Psychology of a Private Company Board Part 2: Family-Owned Businesses

Family Dynamics Meet Company Strategy When Building a Successful Family Business Board

[Editor’s Note: Read Part 1 by Jeremy Waitzman: “Psychology of a Private Company Board in Fund-Owned Businesses.”]

 

The board of directors (“Board”) of a family business owes its fiduciary duties to one constituency: the company’s owners, the shareholders. The question of “who” owns the company matters greatly to the Board’s direction, but there are often competing voices within the owning family. In this article, we briefly explore the role that the Board plays in the governance of a family-owned business.

Dynamics of Family-Owned Businesses

Family dynamics necessarily dictate most everything about the Board’s role in the context of a family-owned business. Namely, those in control of the family usually control the Board and, therefore, the company. In a first-generation family-owned business, the family matriarch/patriarch will typically be the dominant voice and take whatever actions he/she determines is appropriate, regardless if those actions are conducted wearing the “hat” of the owner, board member, officer or employee of the company.

However, once a family business is at least one generation old, control is usually more diversified. This diversification may occur for several reasons, but typically factors on a multitude of family branches, the degree of company involvement by certain family members (but not others) or the roles played by family members in the business.

Evolution of the Board in a Family-Owned Business

The makeup of a Board tends to evolve over the life of a family business. In the beginning, the Board is often a “paper” board that likely exists as a legal formality. It may sign an annual consent and bank documents, but it doesn’t really serve any separate legal or operational function as the decisions remain largely with the founder. The members of this “paper board” generally consist solely of family members and serve at the will and direction of the founder (and oftentimes may just consist of the founder).

As the company first begins to grow, its primary advisors (e.g., lawyer, accountant, consultants) tend to serve as a quasi-board akin to a non-binding advisory board where discussions occur and advice is provided, but ultimately decisions continue to be made by management.

The next iteration of the fiduciary Board—the decision-making Board—usually occurs either because of substantial company growth or a generational transition where the dominant voice(s) have retired or passed away. This is typically the stage when the Board begins to function as a “true” Board, meaning that the Board operates independent from day-to-day management and has a true institutional purpose other than to merely serve as a rubber stamp. Also, it is usually at this point where the Board may consist of non-family members. Depending on the size or sophistication of the company, the Board may still include those with close ties to the family (e.g., a family friend). But it is also typical to include true independents with expertise and perspectives not currently possessed by the current members of the Board.

The “trick” for the Board after the first generation and/or introducing outsiders is adequately balancing the needs of management, ownership and family. A Board must continue to evaluate performance, develop big picture strategy and perform these functions through the lens of what is best for the company, while simultaneously fulfilling its obligations to the owners: the family. This may not always be a straight-forward task as the family is not always 100% aligned on priorities. For example, an older generation may be more interested in legacy issues or maximizing current value, while the younger generation might emphasize long-term income generation or growth.

Use a Family Council

In order to navigate the different perspectives and needs, a Board, or perhaps the family itself, might employ the use of a family council. Generally speaking, the role of the family council is to:

• Build and maintain an understanding of family values
• Promote family unity
• Foster the business success of family members
• Liaise with the Board to effectuate these wishes.

The family council may essentially function as the planning forum for the family in a similar manner as the Board does for the company. Nevertheless, the decisions of the family council will almost certainly affect how the company functions from a big picture perspective. This is because the mission statement of the family (or if no mission statement, the loosely stated goals) will dictate what the priorities should be for the Board and, therefore, the company.

The failure to use a family council or similar equivalent usually results in a much higher percentage of the Board’s time and energy being used to settle family disputes rather than advancing company and shareholder goals. Further, depending on the makeup of the Board, the Board may not be equipped to deal with issues such as sibling rivalry, as opposed to a more typical business issue, such as evaluating a new product line or expanding to new markets. This is especially true where the Board members themselves are the ones with contrasting opinions or rivalry. As such, the individuals who are serving on the Board may substantially affect the role of the Board itself in this context.

A Successful Family Business Board Focuses on the Interests of the Family

Obviously, whether it be an interested family member or a true independent third party, the members of the Board are all going to bring with them their personal experiences and viewpoints. This can be both a benefit and a curse to the company and the owners, but so long as the Board acts within the interests of the owners and does what is “best” for the family, then the Board has conducted itself in the proper manner and satisfied its fiduciary obligations.

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[Author’s Note: A special thanks to Victoria (Vickie) Rock of Veritext, who took notes from the seminar by a similar name on June 11, 2019, upon which this article is based.

Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Board of Directors Boot Camp and The Role of the Board in a Private Company.]

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