How Family-Owned Businesses Benefit from a Board of Directors
When a family-owned manufacturing business built an independent board and its impact on the company
Byline: Doug Baumoel
Estimated read time: ~5 minutes
A family-owned manufacturing firm had just finished a six-month family business consulting engagement and now had a basic management and ownership succession plan in place. In addition, a family bank was set up to manage a vacation property, help avoid family conflict over money, and be used as a capital resource for entrepreneurial family members not in the family business. Satisfied with the work done to date, the founder asked, ‘What’s next?’
Editor’s note: Surnames are not disclosed and first names have been changed to protect the identity of our former client.
Situation: A Fast-Growing Enterprise Lacking Structure
With over 500 employees and several international offices, the company was established on the founder’s proprietary technology and rapidly grew within its 25-year history. Although senior leadership had accomplished a great deal in bringing a start-up from an idea to a $150 million operation, they understood that the next growth phase exceeded their direct experience.
To meet future challenges, it was clear that the next phase of consulting work would need to focus on corporate governance. Accordingly, Andrew, the company’s Founder and CEO, was asked to consider building a formal, independent board of directors. His initial reaction was, “Why would I spend time and money creating a board that I would have to report to, and who would decide my salary?”
Andrew’s reaction was typical for private company leaders who are unfamiliar with controlled-company boards. We then presented Andrew several considerations to better understand why an independent board made sense at this point in the company’s evolution.
Three Major Benefits for Establishing an Independent Board
Upon succession, or in the event something happened to Andrew, his eldest daughter, Margaret, would be the trustee of the controlling interest in the company. Unlike the current situation, where the founder, chief executive, and majority shareholder are one person, Margaret’s role would be quite complicated.
In addition to her fiduciary obligation to beneficiaries, her role as a future board member would require her to consider all shareholders, including shareholding employees. She would also have a vested interest in her own employment with the company, as well as the possibility that her siblings might also work at the company. Navigating such a complex landscape with so many potential conflicts of interest would be difficult.
Margaret would benefit greatly from independent board members who could more objectively consider the ownership interests of all shareholders and, potentially, the employment interests of family members. Moreover, an independent board might be necessary to help Margaret manage the inherent conflicts of interests that might exist in her dual fiduciary role of Trustee and Director. From the business’ perspective, if Margaret did succeed her father, she would be a first-time CEO, and a counsel of seasoned business leaders and industry experts could help her direct the company’s path going forward.
None of the existing managers had led a business from $150M million to $1 billion (the company’s goal), and they were aware that this required different skill sets and embraced the idea of independent governance. They understood the need for the strategic guidance, accountability, and structure that an independent board would bring. They also understood that an independent board would continuously evaluate the senior management team and guide the CEO and founder in identifying leadership gaps and management needs going forward.
Future growth was expected to come from the acquisition of new products and services, strategic alliances with larger companies, and investment in new technologies. These initiatives would require both expertise and, possibly, access to additional capital. An independent board could provide the experience needed to advance prospective alliances and provide lenders and investors with an additional level of confidence.
If certain technology developments proved successful, a public offering might be a way to fund significant growth, and some acquisition strategies might make more sense within the context of a public offering. Regardless, any initiative to raise money in the capital markets would require an independent board. It would make more sense for the current owner to create an independent board with which the company could go public rather than having one imposed upon it by its investment banking team.
Because the CEO / Founder owned a controlling interest in the company, there would be no loss of control. However, a proper independent board would expect to have significant influence despite the lack of formal control. A CEO who routinely does not listen to his or her board will eventually lose independent directors. Moreover, a CEO who has a reputation for losing directors will soon be unable to attract good directors in the future. Therein lies the power of a good director. Yet, there would be some comfort for the owner that, ultimately, he still calls the shots and is in full control as he controls who sits on the board.
A timetable of one year was set to have the first independent board meeting with a minimum of two independent directors. Andrew would be chair and lead director. The COO and CTO would each sit on the board, and in-house counsel would serve as secretary to the board. Margaret, the heir-apparent, would serve as board facilitator. She would be responsible for communicating with board members before and after each board meeting to ensure that all directors had needed information and to see if they had comments or suggestions for the proposed meeting agenda. She was invited to participate as a non-voting attendee at all board meetings.
The company was able to attract the CEO of a publicly-traded family business in a related industry as its first independent board member. This industry leader had taken his family business public and knew full well the advantages of staying privately controlled. He also appreciated the unique level of commitment and passion that family members often have for their business. His personal rapport with both Andrew and Margaret developed rapidly.
The company has continued to grow and the board has expanded to three independent directors. The value of this board has proven indispensable in its guidance on leadership issues, as well as several business challenges and opportunities that faced the company. The board has also been a significant development opportunity for Margaret and has given her father the peace of mind that reliable governance brings.
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At Continuity, our advisors are highly experienced in developing independent boards for family businesses. Learn how we can help guide your family through the steps of successfully implementing an independent board.