The real purpose of the Board in family business

The key word here is “PURPOSE” because the Board as a collective AND each individual Director must understand the purpose of the business or as Peter Crow states “understand the business of the business”. This does not mean being the font of all technical knowledge but rather the Board Directors must understand the businesses supply chain, its business model and its internal core competencies.

The most critical purpose of the Board and its Directors is to add value to the business at every opportunity and to understand that what is good for the business is also good for the family.

What does the family expect in return?

This is a very good question as it is a reality that Independent Directors on family business Boards tend to have “role creep” purely because of the complexity of what is commonly known as the three frames of family business – Family, Business and Ownership. These three frames intersect therefore the numerous “hats” worn by the family members combined with the relationships throughout the supply chain and workforce provides a “rich” diversity of interactions. The Independent Director must know where the family members are located for example;

Family member – Not in the business and does not have ownership

Family member – In the business however does not have ownership

Family member – Not in the business however does have ownership

Family member – In the business and has ownership

All of these have very different expectations of the business and therefore have expectations that the Independent Directors will deliver more than what they have received in the past. More importantly and infinitely more difficult to achieve is the speed in which these expectations are required to be satisfied.

This brings in the need for the family to be “made ready” for a formal Board and Independent Directors as it has to be based on sound rational discussion that meets the emotional attachment and passion of all family members. As an accredited family business advisor I take significant time to prepare a family for this step as it is a massive “leap of faith” for the vast majority of families. One “rule of thumb” I use in developing the Director criteria (position description) is 40% IQ, 50% EQ and 10% SQ because the Independent Director MUST be technically competent, aware of family and personal dynamics and have the ability to understand a family legacy.

Managing the family expectations is critical because an Independent Director has a legal obligation to focus directly on the business and the business shareholders only however the passion within family business can draw you into areas outside the role of an Independent Director.

The only expectations the family should have of the Independent Director is that they deliver on the strategic imperatives of the business i.e. growth in scale and profit, improvement of the businesses fundamentals and risk profile and an improvement in dividends. However, in reality family members expect much more of the Independent Director and these expectations vary across all family businesses. Some examples include (not limited to);

  1. Family member accountability
  2. Improving family relationships and reducing family conflict
  3. Increasing individual dividends
  4. Mentoring family members within and external to the business
  5. Preparing the business for inter-generational transfer

The above highlights some of the unique expectations of Independent Directors within a family business and I hope this serves to enthuse families and potential Directors to embrace to opportunity. In saying that I also stress that it is absolutely critical for the family business to do a lot of preparation to ensure they extract the maximum value out of a formal Board and the Independent Directors they appoint.

It is not a “silver bullet” and requires commitment, persistence and an ability to embrace change therefore to have very clear expectations, objectives and performance criteria is absolutely critical.

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