In the wake of the pandemic and heightened geopolitical tensions, many family business owners have come to realize that the lack of a competent and engaged board of directors can weaken the resilience of family businesses and pose a significant risk in times of greater volatility and uncertainty. What’s more, without family representation on the board, it can be difficult to align the interests of owners with those of the company in a sustainable manner. Understandably, boards typically focus most of their attention and oversight on what happens “below” them about strategic planning and execution. However, in a family business, the board also needs to keep track of what happens “above them” among the owners. This is why it is so important to have family directors on the board – they are ultimately responsible for aligning the business’s competitive strategy with the owner’s continuity strategy. The resilience of a family business depends on getting it right. Strong family directors can support board connections “upwards” and ensure owners remain united and committed to the success of their business.
Imagine your family owns and controls a fifth-generation multinational conglomerate that is a leader in food manufacturing. You have recently been appointed as a family director of your generation. Early in your tenure, Covid-19 hits suddenly, and fundamental questions challenging the viability of the business pop up in front of a board dominated by a non-family CEO and a majority of independent directors. Faced with the prospect of factory closures and severe supply chain disruption, management proposed an emergency plan to protect the company’s cash reserves by immediately initiating historic layoffs, halting all dividend payments to family shareholders (of which 75%), and The possibility of selling shares to the market at a deep discount threatens the family’s control over the business.
At this juncture, you and your other cousins on the board are being asked to ensure that any plan that is ultimately passed protects not only the viability of the company and management’s agenda, but also the unity of the family and the commitment to the business. Subsequent to urgent measures that need to be taken Concentration, some measures are more aligned with the purpose, values and vision of the family than others. Your role is to help the board tease out these strategies in a way that the CEO and independent directors can appreciate and hear. Then you need to turn around and face your family shareholders and the sacrifices they need to make to protect the family business. If this challenge is not handled well, your company will lose the good will that the family has cultivated with employees and customers for generations. Worse yet, you risk losing the loyalty and support of your loyal family shareholders. Manage it well and you can rally these key constituencies to support emergency measures, and in the process leverage the long-term vision, expediency and deep trust of a long-standing family business to gain so much resilience.
The boardroom, as the fulcrum between family owners and senior management, is where these dilemmas arise. Directors are ultimately responsible for aligning the business’s competitive strategy with the owner’s continuity strategy. The viability of a family business depends on getting it right.
Support your board and increase resiliency
Family company boards are often an underutilized resource—they are subservient to owners’ rubber-stamp blocs and In fact The Executive Committee is responsible only to itself. Some are never formally called up, let alone staffed or mandated to provide adequate strategic and continuity of oversight. In the wake of the recent pandemic and rising geopolitical tensions, many owners have come to grips with the reality that the absence of a competent and dedicated board of directors undermines the resilience of their family businesses and creates greater volatility and uncertainty in the face of age poses a significant risk.
In this new context, enhancing the capacity of family company boards so that independent and family directors can work together effectively to add value to shareholders and senior management has become a strategic imperative. As a result, many family business owners are starting to upgrade the functions, composition and processes of their boards. Curiously, while the governance literature has focused heavily on the role of independent directors on family business boards, the role of family directors has been largely ignored.
Carefully select and develop family directors
My firm’s recent analysis of the world’s largest family-owned businesses (including many of the largest family-controlled public companies) shows that, on average, family directors make up one-third of the boards of these companies globally. Unfortunately, few family businesses have the proper plans to develop, review, select and evaluate them.
While technically all directors are equally accountable to shareholders, family directors are often asked to perform a unique set of functions that often only they can perform – precisely because they are members of the family that owns them. These functions require a specific set of competencies, such as the ability to incorporate family values into strategic conversations, or the communication skills to explain difficult board decisions (such as dividend reductions) to families, or the ability to confront senior leadership with challenging ideas, such as The product line needs to be revitalized in a way that is more in line with the needs of younger consumers. As the young family director in the opening example asks his board chair, “Why are we launching a product that I don’t want to feed my kids, despite being lucrative?” These skills help keep the family together and the business motivated. Commitment, which is a unique and powerful source of organizational resilience.
Effective family directors who understand the history of the business can serve as institutional memory for the board. They are also uniquely positioned to be ambassadors for owners and managers of corporate culture. Most importantly, when they know how to earn the respect of independent directors and management, they can elevate the family’s priorities and values so that these can legitimately and unapologetically be integrated into corporate strategy and long-term board deliberations on risk, growth and leadership.They have won directorships on their merits and understand that they serve on the board to represent all shareholders, not just those of their family branch. These skills are always essential in the boardroom, but are especially powerful in the face of post-pandemic decisions that can easily polarize relationships and undermine trust between owners, boards, and management.
Consider the case of a fourth-generation family business board that is grappling with how to attract and retain top millennial and Gen Z talent in the post-Covid era. The non-family CEO, backed by several independent directors, has argued for a quick return to a pre-Covid work schedule and insisted everyone return to the office in person. In addition to increasing the risk of infection, this stance makes it harder to recruit much-needed young workers. After much debate, family directors have decided to propose a more nuanced post-pandemic policy that separates work that can be efficiently performed virtually from work that requires in-person attendance. The family members also publicly acknowledged the dilemma and reminded everyone on the board how important the safety and fair treatment of employees is to controlling the family. They also made compelling examples of the family’s decision to lower everyone’s wages and suspend dividends, sharing the family’s commitment to employees and their families during the Great Recession — a source of loyalty for owners and employees.
Few family businesses have programs to actively develop family directors with these unique and valuable abilities. There are still fewer processes to select, join and evaluate them with rigor and integrity. Conversely, family directorships are often viewed as rewarding appointments, awarded only to branch representatives when senior branch members retire, with little focus on the competencies required to perform these essential governance functions. This naturally undercuts the resilience of even the healthiest family business.
Build a strong bench
Continuity requires the steady establishment of a family member with the potential to effectively serve as a family director. To achieve this, leading family businesses have developed mentoring programs that specifically recruit their most trusted independent directors to mentor and develop high-potential family candidates. The companies have also set up designated “learner seats” for aspiring family directors to be directly reviewed by the board. Those families with holding companies carefully rotate family director candidates through the boards of operating (or partner) companies, and in doing so expose them to governance and strategic issues that play a role in different parts of their business portfolio . These families also ask director candidates to invest in their ongoing governance education, insisting that candidates sit on the best family business governance programs and boards of directors in their respective communities. A key component of their development is helping them learn how to manage the boundaries and dilemmas that come with being a shareholder, director, family member, and certain corporate executive at the same time. Done well, in addition to adding young perspectives and voices in these forums, it can deepen their understanding of the business as a whole.
Recognize the importance of family representation on the board
Without family representation on the board, it can be difficult to align the interests of the owners with the interests of the company in a sustainable manner. Understandably, boards typically focus most of their attention and oversight on what happens “below” them about strategic planning and execution. However, in a family business, the board also needs to keep track of what happens “above them” among the owners. This is especially true during uncertain times, when boards are called upon to make tough decisions under duress.
Strong family directors can support board connections “upwards” and ensure owners remain united and committed to the success of their business. Unfortunately, these moves are often disparaged as “sensitivity” or “kumbaya-ish”. However, take into account that investing in developing thoughtful and capable owners, especially those who may serve on boards, can safeguard a business’s most cost-effective source of capital and its long-term continuity. Many, if not most, family businesses fail not because they do not perform well in the marketplace; they fail because the owners fail to take a thoughtful and active role in corporate governance. What is more important to support resilience?