Wednesday, May 9, 2012

The Role of the Board in Family Business Succession

How to help smooth leadership transitions

Trusts & Estates Magazine
By David Thayne Leibell, partner at Wiggin and Dana LLP in Greenwich, CT

Board of Directors
Board of Directors (Photo credit: Wikipedia)
A relatively unexplored area of family business research is the role that an active, independent board of directors can play in perpetuating the family business from one generation to the next. A recently published book, Building A Successful Family Business Board[1], seeks to close that research gap. In fact, according to the book’s authors, an active, independent board can serve as an objective steward, overseeing the creation and execution of a leadership succession plan that works for both the business and the family.
The authors state that an “active board” refers to a board that meets three or more times a year. An “independent board” is one with three or more independent directors; which is the minimum number that the authors believe is necessary to have a meaningful impact on governance. An “independent director” is an individual who has no ties to the business, other than being a director. The definition of an independent director doesn’t include employees, shareholders or outside advisors to the business or the family.

The Problem

Mawarid Board of Directors
Mawarid Board of Directors (Photo credit: Wikipedia)
Even in the healthiest of families, the leadership succession process is often a difficult task that, for a variety of valid reasons, the family chooses to avoid. The authors cite a 2007-08 survey of family businesses by Price Waterhouse Coopers, which found that while one-quarter of the businesses surveyed were due to change leadership hands in the next five years, roughly half of the family business that participated in the study had no succession plan in place. According to the authors, an active board with independent directors should avoid this problem by requiring the development of a succession plan as a natural part of family business governance.

Family Business Boards

2011 Board of Directors Retreat
2011 Board of Directors Retreat (Photo credit: sfbike)
In connection with writing the book, the authors conducted a study of 360 family businesses regarding the state of their boards. Although every business must legally name a board of directors, the majority of family businesses surveyed had boards in name only. Only 48 percent of respondents had boards that met more than twice a year. According to the authors, boards that meet less than three times a year provide little effective support of management or the shareholders. Of the active boards, only 25 percent featured two or more independent directors, and only 21 percent had more than three independent directors, the number that the authors feel is necessary for independent directors to have sufficient voice to influence family board members in an effective manner. Surprisingly, even for businesses with sales greater than $100 million, only 58 percent had active boards, and only 33 percent had three or more independent directors.
It’s the authors’ view that independent directors are the richest resource available to family-owned companies. The survey results bear this out. Respondents with independent directors on their boards reported a much higher level of board effectiveness (83 percent) than respondents with no independent representation (54 percent). Not surprisingly, board effectiveness increases with the amount of independent representation. Respondents with a majority of independent directors on the board reported 93 percent board effectiveness.
General Benefits
The authors explain that active independent boards: (1) provide in-house experience, empathy and expertise; (2) encourage self-discipline and accountability; (3) act as a sounding board for family and management; (4) provide honest, objective opinions; (5) encourage strategic planning; (6) provide insight into key people; (7) ask challenging, proactive questions; (8) provide confidential and empathetic counsel; (9) engender creative thinking and decision making; and (10) encourage better corporate relations with constituents ranging from employees and suppliers to customers.
Succession Planning
Many, if not most, family business leaders have a difficult time handing over the leadership reigns. As such, many family business leaders delay or avoid succession planning, which can have devastating consequences, not only for the business, but also the family. According to the authors, active, independent boards can be invaluable to the succession process by: (1) ensuring that a succession plan is in place well in advance of the time it is needed; (2) helping the current leader examine various options; (3) ensuring the successor is being adequately prepared; and (4) helping plan for, and complete the process. No other resource provides as comprehensive a source of support to help the company and family achieve continuity as the business passes from one generation to the next.
1. Jennifer M. Pendergast, John L. Ward and Stephanie Brun de Pontet, Building A Successful Family Business Board, Palgrave Macmillan (Jan. 2011).
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