Outside Directors: How They Help You

Outside Directors: How They Help You

Having an active, effective board of outside directors is, we believe, the single greatest resource for the family business. Dozens of business owners who are committed to continuously developing their firms while maintaining family control have told us that having an outside board is the best thing they have ever done. We typically avoid making broad generalizations, but on this subject, our experience causes us to make some categorical statements. A "good" board will improve your company's strategy. A "good" board will help assure your company's continuity. Board meetings provide important forums for communication. They stimulate planning.

Boards also help in other ways. We've seen business founders racked with doubt about their successors' capabilities or about their own roles subsequent to a transition. By providing a knowledgeable, objective, and understanding perspective, outside board members offer tremendous emotional support.

We've seen many successful transitions that would not have been accomplished without the outsiders on the board. We've seen the failure of transition attempts that would have succeeded had a good board been in place. The board can overcome the fears that most often stall the transition process by providing commitment and momentum for one generation letting go and the next taking over.

When second-, third-, or fourth-generation family firms are co-owned and comanaged by several or many family members, outside directors add strength to the continual search for consensus. Board discussions elevate the quality of discourse. When some family owners are in the business and others are not, outside directors provide the necessary objectivity for addressing issues such as dividends, titles, compensation, and performance. We've seen the process of developing appropriate policies change from family feuds to rational deliberation when outside board members were brought into the discussion.

What does a "good" board look like? It includes three or four currently active chief executives whom you respect and who have business and personal experience relevant to the key issues you face. Their only interest in your business is that it grows stronger and lasts longer. The establishment of such an outside board brings many advantages to a family business. Among them:

Fresh, creative perspective. Boards brainstorm ideas and explore embryonic thoughts without the risk that employees might overreact to the topics before they are developed. The breadth and depth and differences of the directors' own experiences bring tremendous creativity. Objectivity. With no vested interest in you or the business, an outside board is the best source of honest feedback and opinion.

Clarified roles. Family-business owners often confuse their various roles. Sometimes they just can't tell whether their thinking represents family, manager, or owner perspectives. Directors can help them see which "hat" they seem to be wearing on a given topic. Accountability. Outside boards provide discipline and accountability for company leaders, resulting in higher standards and better performance.

Affirmation and confidence. Business owners experience increased self-confidence to take new risks because outside directors usually affirm their thinking and reinforce their abilities. Promise of continuity. The mere existence of an outside board tells all impacted by the organization that responsible succession planning is a priority.

Fears that the business will be sold are diminished. Bankers, customers, suppliers, and others feel reassured. Spouses or heirs have help in case of a crisis. Symbol of openness. The existence of a board also tells the organization that business leaders are open to new ideas and that their thinking can be challenged. Despite these tremendous advantages, we find less than 5 percent of all midsize family firms have such an active, outside board. Why?

Most often, business owners just have not imagined the possibility. They think of a board as a fancy governance system for a public company or an honorary relationship in a community organization—not as a resource for the private company. Often they see the potential but are too humble to believe they can attract highly respected CEOs to be directors. We have consistently found that many privatecompany CEOs will respond positively to an invitation from a well-prepared, wellintended business owner.

Family-business leaders sometimes feel overwhelmed by the amount of work they think effective board management will require. In our experience, it takes about 10 days to set up an effective board and another day per quarter to prepare for each meeting. Again, however, those who make the commitment consider it to be perhaps their very best investment.

We have seen boards fail, but only when they are established without adequate thought to their purpose. When familybusiness chief executives are so committed to their own impulses that they can't take counsel or feedback even from those who have their best interests at heart, a board may not click. Even if they've had such experiences, business owners approaching generational transitions should reconsider the contributions outsiders can bring.

The greatest threats to family-business continuity are strategic myopia and lack of proper succession planning. No one knows that better than successful CEOs of other businesses. Nothing can help you address these threats more than putting CEOs on your board.

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