Build A Strong Board

Posted on Friday, March 31, 2017

A strong board of directors provides financial guidance to a company, develops long-term priorities and elects executives to run the operation. To accomplish these goals, directors need to meet frequently and take an objective look at how the business is being run.

Yet in family-owned companies, this is rarely the case. Here are some telling results from an American family business survey* of 1,143 firms:

Number of Meetings a Year

None 13.4 percent
One to two 49.3 percent
Three to four 19.2 percent
Five or more 10.1 percent

*Survey conducted by the George & Robin Raymond Family Business Institute and the MassMutual Financial Group.

In addition, just 58 percent of the survey respondents thought their boards made an outstanding or good contribution -- and 25 percent reported they made no contribution to their companies at all.

Involvement in the operation of a company is critical. Family business boards need to plan successions, advise the senior generation, monitor the younger generation, keep shareholders informed, structure governance and keep an eye on the bottom line.

According to the survey, family boards tend to be small -- 87.5 percent have four or fewer directors with 90 percent including multiple family members.

Outside directors can help provide a "real world" look at the company's performance and direction. However, outside directors are only strong if you allow them to have differing viewpoints. If they are merely "rubber stamping" the views of family board members, they are wasting time, as well as any compensation you provide.

Of course, you don't want to keep relatives off the board, but you shouldn't limit the group to the family. Consider bringing in some outside expertise to ensure the business stays on track and that decisions aren't influenced by family relationships. Accountants and lawyers may have valuable experience to offer the board.

Some of the pitfalls of a family board include:

Secrecy -- no sharing of vital information.
Lack of understanding of the board's role.
Using outside directors only to advocate a family member's position.
Weak board management.
Poor selection of outside directors.

Stay objective when adding outside directors and look for people with specific expertise that will aid your company. For example:

1. A construction company could bring in directors with knowledge of financial, safety and union matters if it doesn't already possess that expertise among family board members.

2. A publishing enterprise might look for directors with retail, printing and electronic publishing expertise.

Anyone considering joining the board of a family-run business should consider the following dangers:

One relative or group may try to make pawns out of outsiders.
Family culture and dynamics can be difficult to understand.
Outsiders may be relegated to business-only decisions.
Issues such as succession, family governance and family councils may be difficult to comprehend.

One final note: The Sarbanes-Oxley Act, passed in 2002, increased litigation risks and the cost of directors' and officers' liability insurance increased as a result. Without this insurance, you probably won't be able to find outside directors to fill the positions. The law also tightens financial reporting standards, which affect smaller companies doing business with large publicly-traded companies and financial institutions. It's important to comply with the provisions of this law.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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