Many family-owned businesses are resistant to forming a board for their company. Leaders of these firms fear they will lose control of their company if they create a board – either a board of directors (who have fiduciary responsibility) or a board of advisors (who only make recommendations). Another concern is that of revealing secrets – usually financial secrets, such as keeping the matriarch of the family or an uncle on payroll, even though he or she doesn’t contribute to the business – to outside scrutiny.
While these are normal and understandable concerns, in our experience a well-constructed board is a competitive asset to a family-owned company or a small to mid-sized company. A board serves at the discretion of the owners of the firm, meaning the owners can hire and fire directors at any time. Truly, any fears of losing control and unfounded.
We believe that the benefits of having a functional, independent board far outweigh any drawbacks. So we suggest five reasons to consider forming a board for your company:
1. Succession planning and decision-making. Many family-owned businesses today were founded by
baby boomers who are reaching retirement age. Succession planning, especially naming a new CEO or
president of the company, can be fraught with emotional issues coming from the family system involved
in the business. 70% of family-owned businesses either fail or are sold to outsiders at the time the
founders retire – and, often, it’s because the anointed president is not qualified to lead the company.
A board, either of advisors or directors, can be tasked with choosing a successor and presenting this
person to the owners for approval. This eliminates the lens of family dynamics from the important task
of selecting the most talented and experienced person to lead the firm into the second generation.
2. Ability to attract and retain top talent. Many times, highly talented individuals are leery of joining
a family-owned firm because, in some cases, family members are favored over outsiders for promotion
to leadership positions. The existence of a board, especially if the majority is comprised of non-family
members, can ensure that strategy, succession, and policies will be set according to sound business
logic. I know several ambitious and high-potential employees who felt comfortable taking a job in
a family-owned firm only upon learning that the company had an independent board of directors.
Conversely, I also know of talented people who will never again work at a family-owned business unless
an independent board of directors is present.
3. Risk taking. Sometimes, it takes an independent board of experienced business executives to
challenge the CEO to take risks such as entering new markets, introducing new products, or taking on
debt to fund growth. Independent directors should be chosen based on their experience running their
own family-owned business or their industry knowledge. This way, they can provide a “been there,
done that” perspective to the CEO.
4. Strategic direction. One of the important responsibilities of a board is to advise on and set the
strategic direction of the company. In concert with the management team, the board should consider
things such as the competition, the industry, potential disruptions to the business, and the unique
strengths that the company can bring to the market. The board can then offer advice on the strategic
direction of the company, including what the company should be doing and what the company should
be saying no to. It is crucial that board members ask the hard questions to steer the company in the best
5. Accountability. As a company grows, it is essential that all employees, from the janitor to the CEO,
are held accountable to predetermined performance expectations. A board can set expectations for the
CEO and leadership team, and hold them accountable to expectations. A board can set compensation
policies for executives and tie variable pay to the key performance indicators that they create. The
result? A better, more transparent environment in which everyone is aligned to the success of the
In regards to forming a board, the question really is, are you ready to scale your business? Are you
willing to implement disciplines needed to grow a great small business into a great mid-sized business?
A board of directors, composed of experienced business leaders, is your secret weapon to growing a
business and ensuring that succeeding generations of your family will benefit from being owners of a
successful company. What a significant legacy you will leave your family!
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