The role of the board and the increasing challenges faced by directors have been much talked about these days in the light of various high profile scandals, the effects of the pandemic, changes in working patterns, the increasing burden of regulation and economic uncertainty. The board of a family company may not attract as much public attention as a listed company but it faces the same challenges as any other board and possibly even more, given the involvement of the family in the business.
Make-up of the Board
The make-up of the board is crucial. Is the entrepreneur who originally set up the business the only or controlling director? If there are more directors, are they family members? Were they selected on merit or do they sit on the board just because they are in the family or hold shares? How long have they been in office, do they have relevant skills and what are their roles?
Every company needs to review the composition of its board from time to time and ask itself, what is its role, are the right people in the right jobs, and how should their performance be measured? These topics are discussed in a new report published by the Financial Times on the changing roles and expectations of board members. The traditional metric of success is profitability, but it is not the only one. Other metrics such as company values, the quality of the leadership and awareness of ESG issues and diversity are becoming increasingly important. Directors are expected play more than just a passive role, turning up to board meetings and reacting to the board papers provided by the executives. They are now expected to understand the company’s business, the markets in which it operates, and the threats to the business be they from competitors, supply chain issues, cyber attacks or changes in regulation to name but a few. They need to ask challenging questions and think strategically.
The Board as a Team
The board needs to be formed as a team with a broad range of skills. Individual directors need to have clear briefs and be held accountable. Research shows that the more diverse a board is, the more successful it will be, so where possible, men, women and people from different backgrounds who bring different perspectives to the table should be appointed. They should be expected to challenge the status quo and ask difficult questions. As a family business grows, it is likely to become more difficult to fill positions only from the family. The point will come when the family needs to decide whether to bring in outsiders to hold executive roles including those of Chairman and CEO. Non-executive directors can be appointed for their particular expertise and experience and to act as a critical friend to the executives.
Family Values
While the family may hold all the shares and have ultimate control, as more non-family members are appointed to executive positions, the family’s day to day involvement in the business will diminish and its role will change. The family may focus on defining its values and ethos and introduce mechanisms, such as including them in a job specification or service agreement, to ensure that they will be respected. Because the family and the executives will have different priorities, tensions will arise which will have to be managed. The family will therefore need to choose the non-family directors and executives carefully and appoint people whom it trusts and respects – and who trust and respect the family and its values.
Is it time to address those difficult issues?
A growing and successful family business represents a challenge for the family. Often, tensions arise because difficult issues have been avoided for too long, such as succession, governance and control. However, if they are faced head-on and dealt with constructively, both the business and the family will benefit. The role of the board, and particularly the independent directors, is to bring a fresh perspective and facilitate the process.
If you would like advice on structuring your family company, please speak with Stephen Morrall or your usual contact at MEUM.
Please email Stephen on stephen.morrall@meum.group