GROWING A HEALTHY FAMILY BUSINESS
Family Business Governance
Scott E. Friedman
Managing Partner, Lippes Mathias Wexler Friedman LLP
Founding Principal, Next Gen Advisors, LLC
Executive in Residence, University at Buffalo Family Business Institute
GROWING A HEALTHY FAMILY BUSINESS
“...an active outside board has been the
single most important element in [the
business owners] effort to reach beyond
mere subsistence for enduring excellence.”
John Ward, Creating Effective Boards For Private Enterprises
GROWING A HEALTHY FAMILY BUSINESS
Three Circle Model
2
Ownership
4
7
1
Family
Renato Tagiuri and John Davis; 1970s
On the positive+ side of business.
6
5
3
Business
GROWING A HEALTHY FAMILY BUSINESS
“Fight or
flight”
“Little
white lies”
Blink!
Predictably
Irrational
Imperfect
Memories
Selective
Attention
On the positive+ side of business.
“By and large, the
idea that our minds
are susceptible to
systematic errors is
now generally
accepted.”
- Daniel Kahneman
GROWING A HEALTHY FAMILY BUSINESS
“Confirmation Bias”
We prefer evidence that confirms and supports our existing
beliefs, while ignoring information that could challenge or
refute them.
The value of a board of directors:
GROWING A HEALTHY FAMILY BUSINESS
Benefit of a Board of Directors - Credibility
Decisions backed by a experienced and
respected board of directors can
provide stakeholders and employees
with confidence that decisions are
smart, principled and objective.
GROWING A HEALTHY FAMILY BUSINESS
Benefit of a Board - Accountability
“Feet-to-the-fire” accountability
regarding business matters and living out
the core principles
GROWING A HEALTHY FAMILY BUSINESS
Benefit of a Board - Relationships
Board Members can increases your network of:





Potential suppliers
Customers
Sources of capital
Professionals
Others who may help the business
GROWING A HEALTHY FAMILY BUSINESS
Benefit of a Board – Succession Planning
An effective board can:
 Help identify appropriate criteria for a successor,
 Help the family identify candidates who can fill the
criteria
 Provide interim leadership in the case of an
unexpected illness or unexpected death of a family
business leader
GROWING A HEALTHY FAMILY BUSINESS
Benefit of a Board - Dispute Resolution
The Board can serve an important role in
mediating continuing disagreements
between family members
GROWING A HEALTHY FAMILY BUSINESS
Other Benefits of a Board - Subject Matter
1. Strategic planning.
2. Monitor performance of company, CEO to assure competent management
3. Consider major decisions (mergers, acquisitions, new business lines, financing, etc.)
4. Approve budget and related capital decisions (including dividends)
5. Review and approve compensation of senior management.
6. Approve authority level of CEO.
7. Approve succession planning and, ultimately, appointment of successor.
8. Approve intergenerational transfer plan (e.g. retirement plan and estate plan).
GROWING A HEALTHY FAMILY BUSINESS
Other “Intangible” Benefits of a Board
1.
2.
3.
4.
5.
6.
Challenge leadership to “do even better.”
Empathetic advisor.
Different perspectives can provide unique insights.
Stabilizing influence.
Can help educate stakeholders.
A symbol of a new era of “professionalism” in the business.
GROWING A HEALTHY FAMILY BUSINESS
Best Practice:
Selection Criteria - General
Boards should be
built around the
specific needs of the
family business (e.g.
high tech,
international,
manufacturing, etc.).
GROWING A HEALTHY FAMILY BUSINESS
Best Practice:
Selecting Directors - Do’s
1. The best candidates for your board are from larger private businesses that
have surmounted the hurdles that face your business. They can help prevent
you from making mistakes that they may have made or learned about.
2. Age: a balance of age (between 40 and 65) can lend freshness, perspective, continuity, etc.
3. Gender: depending on constituency of shareholders, diversity can be helpful (but be careful
about creating a board with loyalties to individual stakeholders!).
4. Experience: cover crucial areas of needed expertise (but complement, don’t duplicate).
5. Facilitator: consider how board members will interact and if one or more members will have
the personality to help “facilitate” board meetings.
GROWING A HEALTHY FAMILY BUSINESS
Best Practice: Selecting Directors - Don’ts!
The following candidates should generally be avoided:
1. Competitors or potential competitors.
2. Friends.
3. Retired businessmen (may “lose touch” with current reality and board status
may become too important and, so, jeopardize honest feedback).
4. Academics and people from Non-for-Profits.
5. People who are too busy to devote time that is necessary.
GROWING A HEALTHY FAMILY BUSINESS
“Vetoing Board Selections”
When establishing the board of directors, key stakeholders should be comfortable
with all prospective board members. If a key stakeholder is not comfortable with
the candidate, the candidate should be rejected. This helps insure that the new
board begins on a positive footing.
The board, however, should not be established to insure that individual
constituencies are represented. An outside facilitator can be useful in ensuring
that the selection process goes smoothly.
GROWING A HEALTHY FAMILY BUSINESS
Best Practice: Size of the Board
Rules of thumb:
1. 3 - 5 directors for most family businesses;
2. 5 - 9 directors for larger, more complex, businesses.
[there are no fixed rules]
GROWING A HEALTHY FAMILY BUSINESS
Best Practice:
Frequency of Meetings
Generally depends of the needs of the business. At
least quarterly meetings are recommended.
GROWING A HEALTHY FAMILY BUSINESS
Best Practice:
Where to Hold Board Meetings
Board Meetings should
be held away from the
business premises to
avoid interruptions.
GROWING A HEALTHY FAMILY BUSINESS
Best Practice:
Committees of the Board
Larger businesses should consider forming committees, including:
Audit committee: review outside auditor’s report.
Executive committee: officer compensation, executing legal documents, etc.
Nominating committee: recommend candidates to fill board vacancies.
Planning committee: review mission statement and develop strategic plans to
pursue mission.
GROWING A HEALTHY FAMILY BUSINESS
Best Practice:
Directors’ Fees
There are no fixed rules. It is generally accepted
that some fees should be paid to acknowledge
a director’s contribution. Typical fees are
between $500 - $2,000 per meeting, plus
expenses for attending meetings.
GROWING A HEALTHY FAMILY BUSINESS
Best Practices - Miscellaneous
 Include up to three nonfamily members
 Quorum for decision making (50%) with majority vote
 Board members should recuse from vote on a matter
which he/she is particularly interested in
 Term limits for family businesses who are just getting
started with a board
GROWING A HEALTHY FAMILY BUSINESS
Myths about Boards
Myth 1: Outside directors usurp control.
Fact: Outside directors serve at the pleasure of the shareholders and can be replaced at
will.
Myth 2: Outsiders can’t be trusted with private family information.
Fact:
Professional management requires some disclosure. Start the “disclosure
process slowly, with directors of high integrity, and gain confidence in the process.
Myth 3: Outsiders will be unable to understand my business.
Fact: Different perspectives can be an asset, not a liability. Experience is
always valuable.
Myth 4: Outside directors will create more “red tape” and slow down operations.
Fact: Directors should not interfere with operations but, instead, on long term
strategic planning.
GROWING A HEALTHY FAMILY BUSINESS
Tips to Make Boards More Effective
1. Define board’s functions and authority;
2. Share your business problems;
3. Prepare for board meetings using agendas, handouts, etc.;
4. Agree on action plans and timetables to implement decisions reached at board meetings;
5. Encourage board members to challenge the CEO, not simply be “yes” men;
6. Encourage probing questions: (how would decision mesh with our strategic plan; is
company meeting its potential? If not, why not? How can we take advantage of this problem
to create an opportunity? Etc.?)
7. Disclose potential conflicts of interest and abstain from votes, where necessary;
8. Offer suggestions, not edicts.
9. Welcome board assistance as a great opportunity, not as a “necessary evil.”
GROWING A HEALTHY FAMILY BUSINESS
Board of Directors vs. Board of Advisors
 Legally required to
function in accordance
with formal bylaws
 Far less formal – typically
meet whenever requested
to do so by the CEO
GROWING A HEALTHY FAMILY BUSINESS
Board of Directors vs. Board of Advisors
Authority
 Organized and functions
according to laws of the
jurisdiction in which the
business is organized
 Neither required nor governed by law –
state law does not require advisory boards
that are established at the discretion of a
company’s leaders; CEO has power to
choose/replace/terminate advisory board
members w/o shareholder or member
approval
GROWING A HEALTHY FAMILY BUSINESS
Board of Directors vs. Board of Advisors
Fiduciary Duties
 Board members owe
fiduciary duties to the
company and its
shareholders
 No fiduciary duties
 Can more comfortably
focus on serving the CEO
GROWING A HEALTHY FAMILY BUSINESS
Board of Directors vs. Board of Advisors
Quality of Focus
 May be more motivated
to help a company
succeed due to legal
obligations to
shareholders
 Are usually
compensated financially
for their service
 Receive more info from
company and therefore
are able to make better
decisions
 Can’t be held liable
for the advice they
provide
 Serve without
compensation
GROWING A HEALTHY FAMILY BUSINESS
Board of Directors vs. Board of Advisors
Liability
 Legal duties and
responsibilities to
the company they
serve
 Directors and
officers insurance as
protection from
personal liability
($$$ for the
company)
 Do not face personal
liability for mistakes made
while advising the
company
GROWING A HEALTHY FAMILY BUSINESS
Family Council [ Governance for the Family]
 A forum to ensure that important information is
shared, questions are answered and minor disputes
are resolved before they become major disputes
 Membership is open to all adult family members
including those who are employed by the business and
those who aren’t
 Spouses of adult members should be included
 Serves as link to the Board of Directors
GROWING A HEALTHY FAMILY BUSINESS
Family Council – Common Topics
 Work/family balance
 Uniform guidelines for employment of family members
 Pros/cons of employing spouses in the business
 Family compensation policies
 Policies, issues and decisions that will affect the family
 Merits of requiring family members to enter into
prenuptial agreements
 Succession planning, retirement planning, financial
planning and estate planning
GROWING A HEALTHY FAMILY BUSINESS
Family Constitution
A formal arrangement of important family
documents to include:
Statement of values
Mission and vision statements
Core policies
Code of conduct
GROWING A HEALTHY FAMILY BUSINESS
Getting Started: The “Board Notebook”
An introduction to the Family Business in order to help directors “get oriented” and prepared for
meetings. Consider including information on the following:
1.
Business history and strategy;
2.
Industry overview;
3.
Ownership chart;
4.
Organizational chart;
5.
Biographies of key players;
6.
Business Plan/Strategic Plan;
7.
Summary of vendors, competitors, customers, etc.
8.
Key financial information;
9. Budget
10. Estate valuation;
11. Miscellaneous (union info, litigation, real estate, etc.);
12. Key issues facing Board;
13. Board agenda (scheduled meeting dates, key issues, etc.)
GROWING A HEALTHY FAMILY BUSINESS
Final thought:
Effective governance can be defined as
creating processes that make revolution
unnecessary.
“Family Business Governance,” Craig Aronoff & John Ward
Scott E. Friedman
Managing Partner, Lippes Mathias Wexler Friedman LLP
Founding Principal, Next Gen Advisors, LLC
Co-Founder and Executive in Residence, University at Buffalo Family Business Institute
665 Main Street, Suite 300
Buffalo, NY 14203
(716) 853-5100
Sfriedman@Lippes.com