One of the most significant factors determining the survival and success of a closely held company, especially a family business, is the presence of a board of advisors. Yet many such firms lack a board, or have one that meets seldom and contributes little.
Why do very smart entrepreneurs continue to ignore a strategy that promises great long-term payoffs for them and their successors? With apologies to David Letterman, here are their top 10 excuses for not establishing a board of advisors:
10. No one “good enough” will want to serve on my board. Start seeking out advisory board members, and you’ll be surprised at the caliber of talent you can attract. When Jay Schindler took over as president of ESKCO, a Dayton, Ohio, firm that provides promotional marketing and corporate packaging solutions, he and his father, Jim Schindler, rethought their requirements for a board. Jim contacted Clay Mathile, who built Iams pet food company into an international brand and sold it to Procter & Gamble Co. Mathile agreed to serve on the ESKCO board and to help the Schindlers restructure it to meet the needs of their growing company. “It was the best thing we could have done for the business,” Jay says.
9. I don’t want to upstage my current advisors. When you’re making decisions about what’s best for the business, the focus must be on what is best for the business, not your advisors. An advisory board offers the opportunity to expand your circle of experts beyond your lawyer and your accountant. Strong outside board members can look at your business with fresh, practical eyes (especially if they have already managed companies one step ahead of yours) and improve the bench strength of your management team without expanding your payroll.
8. I have no idea who to choose as board members. Your current network of advisors — bankers, accountants, lawyers, friends, trade associations, your local Chamber of Commerce — can help you build a short list of potential candidates. You and other family members can then interview the top two or three candidates until you reach a business consensus about whom you can trust to serve your business best.
7. I don’t have time to work on one more project. Board development may not be urgent, but it will save you time and money in the long run. Especially if you’re considering passing the business on to the next generation, board development becomes an essential part of that process. As you begin to enjoy the golf links, a strong board will help you savor your time away more completely. You can chair regularly scheduled meetings where others will challenge the next generation with non-parental, businesslike voices, and you won’t be the one worrying about the balance sheet. Your bankers and other investors will become more confident, knowing that the company’s future doesn’t depend on your heartbeat alone.
6. I don’t want outsiders to know about our problems. Families cherish their privacy, for many good reasons. But sometimes the risk is worth taking. Outsiders can take the heat about thorny issues like realistic salaries for relatives — and perhaps point out problems you didn’t even know you had.
5. I don’t think we have enough issues to discuss. A typical board agenda might include (1) reviewing management’s implementation of the strategic plan, (2) comparing last year’s financials with this year’s, (3) helping determine the feasibility of expanding into a new region or product line, (4) discussing reports from department heads and (5) developing criteria for selecting the next CEO. If you could have the best business brains in your region providing you with a “think tank” as you tackle tough issues like these, would you really rather face all this alone?
4. A board will slow down our decision making. This may well be true, but as your company becomes more professionalized, slower decision making may be precisely what works best. Rushing to put out one fire after another may suit a startup with little at risk, but not, say, a 20-year-old company with two dozen or more employees.
3. Directors will be too concerned about liability. Many family business owners develop boards of outside advisors who meet together with the legal directors to share information and expertise, even though the family stockholders alone take the final vote. This may diminish the exposure of the advisors and reduce the risk of their liability. Of course, you must refer to the laws of your state and consult your own legal counsel about specific board requirements. Liability insurance may be purchased to secure the commitment of the best candidates.
2. If I pick the wrong people, how will I get rid of them? Terms of office make sense, and some simple written expectations in an introductory letter can clarify goals until more formal bylaws are developed. A first term may be one year, so that there is an exit opportunity for all parties. After that, terms may be staggered for two or three years, to maintain continuity and to provide outside advisors with enough knowledge of the business over time so they can provide well-informed counsel.
1. I don’t want to give up control. Actually, developing a board of advisors may be one of the best means to maintain control, especially if your company grows and prospers. When you retire, the role of chairman of this board may suit you very well. As chairman, you can convene the board four or six days a year, review the financials of the business in a systematic way, tap the brains of those who can best help your business prosper, retain authority to hire top management and develop a sounding board to test the fresh ideas of the next generation. Boards are an essential resource for managing sibling/cousin rivalry in successors when you are no longer the tiebreaker. Sounds like a good plan to maintain control, without camping out in the office every day.
Ellen Frankenberg, Ph.D., is CEO of The Frankenberg Group. She is a family business psychologist who consults with family and closely held companies on their strategic issues and business practices, including board creation. Dr. Frankenberg’s book, Your Family, Inc.: Practical Tips for Building a Healthy Family Business, is in its fourth printing. In 2001 she was named by the Family Firm Institute as a Family Business Advisor With Fellow Status, the most prestigious qualification in her field. This article originally appeared in Family Business Magazine. She can be contacted at ellenfrankenberg@gmail.com.