How a more effective board of directors can help a family business prepare for the future.
Nearly every successful family business reaches a point when the founders or business leaders realize they need an effective board of directors to sustain long-term growth and take their business to the next level as a viable commercial enterprise spanning multiple generations. In fact, 90% of the world’s largest family businesses surveyed in the EY and Kennesaw State University report entitled Staying power: how do family businesses create lasting success? stated that they have a board of directors.
However, a critical opportunity may be missed if forming a board is viewed as a check-the-box exercise. A corporate board composed of members capable of bringing diverse skills and experience to the table, offering sound advice, and providing oversight of corporate governance can serve as a powerful catalyst for helping a family business seize a competitive edge and sustain growth.
As they set out to form a board of directors—or as they review the effectiveness of their existing boards—family business executives need to step back and think carefully about their goals and objectives, what type of business they want to build, and where they want to be in five or ten years, or when they prepare to pass the company on to the next generation. After this assessment, they can then address three sequential steps that will help them form an effective board of directors poised to balance the needs of the family with all of the stakeholder demands and guide the business toward achieving long-term, profitable growth.
Define Roles and Expectations
One of the major stumbling blocks many family businesses must overcome when they establish a board of directors is clearly demarcating the roles and responsibilities of the board. This is especially true in any business where the founder still plays a pivotal role, but even more so in a family business where family members may struggle with giving up control to a son or daughter, another branch of the family, or even an outsider.
To mitigate this, family businesses need to clearly document the roles and responsibilities of all executives and directors and establish clear boundaries in terms of scope. While this is important for all boards, it is absolutely essential for family businesses, especially those companies in which the CEO is a family member. For example, some companies may give the CEO free rein for sales, marketing, and new product development, while requiring the CEO to seek board approval before engaging in talks about a potential merger or acquisition.
Just as important, the business must arrive at the right composition of board members. Among the family businesses that participated in our survey, 50% said their boards are composed exclusively of family members, while only 28% said they have an equal number or more non-family voting members on their boards. At the same time, more companies recognize that they need to seek people with outside expertise. Corporate boards go to great lengths to make certain that board members have different skill sets—from financial experience to expertise using new technology. CEOs should be ready to recruit people with experience outside the family business if no family member has the requisite skill set.
Identify Current Gaps
Once the roles and responsibilities for the board have been established, the family business leadership team and board of directors should assess whether the board is capable of helping the business achieve its goals. This assessment should be candid and requires that all involved consider the following five broad areas:
- Composition: Determine whether the mix of board members is adequate to meet the demands of the business. Simply put, boards must have the right set of competencies, particularly in areas such as finance and technology, which complement or augment the skill sets of family members.
- Role in decision making: Study how the board members and management team participate in strategic discussions. To be effective, a functioning board must be capable of providing a long-term view for the business and offer an external perspective of the marketplace. It also should be able to identify and focus on priorities vital to the future, influence business strategies and goals, and monitor financial health and performance.
- Balancing priorities: Assess whether the board understands the requirements of its role and where the boundaries lie in respect of the rest of the business. This often requires the board to engage in an in-depth discussion and necessitates a clear understanding of when the right to speak for the family ends and the needs of the business take over. Trying to balance the interests of all stakeholders is a critical part of this exercise.
- Board dynamics: Examine whether the board relationships nurture a sound working relationship. Key questions: How does the board manage conflict, and do members bring the proper mindset to meetings to help the business solve its problems?
- Processes and procedures: Establish if the business has a cadence for regularly scheduled meetings and sets clear expectations about how they will be conducted. For example, does the CEO provide an agenda, along with presentations and reports, well in advance of meetings?
Family businesses that fail to take these steps run the risk of board meetings turning into a family reunion, where family dynamics may undermine frank discussions about the business.
In the marketplace, family business members must remember they are competing with non-family businesses that often follow leading practices when setting up their own boards of directors. A 2014 study by Boris Groysberg and Deborah Bell in the Harvard Business Review noted that when it comes to such key skills as human resources and talent management, non-family business boards reported a significant discrepancy in directors with the requisite skill sets. The study also reported that many family business boards indicated they did not have a process to determine the skills required for new directors, nor did they measure performance through regular annual assessments. The research also suggests that many did not have an effective CEO succession-planning process and that they rarely discussed who would succeed the CEO in the event of an emergency.
Successful family businesses understand that succession plays a critical role in helping their company transition from one generation to the next. As a result, they proactively address succession planning. In Preparing or procrastinating? How the world’s largest family businesses undertake successful successions, a carve-out report from Staying power, 44% of the businesses reported that their board of directors was responsible for succession planning. Another 45% said the CEO, the owners, or a family council was responsible.
Develop Action Plan to Address Gaps
After the board and management team have identified existing gaps in performance and skill sets, they need to prioritize initiatives based on the impact on the business and ease of implementation. Since finding board members with the desired competencies often is one of the key challenges, many boards must engage in a rigorous search for new members.
To that end, many family businesses may need to hire an outside search firm to help them look beyond the professional networks of family members. The position is too important to ask a corporate attorney or a trusted business adviser to join the board. To be truly effective, the board should find directors who will be ready to ask tough questions and not rubber-stamp key strategic decisions.
Family firms also must become more rigorous in determining how they can improve the governance and oversight of their business. This might entail taking steps to make certain information is distributed to other stakeholders more frequently and with greater clarity, especially with respect to any risks facing the business. For example, in Staying power, we found that some 90% of family businesses said they were either confident or very confident that they were effectively addressing risks related to cyber threats. This reveals striking overconfidence when compared with other business studies showing that most corporate executives are aware their organizations need to do more to address potential cyber attacks.
To make certain that the board and management team continue to move forward and address these shortcomings, family business boards also should provide clear benchmarks and milestones and review their progress after 60 days, after 120 days, and over a longer time horizon after two to three years.
As family businesses expand and move into new markets, a strong board of directors offers a critical competitive advantage. An effective board of directors is capable of addressing multiple business priorities—such as offering strategic insights and providing oversight of governance and risk mitigation. Just as important, board members also clearly understand their role of balancing the needs of all stakeholders, from family members to employees and the community.
A family business led by an effective board of directors is poised to help the enterprise identify risks and solve problems proactively, leverage existing and new relationships, and take advantage of the inherent business characteristics that give it a true competitive edge in the marketplace.
Carrie Hall is an assurance partner in Ernst & Young LLP’s Atlanta office and is the EY Americas Family Business Leader. She oversees Ernst & Young LLP’s services to family-owned business across the Americas. Carrie has worked with entrepreneurial family-owned businesses for over 29 years, providing audits and advising on matters such as growth strategies and sustainability, and she has served as Ernst & Young LLP’s Southeast Region Strategic Growth Markets Leader. She has assisted in acquisitions, divestitures, and debt and equity transactions, including initial public offerings. Her clients have included some of the largest family businesses in the Southeast, with a retail industry focus.
Elizebeth Varghese is a partner in Ernst & Young LLP’s New York office and focuses on the development of integrated consulting solutions. Prior to this, she led the Americas HR Performance Improvement Practice, and has also been the Americas Talent Management Consulting leader. Elizebeth has lived and worked around the world, and brings extensive experience in executing business strategy through human capital initiatives. She consults on talent strategies and people management initiatives, functional optimization, and organization effectiveness. She enables business leaders and boards to navigate through changes in global business conditions, by leveraging their talent pool.