Family Owned Business – Are Board Appointments Too Hard?

Family owned businesses are very crucial to any economy. A family that owns a business totally understands how crucial the organisation’s success is to the owner’s prosperity and the generational wealth. Non-family executives that work at family-owned businesses aren’t oblivious to this fact. They are also made to understand that the success of the business is important to their financial well-being and job security.

Nowadays, many family-owned businesses are more interested in corporate governance than in the past. Some families implement boards in their organisations just to comply with legal requirements. Other family businesses do the same just to move up the rung and stand shoulder to shoulder with other organisations. However, it is up to the owners to choose which hierarchy satisfies their organisational needs.

Research carried out by McKinsey and Company showed that a strong board is the trait of a prosperous family-owned business. Their research further proved that 39% of family-owned businesses under the S&P 500 are inside directors. This is a stark contrast to 23% of board members at non-family owned businesses. Obviously, it is good to have enough family presence in your business but this is not enough. If you seek corporate success, you should not take the all-family approach.

It is a good idea to combine the knowledge of the family with the experience and connection of qualified outsiders. In trying to incorporate board appointments in family-owned businesses, there are usually some bottlenecks. In other cases, some owners are reluctant to change their governance model to people who aren’t family members or relatives. These reasons are outlined below:

a)     Reluctance to give up control

The controlling shareholder usually has the final say irrespective of the opinion of the board. Most owners are reluctant to give up this kind of control.

b)    Reluctance to divulge confidential data to outsiders

By having to recruit external directors to your board, you stand a risk of disclosing private information to the public. You can, however, avoid this by enforcing your directors to sign a non-disclosure agreement.

c)     Lack of time to go through the formalities

Board appointments require a lot of formalities, such as paperwork and recording of minutes. These formalities are also time-consuming. These formalities are however important for future reference. For this to pay off, the board has to bring in a lot of value.

d)    High Cost of Governance

The addition of directors and the formalization of processes is quite expensive. Equities such as director compensation are difficult when there is a lack of cash flow. If you consider directors’ compensation, you must be sure that they are bringing in enough value to your firm.

Roles of Boards in Family-Owned Businesses

There is a greater degree of flexibility in family-owned businesses than in public companies. This is mainly because there is a lack of restriction by the stock exchange and ASX-listing rules unlike in public company boards. However, there are legal duties of care and loyalty for private company boards. External directors are very influential in the areas described below:

·        Risk Management

·        Corporate Strategy

·        CEO evaluation, compensation and succession

·        Company performance

Conclusion

Boards in family-owned businesses have a lot to do with respect to the growth of the business. They help clarify problems, ensure proper management, facilitate information dissemination, avoid conflicts, and assist with the transition. A good board should help the family ownership to know more about their collective rights and opportunities for growth. Most importantly, a good board should ensure that the company is well sustained and the interests of the directors are protected.

 

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