Many family business owners are facing a dilemma when it comes to transitioning out of their business. According to the results of Kreischer Miller’s recent Family Business Survey, over half of respondents (55%) indicated that they expect to transfer their business to family members, yet only 37 percent said they have a development plan in place for the next generation of leaders.
Family business leaders do not grow overnight. It is a multi-year process that involves participation in a wide variety of activities and steadily increasing responsibilities. So where does the next generation go for support to help them develop into leaders? Many family businesses with formal development plans send the next generation to educational seminars, ask them to participate in mentoring programs and peer groups, and encourage additional formalized education, such as advanced business degrees.
But one of the most effective ways to provide a platform for continued support and accountability is to develop a family advisory board.
Stages of Family Governance
In the early stages of a family business, the governance process is often handled solely by the founder(s). Governance tends to be informal and delivered via sporadic family meetings. As the business evolves and the second generation begins to assume larger roles, the need for more formality starts to become apparent. Now the dynamic of managing sibling relationships and spouses comes to the surface. Once the third generation and beyond become involved and the family dynamics increase in complexity, the need for an external, independent voice intensifies.
Developing a Family Board
Once a family business has decided to put an advisory board in place, there are several key elements to consider:
- The number and type of advisory board members. An effective advisory board consists of both family and non-family members. The family representatives should be individuals who are equipped to deal with governance-related issues. This means having a proper temperament, an understanding of the business, a commitment to being prepared for meetings, and a level of trust from the majority of the family members that will be represented by this individual. The best non-family board candidates are experienced and knowledgeable outsiders who can remain independent, but also be sensitive to the concerns of the family.
- The role and functions. The role of the family advisory board should be to provide an independent voice on a) overseeing corporate governance, b) monitoring and assisting in the business’s short and long-term strategy, c) acting as a sounding board and providing advice to management while holding them accountable, d) assisting in the leadership succession, and e) supporting other non-executive or inactive family shareholders to ensure their interests are being represented fairly.
- Meeting agenda items. The typical meeting agenda items include a) shareholder-related topics such as electing directors, evaluating outside auditors, and weighing in on major transactions, b) family topics such as reviewing succession plans and next generation development initiatives, and c) board-oriented topics such as updating strategic plans, reviewing the performance of key executives, and reviewing management’s report on the company’s finances.
The formal development of an advisory board represents the evolution of a family business and is an important tool in implementing effective governance. Because no leader is immortal, having a structure in place like a family advisory board allows for the continuity of leadership and guidance even after the leader is no longer involved in the business.
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