ARTICLE: Family Business Advisory Board: Why, Who, How much ?!

Independent directors bring discipline, objectivity, new perspectives and fresh thinking to the board of a family-owned company. This can help preserve family relationships and sustain and grow your businesses growth.

Separation of family and business:

The distinction between family matters and business matters is often unclear in family owned companies. This confusion is detrimental to both the family and the business. An independent director can be a pragmatic mediator of company issues. The independent director operates without the baggage of family issues to distract from the need to act in the best interests of the company.

The discipline of formal board meetings where business issues are debated, and decisions made promotes the healthy separation between business and family (and the separation between roles of governance, ownership, management and employee). Importantly, the family dinner table ceases to be a ‘de facto’ business meeting, and board meetings cease to be venues for family disputes. This all makes for a healthier business and family life!

Growth:

As a business grows, so does the need for robust governance. Independent directors bring fresh thinking around managing risks and taking advantage of opportunities. They can ask difficult questions (like, is a family member really the best person to manage a new venture?!), help set strategic goals and make changes to the company’s culture and direction that will help the business grow.

The need for funds to expand the business is often the catalyst for bringing independent directors on to the board of a family company because the bank makes formal governance a requirement for advancing more funds. Lenders take confidence from the presence of independent directors on the board and so are more willing to lend.

Can Family Members Sit on the Board of Directors?

It's common for family owned businesses want to have family members sitting on their Board of Directors. Those who do not play an active role in the day-to-day operations of the business can provide invaluable insight into the family dynamic. However, it’s important that non-family members also be on the board. A mix of family and non-family members delivers a healthy combination of board members who will be able to provide the best possible unbiased guidance to the company. This mix also enables the business to stay close to the family values and vision.

Chairperson:

Where shares in a family company are held by more than one family member, the independent director could usefully also be the chairperson of the board. This is especially so where factionalism exists among board members. An independent chairperson can help protect minority shareholders who are vulnerable to family factionalism that can spill over into company decision-making. The chairperson is also a source of support and guidance for the chief executive or general manager.

Cost:

The remuneration of independent directors for SMEs ($10-$20M t/o) is often no more than $20,000 -$25,000k a year per director. An independent chairman for SMEs ($10-$20M t/o) is often around $50,000k per year.

The benefits can greatly outweigh the cost of bringing this fresh thinking to the governance of a family owned company.

Recruitment:

“An advisory board, made up of outsiders who are not “cronies,” is a good way to push the governance envelope. David Bork, The Little Red Book of Family Business.

Avoid the obvious mates of mates, accountant, lawyer etc. Maintain independence and ensure you cast your net wide. To maximize return, select people with skill sets that support your business growth strategy and align with you family values and principles.

Partner with a trusted adviser that will look to truly understand your business, it's challenges/opportunities, growth strategy, ownership and family dynamics. Selection would be best based on a hypothetical profile that was agreed to with the key stakeholders. Transparency and confidentiality is key to this process.

To help with your financial analysis and by way of example. At 'SME People' the cost would sit at approximately $5,000 - 15,000k per appointment (depending on the depth of the process).

Please feel free to call. I'm more than happy to provide any insights and/or guidance.

Warmest regards and good business.

Anna 😊

027-493-5545