Trend by Kevin Logterman, Managing Director, Family Business and Industrial Practices  

A recent survey by Family Business Consulting Group (FBCG) of 424 family businesses uncovered valuable findings about the benefits of creating an outside board of directors. 

The research showed that independent boards contributed to the longevity of a firm and also helped manage the complexity of ownership evolving from multiple generations. The findings additionally suggested that business owners use a board as a tool to help them address issues raised as the business becomes larger with more dispersed ownership.

In my role at Cook Associates Executive Search, I specialize in executive level assignments for family-owned and private equity businesses. Recently, I surveyed leaders in family businesses on the advantages of placing people outside the family circle on to the board of directors. Three specific benefits underpin the advantages private companies reap from outside board membership. One of the most important functions of an outside member is that they can act as an impartial sounding board for the leader of the business. The second advantage of adding outside members onto the board of a family-owned business is that it brings in outside expertise and perspective. Finally – there is a bonus benefit – an outside member on a family business board allows the family to focus on family.

Sounding Board for Leaders

Joe Schmieder is a Senior Associate with FBCG, which conducted the study referenced above. With more than 25 years of experience leading multi-generation family businesses as a non-family executive, Schmieder is a well qualified subject matter expert. His career includes work on independent boards where he has contributed in a myriad of ways.

From his experience, Joe believes that not only does an outside board of directors serve as a sounding board for the leaders of the business, but it also helps guard against group-think. An added benefit during trying times is the tremendous asset of drawing from the wisdom and experience of a board and having the opportunity to see issues and challenges from the eyes of executives who have dealt with similar situations and can lend their experience to the family business. He has, however, encountered family businesses that were resistant to an outside board, even though research has shown it to be one of the three most important factors in multi-generational success. 

Throughout the years, Schmieder has come across businesses that question the value and productiveness of a board.  Reasons can vary. From the requirements for heightened fiduciary responsibilities, an inability to make changes, to the need to keep board meetings fresh and up-to-date.   Joe commented, “Reasons include questioning the value and productiveness for having a board to simply taking the time for meetings.  But, in many cases, the underlying reason is a resistance and/or fear of change.”

Schmieder has heard a lot of reasons over the years but none that have convinced him that the benefits far outweigh the concerns.  If businesses want to work towards a formal board, starting out with an Advisory Board is a logical and productive step towards realizing the benefits for having outside advisors.

Industry Expertise & Unique Perspective

Jan Acker, President & General Manager of TriEnda, heads one of the largest industrial plastics manufacturers in North America. Acker has been a member on three family boards during his career and currently serves on one. He believes his value as a board member comes from professional management experience, a proven ability to grow businesses and industry-specific experience.

Acker relayed an interesting story about serving on a board where he leveraged his expertise to give the owning family guidance. The company was a producer of metal stampings for the automotive business. Although he was asked to join the board by the non-family Chairman and CEO, Acker was approached by the family, not too long after joining the board, to evaluate the performance of the Chairman / CEO.  Once the initial evaluation found significant gaps in leadership and results, Jan was asked to lead in the development of a plan to make the necessary changes in leadership, all the while being mindful of the reputation of the business and the family. The takeaway from that experience, Acker said, is that, “Family businesses are not looking for skyrocketing growth. It scares family businesses. They like consistent growth. Family businesses are concerned with much more than the business – the people, legacy, culture, community and their contemporaries.”

Another seasoned board member is Charles Colman, the CEO of San Jamar. His perspective is unique from other board members because of his experience with his own family’s business enterprises. Colman offers this advice to family business owners, “Parents who are transitioning a business can benefit greatly from having someone on their board that has been through it as a son or daughter.”

Colman also cautions when setting up a board for the first time that, “Leadership arises out of strength. When setting up a new board, it is extremely helpful to surround the board with talent and experience different from that of your own.”  Colman cites an example of a family business that had grown as a result of their strong manufacturing processes but needed help at the marketing and business development level. Ultimately Colman’s strong background in those particular endeavors was the reason he was asked to join the board. He also advises it is, “imperative, especially for new boards, to set up a yearly review for board members.” By establishing a policy of one-year terms for board members there is “wiggle room” that allows for both the company and the board member to determine fit and performance.  

Board Promotes Family Focus

Both Acker and Colman’s experiences highlight the specific value of implementing board members who are outside the family circle, and bring both industry expertise and outside perspective. An added qualitative benefit of creating space for an outside board member is that it allows the family to focus on family. In fact, many family businesses that decide to go in the direction of a board also take steps in creating a family council. A separate family council provides a vehicle for family communication and cooperation. As the business transitions from one generation to the next and families become larger and more complex, creating separate business boards and family boards can bring many benefits to the overall health of the business and the family.

During my tenure with Cook Associates Executive Search, I have worked with a particular family that established both a business board – consisting of non-family executives – and a family council that keeps everyone involved and informed on all the business and family issues. With effective leadership of board entities, this particular family is cohesive and cooperative and has reaped the rewards of a well-run business as well.

In closing, the benefits for having an outside board – be it advisory or formal – far outweigh the negatives. Any family interested in the success and longevity of the business and the family should seriously consider taking steps to integrate members outside the family circle on to the board of directors.