The Role Of The Board
29th January 2017 Sian Steele, Family Business Leader, PwC UK
It is no surprise to find that larger and older family firms are more likely to have non-family non-executives.
According to the 2016 PwC Global Family Business Survey 79% of companies turning over more than $100m have such directors, as do 75% of firms which have reached at least a fourth generation.
Many family firms start with no non-executives at all, though most have formal or informal advisers who can act as a friendly sounding-board. When a proper board is first established, these people are often invited to be the first non-executives. But as they are friends of the family or existing advisers, they’re often more like insiders than outsiders, especially as many of them stay in post a very long time, which carries the risk of ‘going native’ (and hence the importance of renewing the board periodically).
They can still play a useful role, but our experience suggests that they’re unlikely to offer the independence or ‘edge’ that the family firm really needs to maintain a competitive advantage. They’re certainly unlikely to challenge a strong founder or CEO to any significant extent.
As Siew Quan Ng, Family Business Leader, PwC Asia Pacific, observes; “That’s the degree of challenge all family firms eventually need. To reach full maturity, a family firm needs a strong board of individuals with relevant experience, and a wider perspective, complemented with some independent and objective views.”
A well-functioning board can add tremendous value to a family business by – for example – examining how the company’s assets and profits are being used, and moderating discussions about the level of dividends. This can help ensure the company retains sufficient funds to both survive and grow.
“Not being a family member or shareholder means you don’t get the chance to be involved with the strategic business decisions going forward. So, it can be difficult to put forward your own personal perspective. So, you don’t always feel that you’re adding any value to the business," according to the second generation non-family member of a South African family firm.
“In each of our companies we have two external board members who have no relation to our company, because it’s important to have outside views on a board. And every year we change board members – we remove directors who don’t contribute and find other people who will. So being on one of our boards is a challenging position. But that’s what we want. That’s what will help us grow,” explains Selim Yaşar, the Chairman ofYaşar Holding A.S. in Turkey.
It is interesting in this context, that 73% of family firms looking to grow aggressively have non-family non-executives. Family firms need a board which is able and willing to give an opinion, and question decision-making, but which also shares the company’s vision and values.
As Andy Berliner of the US based organic foods producer, Amy’s Kitchen says, “We’re forming an advisory board, but finding people who share our values and have the right experience to help is not easy. We want people who not only have the skills but who appreciate what we’re doing and can put their heart into this.”
While every family firm will want directors who ‘fit’, every business will have different needs when it comes to the selection of the board. We often work with owners who are nervous about giving up control or sharing confidential information with ‘outsiders’, even when these people are board directors.
Others worry about the expense, or struggle to see the value of board meetings, which means they don’t allow the time needed to make best use of them. The process of selecting and hiring outside board members also raises real concerns about getting it wrong, especially for owners who don’t have established processes for doing this, and aren’t aware that there are ways to protect themselves if things don’t work out.
Likewise attracting the right individuals and ensuring a good fit can be challenging, as potential non-executives need to understand the dynamics of the family business, and the complexity of the family relationships involved.
Nowhere is the board more important than in strategic planning. A good board should be challenging the business to develop such a plan, if it doesn’t already have one. For example, it should be raising questions about the impact of new technology, and asking for information on market trends.
The right kind of non-executive director will also have significant experience to offer in the detail of the planning process, from helping the business think through the issues objectively, to scenario assessment, to the formulation of a realistic and effective plan, and monitoring progress against it on a regular basis.
A robust strategic plan will also be invaluable in recruiting new non-executives, by identifying areas for future expansion or diversification, where different skills and input might be needed at board level.
Beyond ‘rubber stamping’: The contribution the board can make
According to the experience at PwC, many family firms are not making full use of their board: a good board is much more than merely a ‘rubber stamping’ body.
Here’s a quick checklist of areas where a robust and objective board can make a real difference:
- Helping the owners separate what the company needs from what the family wants
- Fresh perspectives, relevant experience, and access to influential networks
- Help the CEO move beyond the tactical and the day to day
- Ensuring there is accountability across the business
- Assistance with risk management
- Objectivity, independence, and an ‘outside-in’ point of view
- Support and advice on planning for CEO succession
- A ‘safe place’ for difficult discussions
- Smoothing the transition to the next generation
- Planning and advising on exit strategies.
About the piece - This feature forms part of the PwC Global Family Business Survey 2016, a piece of research that interviewed over 2,800 representatives around the world. It has been reproduced with permission of PwC. Click here to see the full results of the survey and other features.