Board of Directors for Family Businesses

In a family business balancing the needs of the family with the needs of the business is a difficult task. One of the tools proven effective in helping the family business owner is a functioning board of directors.

The board of directors of a corporation is legally charged with the responsibility of running the business. Corporate action is taken by and through its board of directors. There are three primary functions of the board: (1) to establish the policies of the corporation (2) to provide direction to the corporation's management and (3) to oversee the activities of management in running the company. All of these activities are guided by the underlying principle that the board of directors is representing the interests of the owners of the corporation.

A board with a broad range of business skills can provide invaluable advice to the CEO and help him or her work through the complex problems facing businesses in today's competitive market. In many family businesses, the management team is on the lean side and in these cases a board with extensive business experience is even more valuable.

It is important to have outside directors on the board; ideally a majority of the board would be made up of outside directors. Outside directors should be experienced and independent (i.e. they should not have conflicts of interest with the family or business). Family board members should be chosen based upon objective qualifications. All board members should have a strong track record of achievement in business. Relevant industry experience and experience with larger, more complex organizations is helpful but not necessary. All of these attributes give the board members credibility in the eyes of the family. Without credibility the board's decisions will not be supported by the family.

The benefits of a functioning independent board increase significantly as the family business matures and ownership and management become unlinked. Since ownership and management are no longer synonymous, the question becomes how the owners' interests can be conveyed to management and integrated into company strategy while protecting management's ability to run the company without undue interference. As a more diverse group of shareholders comes into being it becomes difficult to reconcile all shareholders' interests.

Take the example of deciding dividend policy in a third or fourth generation business where ownership has dispersed amongst several generations including spouses and not all owners work in the business. Management shareholders typically will want to minimize dividends to reinvest profits to grow the business. Non-management shareholders typically want to maximize their return on investment and so will want to maximize dividends. How does the Company develop a dividend policy that strikes a balance between the needs of the family and the needs of the business?

An independent board, which has the confidence of all shareholders, can act as a buffer between management shareholders and non-management shareholders. If the board gives real consideration to the capital needs of the business and the financial return offered the shareholders, in light of alternative investments, the decision will have a greater chance of being seen as fair within the entire family.

One of the most important responsibilities for the board is to plan for the continuity of the business, in other words, management and ownership succession. The board's role should be to follow the family's determination of the ownership structure that will be put in place for the next generation and its rules and criteria that will govern family candidates for leadership. If the family has not made these decisions, the board needs to emphasize how important it is for the corporation to have a continuity plan and that the plan cannot be prepared without family input. As a succession plan develops, the board should be actively involved in its implementation, including choosing the next generation leadership, based upon the agreed upon rules and criteria.

A functioning board of directors, which has the confidence of the family, can be a tremendous asset to the family business. Many of the difficult issues facing family businesses fall squarely within the purview of the board of directors. An independent board can help the family and the business work out a balance between their conflicting needs in a manner that can allow both to prosper.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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