image:consultancy.uk
culled from:www.hbr.org
As described in the
first article in this series, the "Three-circle" family business
system is composed of three overlapping subsystems: those employed in the
business, the shareholders, and members of the family that has a controlling
ownership stake in the company. 1 Each of these three subsystems influences the
direction and operations of the family company, as well as of the family. It is
essential, therefore, that each subsystem has a defined role and a clear voice
in the governance of the overall system. These three subsystems and their
governance structures are illustrated in Figure 1.
Senior management is
the organizing mechanism and voice of the employees. The family council and
family assembly are the organizing mechanisms and voice of the family. The
board of directors is the principal organizing mechanism and voice of the
owners. The shareholder meeting is another way to organize and provide a voice
for the shareholders. Shareholder meetings I believe should be annual, brief
and rather formal, focusing on the election of board members and auditors and
updating corporate by-laws. While these shareholder activities are legally
required and important, the board of directors, the family council and the
family assembly generally are more effective forums for shareholders for
setting direction and creating policies.
Fundamental to the
effective governance of these complicated systems is the proper separation and
balancing of powers of the governance structures. The board—not the
shareholders (directly), the family or the family council—sets the direction
and policies for the business. Likewise, it is the family council that sets the
direction and policies for the family, usually ratified by the family assembly.
While making sure the family council and board do not intrude on each other's
territory, the board, management, the shareholders, and the family council must
cooperate, coordinate their activities, and communicate well with one another
in order to have consistent and mutually supportive goals, plans, and policies.
Here I focus on the
functioning of an effective board of directors, which is legally elected by the
owners and has legal responsibilities and powers. My recommendations about a
board of directors also apply to a board or council of advisors, one that is
appointed and does not have the same legal responsibilities or powers.
Generational changes
in the family business board
The board of
directors in the family firm usually changes over generations and as the
ownership of the firm progresses through three distinct stages. 2
Figure 2: Ownership
Stages of the Family Business
Figure 2: Ownership
Stages of the Family Business
Most family firms
begin as Controlling Owner businesses where one person has voting control of
the organization and makes most of the key decisions. During this stage, the
board, if the company has one at all, is most often composed of other family
members, friends of the owner, and/or business colleagues. This type of board
typically is only a "paper" board, existing only on paper, or acts as
a "rubber stamp," validating whatever decisions the owner makes.
During the Sibling
Partnership stage, where two or more siblings have voting control of the
company, siblings generally take seats on the board. It is rare that sibling
dominated boards accomplish much. Siblings, who are typically quite sensitive
to one another, often either avoid confrontations or quickly escalate
disagreements into disruptive conflicts. Siblings also often see their board
positions as birthrights that allow them to protect their interests in the
company, rather than as a responsibility—based on one's qualifications—to guide
the firm and protect all shareholders. Such boards rarely provide guidance that
is valuable to management. At the Sibling Partnership stage of the family
business, major shareholders cannot be legitimately denied a seat on the board.
But draw a line so that the siblings do not appoint their heirs to assume their
board seats when the ownership transitions to the Cousin Consortium stage.
The board—not the shareholders, the family
or the family council—sets the direction and policies for the business.—John
Davis
Family companies that
progress to the Cousin Consortium stage, where two or more cousins control the
company, can have bloated, highly political boards. But over time many family
businesses learn the value of a well-composed and well-run board. By the Cousin
Consortium stage, the shareholder group is often too big to have everyone
participate on the board so the board starts to become representative. Plus,
shareholders recognize the value in having the objective, professional
experience of external board members.
I see
well-functioning and poorly functioning boards at each stage of ownership. All
family businesses, beyond the start-up phase at least, can benefit from the
guidelines presented here.
Composition of the
board of directors in the family firm
There is little
debate about the most effective composition of the family business board at any
stage. The addition to the board of experienced non-aligned external members
can help to change the dynamics of board discussions to be more objective and
constructive. Smaller boards, not dominated by family members, tend to work better.
And all board members should be focused on the best interest of the company,
not on the interests of any particular individual or branch of the family.
Figure 1: Governance
Structures of the Family Business System
Figure 1: Governance
structures of the family business system
Most experts agree
that a family company board should be a relatively small group of about five to
eight members. It should include the CEO of the company, a majority of external
board members (meaning not family members or company managers), and a small
number of family representatives. Family representatives are not necessarily
family owners and may or may not be family managers. Family representatives to
the board can be chosen by the shareholders, the family or the family council.
It is complicating to put on the board family member-employees who are working
their way up the organization ladder. Their supervisors too often complain that
it is not clear if the family employee reports to them or vice versa. I advise
against putting family employees on the board until they are in very senior
positions or are the designated successor and close to assuming this leadership
role.
A board should not
include the company's service providers such as banker, lawyer, or accountant.
One should also resist enrolling on the board friends of the CEO, of other
family members. And be especially cautious about appointing company managers to
your board. Company managers tend to steer discussion to operations issues and
away from more strategic topics, and also make it difficult for the other board
members to openly evaluate the quality of company management. Because company
managers can be present for as much of the board discussion as the board feels
is valuable, there are no clear advantages to having company managers serve as
board members.
Responsibilities of
the board of directors
Most boards can best
fulfill their duties by meeting once each quarter for one or more days. One
meeting each year should be a joint board-management retreat mid-way in the
company's planning cycle to plan next year's activities. Additional time
between meetings is typically required of board members to work on special
assignments, prepare for board meetings and meet—often over the phone—to
resolve issues that crop up.
Each member of the
board will typically have a different experience base and a unique perspective
on the business, but all members of the board should have in mind the same
responsibilities. The primary duties of the board are to:
protect the interests of shareholders;
company;
help develop policies that help the company
and its shareholders achieve their goals;
provide performance feedback to senior
management, especially the CEO;
ensure that the business remains decisive;
and
oversee the family's involvement in the
business.
Protecting the
interests of shareholders
Good boards balance
their commitments to company and shareholder needs. For instance, the board
should not necessarily authorize large dividends or help promote other shareholder
goals like family employment or family leadership of the business if the board
feels these actions would weaken the business and ultimately reduce shareholder
value in the company.
Helping make big
picture decisions
This is the most
important duty on the list and the most typical weakness of a family business
board. Boards should advise and help senior management think about "big
picture" topics important to the company, such as its vision, strategy,
growth plans, ability to compete, development of human, financial, and physical
resources, strategic relationships, and succession. I like to say that boards
should fly at 30,000 feet, meaning that they should think broadly about the
company's goals and challenges, concentrate on the big issues facing the
company and avoid getting involved in day-to-day management or operations
issues. Occasionally, the CEO may request that the board help solve a
particularly thorny operations issue. What one should see at board meetings is
brainstorming about future goals and the company's strategies, where board
members can analyze and forecast industry trends and decide what moves the
company should make. Board members should also be willing and able to
contribute their own business contacts to help the company plan ahead and meet
its needs.
Family issues, as much as possible, should
be managed by the family and the family council so that the board can focus on
ensuring that the firm is well-positioned for the future.—John Davis
Setting policy
Technically, the
board of directors sets all key policies for the company. In reality, only the
policies that have broad importance for the company reach the board level. The
rest are created and implemented by managers. In family companies, the family
council also has a policy-setting role.
The board of
directors should assist the management team and family council by providing
direction and guidance regarding policy formation. For example, the board of
directors may recommend that the family council develop a draft policy
regarding the hiring of family members. The board would then review, recommend
changes or approve and enforce the policy. Or the board could request that the
CEO develop a policy for company debt. The board's job is to see that these
policy statements are carefully designed, are internally consistent, and help
to achieve the goals of the company and its shareholders.
Reviewing the job
performance of the CEO and senior management
The board of
directors should formally evaluate the performance of the CEO, identifying his
or her strengths and weaknesses and helping the CEO to establish trusted
leadership of the company. Board members should provide ongoing feedback and
insights on the above and help the CEO establish challenging goals for personal
and company performance. The board needs to be composed of individuals who are
capable and interested in giving feedback. The board is also responsible for
recommending an appropriate CEO compensation structure, including salary,
bonuses, benefits, and long-term incentives. This latter activity is usually
organized through the compensation committee of the board.
The board should also
give the CEO their impressions of the qualifications and contributions of
members of the CEO's management team. The board does not directly evaluate
these other officers and typically is not involved with the compensation of
company officers below the CEO, except to make sure that compensation practices
are well designed and fairly implemented.
Guarding decisiveness
Because of a family's
desire to avoid conflict or protect traditions, family companies often avoid
addressing issues and pressing for decisions. A board must insist on
maintaining a company's decisiveness with the same energy it devotes to
increasing shareholder value. This does mean rushing decisions but rather
knowing when enough has been learned to make a sensible decision.
Overseeing family
involvement in the company
For the family-owned
company, board members have an additional area of responsibility beyond those
in non-family firms. Board members need to understand the family's goals,
relationship issues, and politics, and:
help to see that the family's reasonable
long-run goals (as the board defines "reasonable") for the business
are met;
mediate the family's influence on the firm
so that neither the financial and employment needs of the family nor family
conflicts endanger the long-run viability of the company; and
provide helpful mentoring and feedback for
family managers, especially when such help is difficult to get from managers in
the company.
The board of
directors should not be expected to resolve issues it is not designed to
tackle. Family issues, as much as possible, should be managed by the family and
the family council so that the board can focus on ensuring that the firm is
well-positioned for the future.
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