Family Business Boards: Interest Is High, but Founders Have Their Concerns

Family Business Boards: Interest Is High, but Founders Have Their Concerns

We see more family companies interested in corporate governance today than we did a decade ago, as shown in changes they’ve made to their boards. While some family companies have a board only to satisfy legal compliance requirements, more are moving toward the outer rings on the family business corporate governance model. Ultimately, owners will choose which level best suits the company’s needs and when changing circumstances mean the company’s governance should transition to another ring.

  We recognize that governance at any family company will be determined almost exclusively by what the founder (or family members who control the company) wants. You may have a compliance board or an inner circle board — 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.

  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 about adding 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.

  1. I don’t want to give up control: If you’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 want to take.

  2. I don’t want to share confidential information with outsiders: One way to avoid doing so is by having only insiders (family and management) on your board. If you choose to add other directors, you can remind them that they’re expected to maintain confidentiality about the company’s operations and results. You may consider reinforcing the expectation by having the directors periodically sign a nondisclosure agreement.

  3. I have no time to go through the formalities of having a board: Having a board does require certain formalities — like preparing meeting agendas and materials, and recording minutes. And yes, these activities take time. Hopefully, your board is effective at bringing value so this time investment pays off. In some situations these formalities can prove valuable. For example, if at a future point in time some family members allege that the company is not being run properly, having copies of meeting materials and minutes can help demonstrate that there was appropriate board oversight.

  4. It’s expensive: Governance usually costs more as you formalize processes and add directors. If cash flow is a problem you could consider equity-like vehicles for director compensation. However you choose to compensate directors, you can assess whether they are bringing the value you need. If not, you can replace them.

  Although it’s not a concern, per se, we also commonly hear from founders that they don’t need a board because they already know what’s right for their company. However, there could be a time when you’ll face a new situation where you are less certain about which direction to take. An established board that understands your business may help you respond to such challenges with sound advice and perspective.

 

  Catherine Bromilow is a partner, and John Morrow is a director, in PwC’s Center for Board Governance. This article is an excerpt from the Center’s June 2014 report, “Family Business Corporate Governance Series: What Is a Board’s Role in a Family Business?” The report was produced in conjunction with PwC’s Private Company Services Practice. A copy of the full report is available at http://www.pwc.com/us/centerforboardgovernance.