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Independent Directors for Family Owned Business

This article is provided by Institute For Family Business (IFFB) 

“We are likely to dissolve the board” declared a family-owned business leader during a meeting this writer attended last year.

The reason for dissolution was that whereas the value of the governance body providing advice on business strategy and operating issues was unquestionable, the board was facing challenges addressing the dynamics that present themselves when the family-owned business is at the intersection of family and business - intra-family conflicts, sibling rivalry, and entitlement among others.

The company had an independent board member, who believed that the family needed to deal with these type of face-ups in the family and the board had no role. The discussion subsequently took a life of its own, as the writer recommended that the business seeks the right independent director to assist it take on issues beyond economic value creation and steadily benefit from the crucial ingredient of independent governance. This worked like magic.

Such are the scenarios witnessed in most family-owned business. This particular one was lucky to have a happy ending, but still presents the typical minefield family-owned businesses face.  It brings into perspective the skills set and value addition required to reap the benefits of utilizing independent directors.

In essence, unlike their counterparts in the non-family private business, the best independent directors in a family-owned business ought to understand more than just the financial goals of the business. They must be alive to, and assist the family address potentially destructive - while augmenting the positive - family dynamics. The mandate of an independent director in a family firm strides beyond assisting the family create shareholder value, to things that the family shareholders value, including long-term family engagement, unity and alignment.

What to seek in independent directors – for family firms

It is desirable that an independent director possess capabilities that support strategic growth, along with deep knowledge and appreciation of the business goals and values. They should also possess – beyond business – related capabilities that include;

Communication: Good communication skills are a sought - after quality among directors of any company.  However, in family-owned businesses, it is “super important” considering the added complexity and importance of family dynamics. Communication skills determine their ability to convey important ideas and suggestions within and across groups. Particularly issues that require shared understanding and collaboration on the board, by the executive and non-executive members, employees, current and potential stakeholders.

Empathy: To aptly handle the unique dilemmas faced by family-owned enterprises - from sensitive issues, such as cross generation issues, to succession, to addressing performance output of a family member.   Independent directors are best equipped to be understanding. There is a need for them to possess the requisite exposure “been there before” and provided solutions. This enhances an outlook of confidence and instills credibility in the eyes of stakeholders.

Reflective / mature temperament: Independent Directors who can serve as “the voice of reason” are a valuable asset not only in any business, but more so, in family-owned businesses where interactions can often be (mis)taken as a personal attack. Therefore, the director must understand the nuances of family-owned business and look beyond profit motive and counsel regarding the best option for the business and the family.

Where independent directors can exert influence

Independent directors should provide oversight on strategy, growth and control including collaborative problem-solving with management. They should also understand the fine distinction of family dynamics and deploy their skills in navigating the grey areas of family – business overlaps like; 

Family conflicts: A strong independent director could influence the dynamics as an intermediary.  This need not involve communicating on behalf of family members, but by developing a strong trust-based relationship across multiple family members.  In adopting this negotiation position, they then help the family keep the conflict in perspective as well as understand its potential implications to the business. For instance, in an advisory assignment, the institute of Family Business witnessed an Independent director help two warring family factions. It was not largely about one side “winning” over the other, but doing what was for the collective good.  This role included serving as “voice of reason” that counterweighs family factionalism and historical bias and encourages focus on “the bigger picture”.

Non-operating shareholder influence: The best independent directors appreciate the need to involve family shareholders who may not be immediately involved in the business, and yet, as key stakeholders, need to have some intimate contact with the business.  This is a key departure from non-family businesses. For instance, the independent director encouraged the need for the management team to sacrifice business operations time to sit down with young future owners in a family-owned business to assist them understand the business and its future

Talent Management / Mentoring: Independent directors are extremely valuable in mentoring family members – growing “bench strength.” Depending on their area of expertise, independent directors can serve as “sounding boards’ / “in-house” coach and counsel to the family members on areas of their specialty i.e. legal, technical, and financial or leadership issues.  A well-rounded independent director can bring on board insights on the need to balance preserving a sense of loyalty while meeting business goals regarding employees. 

Copyright © 2016 Institute For Family Business (IFB). All Rights Reserved.

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