The Pacific Family Business Institute (PFBI) has just released the results of its 2018 survey. With support from Cascadia Capital, Moss Adams and Davis Wright Tremaine, PFBI interviewed 81 family businesses in Washington and Oregon, focusing on their governance and compensation practices. This was the first regional survey on these topics. Here are some of the key takeaways:
- Good Governance is Worth the Effort. 80 percent of the respondents consider the contributions of its Board of Directors to be “valuable” or “very valuable.” They recognize and appreciate the value of having a formal Board of Directors with regular meetings, defined processes, committees, compensation and independent (non-family) directors. The value provided by a functioning board heavily outweighs the time and expense involved.
- Types of Governance Structures. 61 percent of respondents have only a Board of Directors. 18 percent have both a Board of Directors and a Family Council (the governing body of the family, with its representatives elected by family members). The remaining 21 percent have only a Board of Advisors (providing non-binding, strategic advice to the Company).
- Board Member Compensation. 67 percent of respondents pay their Directors. Independent Directors are the most likely to be paid, while family members who work in the business are the least likely to be paid for the service on the Board. Compensation for Board members ranges from $4,500 - $78,000 per year, often with other perks and the reimbursement of expenses. Some boards are paid through an annual retainer, others offer a per-meeting fee ranging from $300 to $6,500, which may or may not be on top of the retainer. Some Companies offer compensation based on Company performance, earnings, or profits, while others provide restricted stock, phantom stock, or options. One respondent makes a charitable donation in the name of each Board member.
- Board Composition and Recruitment. On average, a Board of Directors has 7 members, four of which are family members and three of which are independent. More than 60 percent of Boards have independent directors. Only half of the respondents have formal written policies or guidelines for Board membership. “Specific expertise” and “trust by the extended family” were the most sought-after qualities for independent Board members.
- Board Retention. Most respondents indicated that it was easy to recruit and retain Board members. Most Boards have little turnover and do not have term limits. The average Board member serves for 15.6 years(!), leaving only upon retirement. Families should consider instituting term limits that will give them flexibility to renew their Boards as governance and other needs of the business change over time.
- Board Time Commitment. On average, a Board of Directors meets 3.6 times per year. Boards of Directors typically spend 20 hour every year in formal meetings (and a like number of hours in preparation for such meetings), with additional time for special meetings and projects common. Board Chairs typically spend an additional 75 hours or more on their leadership role. A typical Board focuses on internal issues in meetings 60 percent of the time, tends to operate with standing compensation and audit committees, and provides developmental opportunities for its Directors. The meeting frequency for Boards tends to be greater for older, larger and more complex organizations.
- Family Council. The average Family Council meets 3.3 times per year for a total of 21 hours. Preparation time is typically one-half of the meeting time. The Council Chair typically spends another 20 hours in leadership and planning functions. Just over a third of the respondents pay Family Council members who are not employed by the business. On average, compensation consists of an annual retainer of $1,500 ($3,500 for the Council Chair) plus a per meeting fee of $700 - $900 ($200 if meeting is attended by phone). Businesses that have both a Board of Directors and a Family Council are more likely to have independent directors.
- Rural versus Urban Practices. Rural respondents are more likely than their urban counterparts to have an active Board of Directors, and those Boards are generally smaller. Rural companies also tend to report greater satisfaction with their governance structures and are more likely to emphasize the need to mentor family members regarding their roles in the family business and its governance.