Can Family Members Be on the Board of Directors Forever

Mary Ann Cloyd is leader of the Heart for Lath Governance at PricewaterhouseCoopers LLP. This mail is based on a PwC publication by Catherine Bromilow and John Morrow; the complete publication, including interview insights, is bachelor here.

Private- and family-owned businesses are a vital role of our economic system. If you or your family owns such a visitor you empathise how important the company's success is to your personal wealth and to future generations. If you're a nonfamily executive at a family company, you also recognize that its profitability and resilience is vital to your task security and fiscal well-being.

We see more than family unit companies interested in corporate governance today than we did a decade ago, every bit shown in changes they've fabricated to their boards. While some family companies take a lath only to satisfy legal compliance requirements, more than are moving toward the outer rings on the family business corporate governance model, below. Ultimately, owners will choose which level best suits the company's needs and when irresolute circumstances hateful the visitor's governance should transition to another ring.

Family Concern Corporate Governance Model*

* Some companies also take an Advisory Lath to advise management (and directors). Advisory Lath members don't vote or accept fiduciary responsibilities.

Compliance board. While nigh states require companies incorporated in the state to have a board, the requirement may be equally simple as a board of at to the lowest degree one person that meets at least one time per year. A company may have only the founder on its board. In the early on stages of a founder-led company, this blazon of lath may well be the best fit for the company, since the founder is unremarkably more focused on edifice the business than on governance.

Insider board. Such a board often includes family members and members of senior direction. This membership can better involve the family in the business organization, help with succession planning, and innovate additional perspectives to board discussions. The insider board may be created past the founder—who may no longer be the CEO—or by the next generation owner(s) of the company. That said, the founder/owner(s) retain controlling potency.

Inner circle lath. In this blazon of lath the founder/possessor adds directors he or she knows well. These may include an auditor, lawyer, or other business professional that guided or influenced the company, or the founder's close friends. These directors may bring skills or experience to the board that are otherwise missing and may be in a position to challenge the founder/owner(s) in a positive way. Such boards might create an audit committee or other committees. That said, the founder/possessor(south)—who may or may non exist the CEO—retains decision-making authority.

Quasi-independent lath. This level introduces outside/independent directors who have no employment or other tie to the company apart from their role as a director. (See the Family Business Corporate Governance Series module Building or renewing your board for a more than complete discussion of independent/outside directors.) These directors introduce objectivity and accountability to the board and they wait their input to be respected. Board processes and policies will probable become more formalized with exterior/independent directors on the board. The number of committees may increase. This outermost ring on the family business organisation corporate governance model is virtually similar to governance at a public company.

59% of CEOs and CFOs of 147 family-owned/owner-operated companies report having a "formal lath of directors that acts on behalf of visitor owners to oversee the business and management," per a PwC 2013 survey.

We recognize that governance at any family company will be determined almost exclusively past what the founder (or family members who command the company) wants. You may have a compliance board or an inner circumvolve lath—and those may be entirely appropriate for where your company is at present. We've seen numerous family companies that benefited greatly from moving toward the outer rings in the governance model—especially when anticipating a generational transition.

In this postal service, we'll help yous understand how to build an effective lath for your family unit company, and how boards can assist with some of the particularly challenging problems family companies face up. This kickoff module discusses why y'all might desire to evolve or modify your governance model and what you lot could expect from a board if you practise and so.

Each family company's situation is unique and we can't address every scenario. Our goal is to provide a framework of how corporate governance practices apply to family unit companies so you can decide what's best for you.

Advantages of Evolving Your Governance Model

"Inner circumvolve" or "quasi-independent" boards can add together tremendous value to family businesses, including in the following areas:

Separating the company'due south needs from the family's needs

Peculiarly in a company's early on years, founders and family members may view company assets as belonging to them. Removing assets—like significant amounts of cash—from a visitor can bear on the visitor's wellness, and even its viability. It tin can also have tax and regulatory consequences.

Directors can ask questions about how the company'due south assets and profits are used. They can also help moderate discussions about the appropriate level of dividends for shareholders. This tin help ensure the company retains sufficient funds then it tin can survive and grow.

Directors can leverage what they've seen elsewhere to assistance managers address challenges or perhaps avoid them in the outset identify. Some directors may also bring deep industry experience, which can be helpful when setting and implementing the visitor's strategy.

Plus, directors oft accept extensive networks that can prove helpful to the visitor in other ways.

Assistance the CEO look beyond tactical issues

CEOs, especially in smaller family unit companies, often find themselves defenseless upwards in solar day-to-day operations with lilliputian time to think strategically near the business organization. Discussing strategy with a board can assistance the CEO focus on the big picture and spot trends, changes in the marketplace, and new opportunities.

Accountability

Periodic board meetings can assist instill discipline in the executive team every bit managers will need to report on strategy, projects, financial results, and other matters.

Risk management

Directors tin bring an outside perspective and discipline through overseeing risk management. They may bring different views on the importance of the risks that management has identified, and encourage executives to devote appropriate resources to addressing those risks.

Objectivity and independence

Often a company founder or CEO is the champion for certain projects and people. This can be slap-up because it ensures a project will get needed resource and leadership attending. Simply sometimes it tin be a trouble if management doesn't recognize when to pull the plug on something that'due south just non working. Outside (i.e., nonfamily, nonmanagement) directors tin can bring objectivity that tin assistance direction make hard decisions when needed. And those directors may exist in a better position to deliver sometimes hard but necessary messages to the CEO.

Planning/advising on CEO succession

Because no CEO or founder lives forever, succession planning is critical. While a planned, orderly succession is ideal, a sudden disease or death could create a leadership vacuum. If the founder or CEO hasn't considered succession, a board can encourage him or her to accost information technology properly. Indeed, in an emergency an experienced manager could even stride in on a temporary ground until a permanent leader is found.

In the case of planned succession, the board tin can aid by encouraging the CEO to place possible replacements and ensure internal candidates get the diverse operational roles to help fix them for the possible chief executive role. (See the Succession planning module in this Series.)

Directors tin too participate in coaching and mentoring family members who have joined the business concern and may aspire to run it one day. Given family dynamics, directors who are not related to the family unit may be able to identify—amend than a parent or relative can—strengths and areas where a son or girl (or niece or nephew) needs coaching. And those younger family members may be more receptive to receiving and acting on that advice from someone outside the family unit. By helping family members develop into constructive business leaders, a lath can better the odds of a successful leadership transition within the family.

A safe harbor

If something goes incorrect in a company—especially if it may involve a family fellow member—employees or outsiders may find it easier to report concerns to directors who are not family members or role of the management squad. The lath can then decide whether to investigate further.

Smoothing ownership transition to the next generation

In our feel working with family unit companies, some stammer when passing control of the visitor (which may exist different from changing the CEO) from one generation to the side by side. An established board tin provide continuity and guidance to a younger generation and help preserve the founder's vision for the company. Effective directors build relationships with new family members who are added to the board.

Planning/advising on exit strategies

Sometimes passing the company down to the next generation isn't the best motility to maximize shareholder wealth or to ensure the company's ongoing survival. A board can provide communication on whether the generation in command should:

• Sell the visitor
• Merge with another company
• Accept the company public
• Wind the company downward

Family companies also may have one or more outside investors, and these investors may take a time horizon for their leave from the business. A lath tin provide input on exiting with minimal disruption to the visitor.

Possible Concerns Near Irresolute Your Governance Model

It's all well and good to talk about the value a board can bring, but it's not unusual for founders to have concerns most calculation individuals to their board who aren't either family members or close friends. Here are some of the common concerns and possible ways to address them.

I don't desire to surrender control

If yous're the controlling shareholder you still get final say, regardless of what your board might suggest. You can also draft your delegation of authority policy to preserve the decisions you lot want to take.

I don't want to share confidential information with outsiders

One way to avoid doing so is by having only insiders (family and direction) on your board. If you choose to add other directors, you lot tin remind them that they're expected to maintain confidentiality nearly the company'due south operations and results. You may consider reinforcing the expectation by having the directors periodically sign a nondisclosure agreement.

I have no time to go through the formalities of having a board

Having a board does crave certain formalities—like preparing meeting agendas and materials, and recording minutes. And yep, these activities take time. Hopefully, your board is effective at bringing value and so this time investment pays off.

In some situations these formalities can evidence valuable. For example, if at a future signal in time some family unit members allege that the company is not being run properly, having copies of coming together materials and minutes tin can assistance demonstrate that there was advisable lath oversight.

Information technology'due south expensive

Governance usually costs more as you formalize processes and add directors. If cash flow is a problem you could consider disinterestedness-like vehicles for director compensation. However yous choose to compensate directors, yous tin can assess whether they are bringing the value you need. If not, you can supervene upon them.

Although information technology's not a concern, per se, we also commonly hear from founders that they don't need a board considering they already know what's right for their company. Even so, at that place could be a time when yous'll face a new situation where yous are less certain nearly which management to take. An established board that understands your business may assistance you reply to such challenges with sound advice and perspective.

What Can Yous Await Your Lath to Do?

Boards of private family companies have more flexibility in the roles they play than public visitor boards. Why? Because they're non bound by the SEC and stock exchange list rules that set responsibilities for public company boards and board committees. [1] Directors on private company boards do, nevertheless, have legal duties of care and loyalty (See the Edifice or renewing your board module in this Series for descriptions of these duties.)

There are sure standard responsibilities that boards typically have. Understanding what those are can aid you lot better consider which responsibilities you desire your board to take on. [2]

The owners of a family company may determine they don't want the board involved in all these areas. For example the founder's strategic vision may be so strong that he or she doesn't want whatever input. That said, companies have failed when they missed the implications of a changing business or strategic environment, or were unsuccessful in their expansion efforts. And so nosotros believe it'due south worthwhile for whomever is running a family company to consider getting input in the areas described beneath before reaching major decisions.

Corporate strategy

Nigh executives agree that it'southward management's responsibility to develop the company strategy and and then hash out it with the lath. During this discussion, directors draw on their feel to challenge the plan and the appropriateness of the underlying assumptions. Often, the word will result in at least some changes to the strategy initially presented. In one case management and the board agree on the strategy, the board will approve information technology and (in many cases) the budget needed to achieve it.

Company performance

How does the board know that management is executing the approved strategy effectively? By asking management to identify and set targets for key performance indicators that can exist used to monitor progress. The board so monitors operation and discusses what remediation may be needed if functioning is falling curt.

CEO evaluation, compensation, and succession

No CEO knows everything—even if he or she founded or "grew up" in the company. For example, a founder who is a technology or service innovator may not fully understand the dissimilar financing options for growing the company to the next level. Or a CEO who has adult a concept largely alone may not understand how to build an effective squad. An important role for private company directors can be to coach the CEO. That could include acting as a sounding board, helping the CEO manage through an issue, or having sometimes difficult conversations.

The reality is that founders or controlling shareholders who are CEOs unremarkably determine their own compensation. Just boards can be helpful in establishing operation targets and pay levels for CEOs who are other family members or professional managers. When a family member is the CEO, a skillful lath can provide guidance and perspective almost the advisable level of compensation. And when the time comes to replace the CEO, whether planned or unplanned, the board will participate in hiring a new CEO. (See the Succession planning module in this Series.)

Risk management

A company might face risks as varied as new competitors, emerging regulations, unreliable It systems, losing primal people, or the impact of severe conditions or other natural disasters on operations or the supply chain. Directors can provide feedback on whether they remember managers are identifying the relevant risks and addressing those risks effectively.

Information technology'southward ofttimes difficult to decide how much run a risk a visitor should take. For case: Should it have on more debt to finance expansion into new countries or should it delay that expansion until it can self-finance? Should the visitor invest more into a product line that already accounts for a big part of its income or should it aggrandize to other products to help spread its risk? At that place is no single correct reply to such questions, and directors can help executives determine the level of run a risk to accept.

Significant investments and transformational transactions

Pregnant investments (say, purchasing a major production line, building a new constitute, or establishing a strategic human relationship) and transformational transactions (similar mergers and acquisitions or divestitures) don't e'er pay off as initially expected. Directors can ask questions to help ensure management focuses advisedly on the expected costs and returns of a proposed transaction, and whether it fits with the visitor's strategy.

Compliance with legal and ethical standards, the company'due south "tone at the peak," and the visitor'southward bear upon on its community

Most hold there is a clear linkage between long-term, sustainable operation and a visitor's behavior as information technology relates to shareholders, customers, employees, and the communities in which it does business. That'due south why many boards monitor the company'due south moral compass. How? Partly by ensuring the CEO is setting the right tone at the top.

A board can besides aid ensure the continuity of the company'southward culture through succeeding family generations and leadership changes.

External communications

The board tin can play an important role in ensuring that the data—whether favorable or unfavorable—the company communicates well-nigh its performance is reliable, relevant, and timely. And that includes overseeing the reliability of financial data that goes to the family, other shareholders and creditors, and any regulators or other authorities.

Board dynamics

Bringing the right people together is the first step to creating an constructive board. What else is needed?

• An appropriate board structure, mayhap including committees
• Enough meeting time to permit the board to acquit out all of its responsibilities
• The correct information to back up board decision-making
• An surroundings that encourages candid discussions and good for you debate

One way some boards check on whether they are effective is to periodically assess their ain performance.

Family company boards may face up even more challenges than other companies in ensuring they have effective board dynamics. Why? Because sometimes family unit issues go intertwined with company issues. When the 2 overlap they can distract management and the lath.

How many boards are involved in the responsibilities described in a higher place? A PwC 2013 survey asked CEOs and CFOs of 147 family unit-owned/owner-operated companies that question.

What are the board'due south main responsibilities?
Monitor visitor performance	85%
Fix corporate strategy	74
Oversee/approve capital budget and key operating budgets	62
Ready/approve bounty for top executives	61
Oversee risk management	59
Evaluate peak executive functioning	56
Succession planning	56

These findings are like to what the National Clan of Corporate Directors found in its 2013-2014 Individual Company Governance Survey.

Which three governance bug are the highest priorities for your board in 2013?
Strategic planning and oversight	57%
Corporate performance and valuation	46
Fiscal oversight/internal control	27
Risk oversight	25
Executive talent management and leadership evolution	24
CEO succession	17
Board effectiveness	sixteen
Director recruitment and succession	12

Questions to Consider

(1) Is our current approach to governance working for us right now? Do we await it will be appropriate given predictable changes to the company or the shareholder base in the most future?

(two) If we modify our arroyo to governance, what should we practice and how should we get at that place?

(3) What responsibilities should our board take on that it's not currently doing?

Endnotes:

[1] Encounter PwC'southward publication Governance for Companies Going Public—What Works Best for a complete discussion of regulatory requirements. It'due south bachelor at www.pwc.com/united states of america/en/corporate-governance/publications.jhtml.
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[ii] Meet Board Effectiveness—What Works All-time, 2nd edition, for a further discussion on board responsibilities. Information about this book is at www.pwc.com/us/centerforboardgovernance.
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Source: https://corpgov.law.harvard.edu/2014/07/30/what-is-a-boards-role-in-a-family-business/

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