Carrie Hall, EY Americas Family Business Leader
Sustainable and successful family businesses tend to have strong governance. One important prong in their governance models is a board of directors. As featured in our report, Staying power: how do family businesses create lasting success?, nearly 90% of the world’s largest family businesses have a functioning board. A strong board helps reduce the risk of nepotism, internal conflict, inequitable allocation of ownership shares and succession woes. And well-functioning boards diligently monitor performance and draw on the industry knowledge gained through the years.
Unfortunately, a board made up of only family members can experience governance issues due to the unique dynamics of family relationships. But independent outsiders can help family members navigate idiosyncratic personalities and the family dynamics that can impede smooth succession and sound business decisions.
For family businesses to make the best decisions regarding leadership, purpose, business strategy and succession, they need to be able to reflect. Personal interests and feelings often cloud that reflection. Independent directors can provide the needed clarity as well as a fresh perspective. Since they are not part of the family unit — or a friend or paid advisor — they can bring the necessary objectivity to the difficult decisions, particularly those regarding strategic initiatives and management roles.
Independent directors help balance the family’s desires with the fiscal needs of the business, a key component to a lasting legacy. Their responsibilities span from mediating shareholder differences to identifying new growth areas. They offer expertise and knowledge that the family management team may be lacking, and they can shed light on areas the family may have never even considered.
Because of the pivotal role independent board members play, family businesses should take great care when seeking out such advisors. Recruitment should focus on the specific capabilities and experience the company needs, such as work in a related field, experience in assisting with succession plans, a strong financial analysis background and more. The goal is to find a candidate who can help balance the family’s expectations with realistic objectives — someone who can assist the family with making decisions based on market insight, objective data and sound principles. The ideal candidate will be an independent outsider with no other ties to the company so he or she can make recommendations without fear of repercussions.
Independent directors of family-owned companies provide more than business intelligence. They:
- Serve as coach, counselor and peer advisor
- Consider how strategic and operational recommendations, such as succession planning and dividend policy, affect family dynamics
- Place the enterprise on a path to a strong legacy for future generations
Family businesses should strive to add independent outsiders to their boards of directors. The objectivity, clarity, and valuable insight they bring to the table can help create a long lasting legacy.