ratio of independents to family representatives for a family owned business board of directors. On the one hand, it is important to keep the family values at the forefront of business planning. This often requires that the family have a prominent seat at the table. On the other hand, independent board members present their own unique perspective free from the sometimes limiting “status quo.” Independents can act as a neutral force in decision making, mediate as trusted advisors, and fill knowledge or skill gaps missing within the family. One way for finding a true independent is to search outside of the family’s immediate circle. Utilizing industry associations and search firms will widen the net for a diverse pool of potential contributors. Even public companies have recognized the importance of having independent board members from diverse backgrounds and experiences in order to build an effective board, but one size does not always fit all, and considerable thought should be taken when determining the correct ratio.
There are other concerns to consider when composing a board of directors. Important qualities to look for are preparation, experience, and a willingness to share their unique insights and perspective. Though attending the infrequent meetings is important, the company needs more than mere attendance. The board is only useful if it is made up of people who are prepared to thoroughly discuss the unique challenges and opportunities that the business is facing as outlined in the agenda. Fostering open discourse within the board room is critical to sorting through the multiple opportunities and challenges the business may face—and not succumbing to the “groupthink” that many family businesses are prone to. Independents can provide the fresh perspective a family owned business needs in order to successfully compete in a changing business landscape which rewards those who are willing to adapt, change, and innovate faster than their competitors. Need proof? Just look at how different the Fortune 500 list looked in 1955 compared to 2016, with only 12 percent of the companies managing to stay on that list. Statistically speaking, for most family businesses, diversifying the board isn’t just good practice, it may very well be a matter of survival.
Building a diverse board of directors should be as important a priority as succession planning, for what good is planning for who will take over the company in the next five to ten years if there is no company to take over? It is only by carefully considering the composition of the board that family businesses can ensure that they have “future proofed” their company for the next generation.
Jose Hernandez has researched and drafted legal memoranda on a variety of topics, including intellectual property, corporate governance, and securities law. He has experience reviewing and negotiating licensing agreements for both startup companies and large corporations. Jose can be reached at [email protected] or directly at 206-757-8806.