editing disabled

The board of directors is elected by the shareholders to provide governance for the business. The board of directors has a fiduciary responsibility to the owners to select officers of the company, approve business strategy, approve ownership distributions, and approve major capital expenditures. While many family businesses include only family members on the board of directors, some family businesses include non-family members on the board of directors in order to bring an outside point of view to the board. This can help to resolve differences of opinion between family members. Another approach to developing an “outside” perspective is to use a Board of Advisors.








The value of external members of the board

A family business board’s mission is to work with and assist the CEO. Therefore, a smaller board is better (five to nine members). It is recommended, although not required, that board members should be independent outsiders. Members could be fellow CEOs, business professors, but should not be family friends. The main idea is to maximize the independent, objective, and fresh perspectives that the CEO receives from board members. It is important for a board to set a strategy and stick to it. This is why it is so important to have outside board members. They can help create a sound strategy. Having a strategy makes it easier to communicate board messages through all aspects of the company, no matter what size of company. One of the influences on the board is the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act holds corporate directors responsible for the accuracy of financial statements. Many banks are now holding all businesses to the same standards as expected by the Sarbanes-Oxley Act. With this knowledge a board can stay on track with other non-family owned businesses. The Sarbanes-Oxley Act is a strong influence on why many new companies are remaining private and why formally public companies are becoming private.

Benefits of having outsiders on the board:
  • They provide unbiased objective views.
  • They bring a fresher and broader perspective to issues of key concern for the firm.
  • They bring with them a network of contacts.
  • They make top managers accountable for their actions.



Responsibilities of the board

The primary responsibilities of a board vary but they generally focus on the aspects that would otherwise be handled by the owning family.
Their responsibilities typically include:
  • Reviewing the Financial status of the firm
  • Deliberating on the strategy of the company
  • Looking out for the interests of shareholders
  • Promoting and protecting the unity and long-term commitment of the owning family
  • Mitigating potential conflicts between shareholders, including majority and minority shareholders
  • Ensuring the ethical management of the business and that there are adequate internal controls
  • Being a respectful critic of management by asking insightful questions
  • Reviewing the performance of and holding the COE and top management accountable for performance and good shareholder returns
  • Providing advice to the CEO on acquisitions, divestitures, key executive performance, executive compensation, human resource issues growth opportunities, risk management, financing growth, liquidity, ect.
  • Bringing a fresh, outsider perspective to issues
  • Assisting in the recruitment, selection (sometimes through a nominating committee of the board), and election of new board members
  • Assisting in the objective planning and managing of the multiyear succession and continuity process
These are the usually the aspects of the business that would be handled by the owning family but the board is able to keep an outside perspective and eliminate emotional factors such as how to distribute the business to the next generation.


[Definition 3]
A Board of Directors has legal entity over a company. This gives them a unique job and can put the board in difficult legal and emotional positions regarding the family business. In some instances a Board will be required to have some form of liability insurance given the fact that their overall decision making power generally affects the financial state of the company. Although generally not seen in family business, corporate fraud is an issue that sometimes can put undue pressure on a Board. This issue in itself is enough to discourage someone from taking a position on a Board of Directors for a company outside of their family.
Generally in smaller to mid-sized family businesses a Board will act as more of an advisory council, helping to guide the company in the right direction on management and financial decisions. The Board of Directors of smaller family-owned firms is more likely to be guided by the principles of the stewardship theory. This line of thinking is a guiding rule that is based on the idea that the company is an extension of themselves, as it generally is with family members that are deeply invested in the company. It helps to give the Board an idea of what it feels like to be an actual member of the family and understand the emotions that are involved with the failures and successes of the company. The idea is that the incentives that a family member holds to make the company the best it can be will be carried over to the top of the management chain.
A Board of Directors has responsibilities that fall on the financial viability of the company as well. Part of the job of many Boards is to make sure the company has adequate financial resources to ensure the company will remain in business and be able to meet financial obligations. Part of this responsibility is centered on approval of an annual budget.
Responsibility also falls on the Board of Directors to not put themselves in a position where a conflict of interest can occur. This means that because so much of their decision making is reflected directly through the success of a company, it is their responsibility to be disconnected from that business by way of outside sources that could influence any decision they may have to make.

References

  • Poza, E.J. (2007). Family Business, 2nd Edition. Thompson South-Western.

Article contributors

Asa Manning [3]


This article is a stub. You can help Family Business Wiki by expanding it.

Categories: Governance