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Creating a Board in Your Family Business

Mario O. Vicari, CPA
Mario O. Vicari, CPA Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Creating a board for your family businessThe percentage of family businesses with a board of directors is on the rise. In fact, many of the most successful family businesses use boards. Yet companies without a board tend to struggle with the idea of creating one because the task can seem daunting. Many family companies have never had a non-family member involved “behind the scenes” at their business, and that scares some families.

A board of directors can serve a vital role in helping a family company navigate its future. Besides the obvious advantage of having access to individuals with expertise in strategy and other high-level business issues, a board provides two additional distinctive benefits. First, a board brings greater accountability to the family owners and executives running the business. This is a significant step for a private company, since the family owners are agreeing to allow others to hold them accountable, for their own good and for the good of the family business.

Second, a board is an essential independent party in addressing difficult issues that could lead to family strife and disputes. Issues such as pay, performance, and position are very hard for family members to discuss with each other. Board members can assess these situations more objectively, providing structure and an independent voice to make the best decisions for the business and reduce family conflicts.

Board composition

It is considered a best practice to have both family and non-family board members. Family members are important because they provide the context of the company’s history and legacy. They also often fill key roles in the business and are owners, so it is appropriate for them to have representation on the board. “Representation” is the key word, however, since it is unwise and impractical to have all family members on the board. Additionally, it is healthy to have more outside board members than family board members. Because they are not biased by family issues or the history of “how we have always done things,” outside board members add significant value to the company.

The number of board members can vary depending on the size of the business, but in our experience, most boards have five to seven members. A smaller number raises the question of whether the company is getting adequate input. A board with more than seven members can be hard to manage and costly to administer.

Board committees in family firms can also vary, and there tend to be far fewer committees in private company boards than in their public counterparts. However, we very often see committees that address compensation and family employment issues. Non-family participation in these decisions eliminates family bias and tension and leads to better decisions.

What to look for in a board member

Once your business has made the decision to hire board members, you must determine the skills, background, and personality traits you’d like those board members to possess. Studies have found that the most important attributes for board members in family businesses include:

  • Integrity
  • Commitment to making an impact and a passion to serve
  • Not allowing their ego to influence advice
  • Willingness to speak the truth to management

Beyond these essential traits, there are a few additional considerations. Family business boards should be competency-based boards. Accountability is an essential quality and usually defines a board member’s ultimate success. Several “soft” skills are also critical. For example, is the candidate able to communicate openly and honestly? Will he or she be able to truly understand the business and collaborate effectively with management? Can the candidate provide advice and guidance to the CEO regarding strategic business matters? Does he or she understand family dynamics and have an ability to navigate family politics, while still providing concrete strategic and tactical advice?

Finding the right fit

After you’ve identified the ideal profile for your board members, your task turns to locating the right candidates. When hiring non-family board members, we recommend consulting your most trusted business advisers first. After all, these individuals know your business and your needs well. These advisers could include your accounting firm, law firm, banker, or insurance agent.

In addition, many of the top retained executive search firms are plugged into the best board member talent available. It is highly recommended to network with these firms as well, especially those that serve family businesses.

Once you have completed the due diligence process and retained a new board member, here are a few tips to ensure a smooth transition:

  1. Consider having the board member complete a personality profile to see how his or her characteristics align with yours as a business owner.
  2. Be open and transparent regarding organizational challenges and the company’s financial standing. Lack of trust will negatively affect a board, so it is essential to be candid with your board members.
  3. Both the CEO and the board member must check their egos in order for the process to be effective. The owner must be able to objectively listen to critical comments and the board member must be comfortable with providing feedback openly.

Mario O. Vicari can be reached at (215) 441.4600 or Email.

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Mario O. Vicari, CPA

Mario O. Vicari, CPA

Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Construction Specialist, Family-Owned Businesses Specialist, ESOPs Specialist, M&A/ Transaction Advisory Services Specialist, Transition/Exit Planning Specialist, Business Valuation Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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