Ask a multi-generational family business owner whether they have a board and you are likely to get more than a “yes” or “no” answer. In fact, there are three common responses for those that have boards:
Response 1: “Yes, we couldn’t live without it!” This is usually followed by describing a dynamic, skilled, and innovative team of family and (often) non-family board members who are clear on their mandate. These organizations tend to be well run with effective management, planning, and accountability practices. Board members are selected strategically based on the contribution they can make through their KASE (knowledge, ability, skill, and experience), network of relationships, and/or life stage attributes that align with the needs of the business. Board member performance is actively measured and terms end as the needs of the business change.
Response 2: “Yes, and I wish I could get rid of it, it is a waste of time, money, and energy!” Followed immediately by a lament about how controlling, constraining, or complex they are. In these cases, the role of the board is often unclear, members were selected for a variety of less than strategic reasons, and members lack independence. We see these types of boards when: a) good intentions fall short of best practice; b) there is a lack of understanding or commitment to the board process - including management follow thru; c) when there is an incomplete transition and the predecessor generation has turned over operational management yet, maintains control through governance; and d) when board members are selected based primarily on personal relationship with predecessor generation (eg., golfing buddies and friends).
Response 3: “Yes, we meet when we have to.” This is the “do no harm” board. Board members do not wreak havoc for the family business leader, nor does the business reap the benefits of a dynamic collaboration. The primary board function may be seen as a buffer for family conflict, a legal compliance ‘to do’, or a structure that was put in place because it was “a good idea at the time and we just haven’t done much with it". No matter what the descriptors are, the value of a robust board of advisors is being missed and the cost is lost opportunity.
When describing the choice to forgo a board, the response usually includes a reaction to having heard stories about Responses #2 or #3. This reflection is followed by statements like “we’ve never needed one” or “we’ve been thinking about it, but we’re not sure where to start”. In these cases, family business owners (governance) are likely also the active managers (operational management). In rare cases, the family has been so successful at navigating relational complexity and their market environment that the need for a board has not been apparent. However, we've all heard the discouraging statistics about the number of family businesses that fail to go beyond the 3rd generation.
This is due, in part, to a lack of functionally separating governance and management along with under development of top leadership capacity. Generally, by the time family businesses reach the so called “cousin generation” (G3; two generations after the founder) those that lack clear separation of operational management and governance tend to develop exacerbated PACI (power, authority, control, and influence) issues that can strain family dynamics. Non-family executives often struggle to make a positive impact and a lack of clarity for decision-making systems, planning, and performance management are common.
Separating management and governance fosters opportunity for smoother succession efforts, improved business performance, and increased family cohesiveness. Beyond these important aspects, the process of organizational and family development required to separate management and governance can yield powerful results. What's required to achieve the results? Four key attributes (which are also best practices for growing organizational capacity):
1. Designing formal planning processes for strategic direction, resource allocation, and performance management.
2. Creating role clarity and defining decision-making authority
3. Aligning performance measures and evaluation practices
4. Identifying and closing gaps in KASE that are holding the organization back
Developing or enhancing these attributes increases organizational performance, supports identification of new strategic opportunities, drives more money to the bottom line, and fosters family cohesiveness. Beyond developing structures and systems to enhance performance, the most dynamic boards add value by giving access to skills, experience, and relationships the organization may not otherwise realize. For more on developing family business boards, check out these resources:
1. Harvard Business Review: Every Family Business Needs and Independent Director
2. Harvard Business Review: Lessons from Great Family Businesses
3. McKinsey & Company: The Five Attributes of Enduring Family Businesses
4. Family Business Review: Viewing Family Firm Behavior & Governance Through the Lens of Agency & Stewardship Theories
5. Harvard Law: What is a Board’s Role in a Family Business?
6. Harvard Business Review: A Guide to Big Ideas and Debates in Corporate Governance
Or, drop us a note at: admin@ockiwi.com we’re happy to help or connect you with other resources.