A board of directors is often promoted as a critical tool for growing family businesses—and rightly so. A well-constructed board can bring new thinking and perspective, better deliberation, along with expertise and experience that the business needs to grow and achieve its vision of success.
But boards are not a magic elixir, either. When the owners, management, and board collaborate effectively, their efforts can significantly enhance the business. But, when the owners fail to communicate their vision—their direction—for the future of the business, there is a real possibility that the board’s well-intentioned efforts will veer off course, destroying capital the family has worked for years to create.
The chain of events that leads to destruction of capital by a board composed of talented and well-meaning people doesn’t happen overnight. Let’s see how this might occur.
Many family businesses start off without a board of directors. The founder runs the business, and a board seems unnecessary: the founder is fully informed and has oriented company staff and the wider family toward their vision for the future. A board would just be…intrusive. And, the directors might try to tell the founder what to do. No thank you!
STEP FORWARD TEN YEARS
The business is expanding, and with ambitious efforts underway to push into new markets, the founder’s trusted advisors are pushing the company to put a board in place—and not one made up solely of family members, or family members plus the VP of Finance, the company’s outside counsel, and accountant, either. A board with outside directors! The advisors point out that adding one or more outside directors with relevant experience and expertise will help the company navigate the expansion more quickly and at lower cost, and position itself for further growth.
The founder ultimately is persuaded (thanks in part to encouragement from a business-owning friend who built a board, and credits his success to the input of his independent directors). The board is created, and recommendations from the advisors and the friend result in a group of directors with an effective balance of experience, skills, and perspective. The expansion goes better than anyone anticipated, and the business flourishes.
STEP FORWARD FIFTEEN MORE YEARS
The business is now a well-known regional player in its industry. The board has grown and independent directors now make up a majority of the board seats. The board has helped to both identify a strong group of senior managers, and promote a rigorous planning process that has improved transparency, clarified goals, and unified the team. The founder, who is now thinking about retirement, has found the board to be a big help, and certainly not an impediment.
“Okay,” you say. “That’s a good pitch for an outside board. Sounds to me like this board has been a good addition and an important factor in the company’s success. But, where’s the bit about it running away with the business?”
THE BIGGEST CHALLENGE FOR THIS FAMILY BUSINESS AND ITS BOARD IS STILL TO COME
How to navigate the leadership transition when the founder exits and the business comes to be owned by the founder’s heirs.
At this point—especially, when non-managing owners come to control the business—there is a real risk of what we might call a “vision vacuum.” The new owners—perhaps, the founder’s spouse and children—are committed to continuing the founder’s legacy and achieving the vision, but they probably aren’t all that clear about the details, and it is unlikely they have taken time as a family to articulate the legacy and vision. (This is understandable: entrepreneurs are typically too focused on what they’re doing to talk much about it, and some make business decisions by such an intuitive process, they couldn’t describe it in detail, if they tried.)
Newly installed as owners, and a bit unsure of their roles, the successor owners are just grateful that the directors and management continue to carry on the work of the founder and that the company continues to grow.
In this vision vacuum, the board’s vision may come to overtake the founder’s in important ways. The board may begin to follow pathways laid out by other companies they’ve worked with, and focus more on shepherding the business toward a sale or other exit—thereby monetizing for the owners the financial growth that has been achieved. After all, isn’t a lucrative exit the desired goal of every business?
But what if that’s not the outcome the owners want? What if they have non-financial objectives that produce non-financial capital—continuing a multi-generational legacy, being a highly regarded employer in the community, creating career pathways for children and grandchildren? The vision vacuum, and the focus on a financial exit, may mean that the board delivers a financial payday, even as it destroys these non-financial objectives.
SO, IS THE ANSWER TO NOT CREATE THE BOARD AT ALL?
No—failing to bring on perspective, experience, and expertise may well leave the business as an “also-ran,” unable to grow and achieve its objectives. Is the answer to replicate the founder-led model by pruning the tree and avoiding having any non-managing owners? That might work, but it also might violate the family’s objectives of shared ownership.
The best answer is to avoid the vision vacuum in the first place, by developing an effective Owners Council that can clearly articulate its vision of success to the board and management over generations. When the owners do their work, the odds of a runaway business drop. After all, without a compass that points North, how would any board know where to steer?