The Board of Directors
Over the years, many new rules and guidelines pertaining to board composition and duties have come into being. The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO possessing integrity, for sure, who will be devoted to the company for his/her business lifetime. Often, that task is hard. When directors get it right, though, they need to do little else. But when they mess it up … –Warren Buffet, letter to shareholders, February 2020
The board of directors is a first line of defense. It is the tool of checks and balances par excellence.
Before building a board of directors it is important to understand what a board does, and whether the shareholders need one.
Not all family businesses need, or are ready, to have an IBM-style board of directors. Some are content with a hybrid-type board, combining the functions of a shareholder assembly and those of a board of directors.
Others need a longer time to transit from a private and collegial decision-making forum to a more formal one.
Regardless of circumstances, once the shareholders decide they need a board, they would need to determine what kind of board their business needs, and what kind of board the shareholders can work with.
Most legislation is silent when it comes to determining the composition of the board, the profile of the board members, or the tenure of the directors.
As a result, there is no fixed or unique formula for a successful board.
The answers to these questions will depend on the needs of the business over an extended period of time.
Prior to determining whether a family needs a board to take over the management and oversight of their family business or not, it would be interesting to explore what a board actually offers the family and shareholders/owners from a family business perspective.
We are of the opinion that having a board for the sake of having one, and not utilizing it as it should, is a waste of time, money, and energy.
Indeed, many families we know think that they do not need a board, and most believe that such a tool is useless. They are the shareholders, they own all the assets, and they know best.
This may be true at the startup phase of a given business, but unfortunately, over time complacency settles in, and mistakes are made.
So, what can a board offer?
The board may offer, inter alia,
1. The family
• Independent oversight: Removes emotions from the decision-making process.
• Professional approach: It does the “homework.”
• Checks and balances: It regulates shareholder access and influence over decision-making.
2. The shareholders/owners
• Ownership neutrality: Removes emotions from decision-making.
• Institutionalized approach: Regulates shareholder access to and influence over the decision-making process.
• Protection: from “irrational exuberance.”
Once a family decides it needs to appoint a board, it would need to investigate the various factors that must be taken into consideration when building a board of directors. Not every member of the family qualifies to sit on the board, and not only family members qualify to sit on the board
Early on, families should widen their scope and identify the most qualified individuals who can assist them in managing their business.
They should not fear recruiting non-family members and non-executives to sit on the board. To give them comfort that neither will take the till and go home with it, they should (1) find the best talent out there and (2) introduce effective checks and balances (the famous trust and verify theory of Ronald Reagan) mechanisms to reduce risk.
Most of the family businesses we have worked with tend to want to appoint family members to the board.
Sometimes, this defeats the purpose.
The questions below will help guide your thinking with respect to the board of directors and its members:
1. What is the desired level of family involvement in the business?
2. What skills do family members have to contribute (if any)?
3. Where are these skills best used?
4. Who are the right people to direct the family business?
5. What skills will the business benefit from/is the business lacking?
6. Where do we wish to take the business in the next 5–10 years?
7. How are we going to get it there, and what types of challenges are we likely to face? (Think of the black swan.)