Business foundersAdding independent directors to a family business board

Key things to know

  • Transitioning leadership in a family business from one generation to the next can be challenging.

  • If your business advisory board is comprised of family members, adding external directors can bring a new perspective.

  • Three steps can help you navigate finding and selecting the right advisors for your board.

Running a family business is challenging enough, but complicating matters, quite often, is the need to manage family dynamics as well. This can become even more evident when it comes time to transition leadership of the business from one generation to the next.

Despite your best-laid plans, giving up power and authority is not always easy when the baton is passed to younger family members. Assuming your business has a board of directors, if it’s filled with family members or even if it includes some non-family employees that have been a part of the business for years, it can be difficult to have a robust discussion of ideas, strategies and challenges.

That’s why bringing in an objective outsider with a fresh perspective may help you find a better way to manage both the transition process and future operations of the company.

Common challenges in a family-owned business

If you’re leading a family business and transitioning roles from one generation to the next, it’s likely issues—and strong emotions—will arise in the process. Issues could include:

  • Succession and transfer of ownership is unclear. This could be due to inconsistent or insufficient communication among family members, including roles and responsibilities that are ill-defined.
  • Family dynamics that can complicate things. For example, younger family members may be reticent to disagree with those who are older, or they may be confused about how to manage their dual roles as employees and as part of the family when conflicts arise.
  • Varying levels of family engagement in the decision-making process. Some may be involved and others not, whether by choice, oversight, or personality.

Advisory boards are often created when control of a family business is transitioning from the first to the second generation. Adding independent advisors to the board often doesn’t occur until a third generation or ownership group takes the helm. By that point, it’s obvious to many that a board consisting only of family members no longer serves the interest of the family business or the family itself.

If your family’s business is transitioning roles from one generation to the next, an independent director may help you manage both the transition process and future operations of the company.

Objective, external directors who do not have a close history with the family can help in making the tough decisions necessary to move your business forward.

Benefits of independent directors on a family board

Outside directors can enhance a family business board in a variety of ways:

  • Provide expertise in a range of subject matter areas, including communication skills development, leadership development, and learning opportunities.
  • Help owners adapt to changing circumstances in the market, industry and even within the family.
  • Help make decisions that are difficult for the family to handle alone.
  • Offer an objective, non-confrontational viewpoint that’s not shaded by emotional issues that can affect family members.

Outside advisors provide a way to create more accountability for founding owners and successors. As independent voices, they can focus on a timely decision-making process to ensure the business evolves as necessary to meet new realities. This can help make the business more credit-worthy as well as sellable, should either the need or interest arise.

A final benefit of bringing in advisors not currently connected with your family or enterprise is that it gives you an opportunity to add or expand diverse viewpoints in your organization.

3 steps to adding independent directors to your family business board

If you’re ready to bring in outside experts to your board, these three steps can help you navigate the process.

1. Determine your purpose

What are your primary objectives for bringing in independent advisors? Consider the following as you assess the purpose of your board and the form it will take. You may want:

  • Expertise specific to the operation of your business as you anticipate future challenges and navigate uncharted territories.
  • Growth of your networks, personal contacts and resources.
  • Improved accountability and transparency in setting measurable goals and gauging performance, along with improved financial reporting and auditing.
  • Knowledge about better monitoring and measurement of execution on management’s strategic plans and guidance on better practices in evaluating key employees. The confidential input and oversight outside advisors can provide can model helpful practices.
  • An outside perspective as a sounding board for your CEO, who is trying to manage the complexities inherent in a family business. An independent advisor can offer an objective viewpoint and be in a good position to facilitate areas of conflict.
  • A boost to your firm’s credibility and enhanced professional image.

Narrowing down a list of top objectives will help in your search for candidates.

2. Write a position statement

Once you have your search criteria established, create a position statement that can help potential candidates assess their interest in and qualifications for the position.

The position statement should include:

  • A brief description of the company and family, along with your purpose, core values, goals and design of your ideal advisory board.
  • Qualities and capabilities desired in prospective directors and your vision for the board’s structure.
  • Details of how frequently meetings are held and the format of those meetings.
  • Level of commitment required, such as whether you expect the outside director to create and/or review reports or be involved only in discussions.
  • Other elements such as the length of the term of service and compensation, if any, for the role.

Once the position statement has been written and approved, assemble a search committee comprised of members from each generation and family branch. It’s important to represent all pertinent viewpoints in selecting an outside candidate with which all family members are comfortable.

The search committee should disseminate the position statement to potential candidates for their consideration, as well as to any trusted advisors and contacts who are comfortable passing it on to individuals they believe might be good candidates.

3. Begin the selection process

When candidates who meet the desired criteria begin to surface and are presented to the family for consideration, be sure to verify references and schedule interviews, preferably both at the business and candidates’ offices.

It may take several months to a year to go through this process and identify the right people for your advisory board. If you’re seriously considering finding candidates, you’ll want to get started quickly. Even with the commitment required to go through the selection process, this is time well spent. You’ll gain invaluable knowledge and increased buy-in as the family makes these selections together.

The start of a new era

Adding independent directors to your board represents an important milestone for your family business and may require a period of adjustment for everyone involved. However, families who take this step will likely benefit from the wisdom and expertise an outside perspective can offer in helping their business reach the next level.

Learn how Ascent Private Capital Management® of U.S. Bank works with business founders and owners.

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