When Cooler Heads Prevail

When Cooler Heads Prevail

Independent board members can quell family business disputes by reminding family directors to ‘wear the right hat’ in the boardroom. 

Chris Vernon, fourth-generation president and CEO of The Vernon Company in Newton, Iowa, has an immediate response if his siblings request a raise: “Write it up, present it to me, and then I’ll present it to the compensation committee for you.”

Vernon’s company, which manufactures and markets promotional materials, has a majority-independent board, with five outside directors and two family members (Vernon and his father, who is the chairman).

Independent directors serving on the compensation committee review and approve pay recommendations for family members and top officers at the company.

“Frankly, that’s one of the conflict reducers for me,” Vernon says.

In family companies, personal and business issues are often inextricably intertwined. Independent directors — if they’re the right people for the job — can help prevent or manage some family disputes, such as those involving conflicts of interest. When it comes to family compensation, for example, the issue on the table is extremely personal.

Decisions about pay or promotions for family members “should be approached dispassionately, based on merit — and that is easier for an independent director to do than a family director,” explains Doug Baumoel, founding partner at Continuity Family Business Consulting. “You want to make sure that the decisions are not compromised by preexisting relationships.”

‘Board hat’ or ‘family hat’?

In some family companies, particularly those just beginning to think about governance, independent directors must “educate family members about the whole notion of what it means to be a fiduciary,” says Pascal Levensohn, managing director of Dolby Family Ventures and a corporate governance adviser to family offices and institutional investors. (Fiduciary boards are tasked with protecting shareholders and voting on decisions that are binding for company management — in contrast to advisory boards, which are more informal and play no binding regulatory role.)

In these situations, independent directors should lead by example, Levensohn says. His advice to directors: “Be the voice of what’s in the best interests of all the stakeholders, and make sure people understand that that’s the position you’re taking.”

Independent directors must be scrupulous about maintaining neutrality, Levensohn cautions. “In order to be effective and remain effective, an independent director needs to aggressively self-police in order to maintain a perception of independence.” Directors, he advises, must “try to be friends equally with different factions.”

Phil Clemens, retired chairman and CEO of The Clemens Family Corporation — which is based in Hatfield, Pa., and has holdings in pork-processing companies (including Hatfield Quality Meats), real estate and transport — now serves on the boards of three companies and eight non-profit organizations. Clemens says he often reminds family directors to be aware of “what hat they’re wearing.” In the boardroom, Clemens notes, directors must wear only their “board hats,” not their “family hats.”

“This comes up a lot,” Baumoel observes. “Sometimes families sort of devolve to silos of ownership. The presumption is, ‘My brother is representing our branch on the board.’ And when that brother sits down at the board table, he’s got to cleanse his mind of that. He’s got to say, ‘I’m not here to represent my branch; I’m here to represent all branches.’ And in that role, he should be able to make decisions for the benefit of all shareholders.”

In a family business boardroom, it’s often hard to separate family decisions from business decisions.

“Let’s say the issue is selling the family business,” Baumoel says. “If I’m the next-generation leader, I have a stake in that outcome that’s personal. And maybe the independents can decide if now is the right time to sell better than I can.”

The key is fair decision making, Baumoel stresses.

“With every decision you make on a family business board, you have to consider if you’re in a conflict-of-interest position,” he explains. “And you have to always ensure that you’re using objective data and that the right decision makers are at the table.”

Vernon says occasions do arise when he must recuse himself. “There have been times when I’ve stepped away from a conversation and just said, ‘Look, I can’t vote on this matter, or I can’t be a decision maker on that matter, because I’m too intimately involved,’” he reports.

Limits of the role

Family members should understand the limits of independent directors’ role. While their objectivity can help stave off disputes, they shouldn’t be conscripted as family business consultants.

“My view is, the best way to resolve the conflict issues is to bring in a specialist consultant — someone who is paid to resolve the issue who is not a corporate fiduciary,” Levensohn says.

Experienced independent directors will speak out when boundaries are being crossed.

“I oftentimes tell people, ‘Don’t bring me into your family disputes. I am not here as a psychologist, or a psychiatrist, or a family counselor. If you have a family issue, it needs to go outside of the boardroom,’” Clemens says. “‘That’s not why I came on [the board]. If it has to do with the business, let me help you there. [The board] can help you make the business run as successfully as possible and drive shareholder value.’”

On the other hand, Clemens points out, if a recalcitrant family member is disrupting the business, it’s within a director’s purview to recommend the removal of that individual from the company.

While it’s true that independent directors come to the table without family baggage, those who view their role as peacemakers rather than decision makers can actually enable a family director’s bad behavior, Baumoel notes.

“Not everyone is going to be happy all the time,” Levensohn points out. “You can’t please everybody, if you’re trying to steer the right course for the overall organization.”

Effective independent directors help family business leaders think things through clearly from a business standpoint. “They try to take all the emotion out of the decision, because oftentimes those decisions become extremely emotional,” explains Clemens. “Independent directors can really help family members on the board to act on facts, not on feelings.”

They do this by asking the right questions. When Clemens joins a board, he tells family leaders, “‘My job is not to come in and give you answers. My job is to come in and ask you questions. And I’ll be asking you questions that you either can’t or won’t ask yourself.’ And in fact, some of those questions actually help solve the family conflicts that are happening.”

Clemens cites examples of such questions: “This doesn’t seem to make business sense. Why are you doing it?” Or: “This manager doesn’t seem to be performing well. Are you keeping them on just because they’re a family member? Do you see something in their performance that we don’t see?”

Before engaging independent directors, the family must clearly identify a shared vision for the company, Levensohn says. “Once you do that, you can keep coming back to it, saying, ‘Hold on a second. I think we all signed on to do the following. And let me explain to you why X is not consistent with achieving that shared goal.’”

Cultural fit

It’s essential to ensure that prospective independent directors are the right fit for the family culture.

A soft-spoken individual likely won’t fare well among directors who debate like street fighters. Families who shy away from confrontation need an independent director “who is willing to confront, but able to do it in the right way,” Clemens says. If the fit isn’t right, he predicts, the family will shift their focus to the director’s personality rather than the issue at hand.

At The Vernon Company, even though Vernon and his siblings don’t always see eye to eye, everyone understands the independent directors are committed to making good decisions in the best interests of the business and the family, he says.

“I’ve actually had family members, after we’ve had disagreements, who have said, ‘You’ve really chosen a great board,’” Vernon says.