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Tuesday, May 30, 2017

Professionalizing Business Governance: Establishing a Board of Directors (or Advisors)

By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman

A number of traditional (“Stage 3”) planning strategies are consistent with those strategies informed by social neuroscience and positive psychology and, so, continue to remain critical in 21st Century family business planning initiatives. In this post, we highlight one of our favorite “stage 3 planning”™ strategies:  “professionalizing” the family’s business governance by constituting a board of directors that includes thoughtful, experienced, and independent (i.e. non-family) members. 

According to PricewaterhouseCoopers, “an independent board is one of the main pillars of good corporate governance,” such that “nearly two-thirds (64%) of [companies surveyed] now have nonfamily members on their boards.”(fn 1)  Outside board members can be extremely vital in providing objective input, particularly when family board members are emotionally invested in decisions and strategies.

We believe that including non-family participants on the board of directors can be helpful in (1) attracting and retaining high quality employees, who may be concerned with whether their employer is likely to remain viable over time, (2) providing additional informed perspective on material decisions facing the business, (3) helping to mediate disputes between family members by providing objectivity, and (4) helping manage the succession process, including selecting and mentoring a successor who is capable of leading the business while maintaining and nurturing the family’s trust and confidence. For example, decisions made by (or with the endorsement of) respected independent board members can alleviate concerns that a child was selected as a business’ next leader by a biased and impartial parent, whether or not the child was well qualified to assume that role.

Unfortunately, many families have been reluctant to add non-family members to the company’s board of directors out of a fear of losing control and/or a fear of exposing family problems. In such cases, some families find it useful to form an informal “advisory board” rather than a formal board of directors.  Because advisory boards serve at the pleasure of management, they are becoming increasingly “. . . popular at family-held companies, where a ‘guidance but not governance’ role is well suited to dealing with family owners.”(fn 2) Practically functioning much like boards of directors, advisory boards are often comprised of three to five independent (i.e. non-family) members who are trusted because of their business-savviness, relevant expertise, a willingness to challenge management’s ideas and, as importantly as anything, interpersonal skills that mesh well with family members and company employees. An advisory board “ . . . can provide the CEO and management the benefits of experience, expert knowledge, contacts and credibility . . .” but without compromising an owner’s desire to maintain control over the business.(fn 3)

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(1) Professionalize to Optimize: US Family Firms Are No Longer Winging it, PwC 24, www.pwc.com/gx/en/pwc-family-business-survey/index.jhtml (last visited Mar. 29, 2017). 

(2) Ralph Ward, The Fundamentals of a Family-Business Advisory Board, Inc. (July 1, 2000), http://www.inc.com/articles/2000/07/19779.html 

(3) André Morkel & Barry Posner, Investigating the Effectiveness of Corporate Advisory Boards, 2 Corp. Governance, no 3., 2002, at 4, 4–9 

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to "Stage 4 Planning" Strategies, 65 Buff. L. Rev.,  May, 2017



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