So, you’ve been asked to join the board of directors of your family’s company. You may have already been working in the family business in an operational capacity, perhaps in the production, sales/marketing or finance areas. You have a good working knowledge of how the business operates, and your family would like you to take the next step. But although you understand the day-to-day processes involved, you’re not a professional director, and are worried about the new responsibilities you will be taking on.
This is a scenario that most family companies will find themselves facing at some stage, as senior family members (often the business founders) pass the baton to the next generation. In my work consulting to family company boards, it’s a common situation and definitely something worth planning ahead for.
Joining the family company board isn’t a decision to be taken lightly. There is far more involved than simply attending a monthly board meeting, perhaps followed by a nice lunch at the company’s expense. Whether they are aware or not, company directors take on a variety of risks and responsibilities and are subject to an array of corporate requirements which, if not dealt with properly, can expose them to significant penalties and financial liabilities.
Based on my experience in advising family companies over the past three decades, here are my 5 tips for new family company directors.
Understand Your Legal Responsibilities
Directors have a general fiduciary duty to act in good faith in the best interests of the company at all times, to be careful and diligent in the exercise of those duties, and to not improperly use their position for their own personal benefit. New directors would be wise to gain an understanding of how this general duty applies to them in their own company’s situation, as family companies are often conducted in a less formal way than public companies, with lines between the roles of shareholders, directors and management often becoming blurred.
Aside from these general responsibilities, there are an ever-increasing array of specific laws which directors need to understand, including OH&S, environmental and privacy regulations which, if transgressed, can result in significant personal liabilities for board members.
Generally, it will not be an adequate defence for a director to claim ignorance of any of the relevant legislation, except in very limited circumstances. New directors should consider a programme of self-education, such as the various courses offered by the Australian Institute of Company Directors or the Family Business Association (AU).
2. Learn How To Read And Interpret Financial Reports
A further significant director responsibility is to ensure that the company does not trade whilst it is insolvent. Therefore, every director needs to be able to understand the red flags which might indicate a solvency issue is on the horizon.
While it’s not necessary for every director to become experts at analysing financial reports, they need to have a robust working knowledge of how to interpret the financial reports that are presented to them. Also, in my experience it is helpful for at least one board member to have a finance background in order to provide a safeguard for the board should some of the solvency indicators be more subtle.
Board reports need to include clear information showing all of the relevant balance sheet and profit/loss ratios and cash flow forecasts to enable the board to properly assess the financial performance of the company. New directors should not be afraid to ask questions of the CEO or CFO should they feel that the board reports don’t provide this information clearly and unambiguously. If a director believes that the financial information included in the board report is inadequate, the company’s finance team should be instructed to prepare whatever information the board requires to properly carry out its duties.
3. Get To Know Your Fellow Directors
While each director is subject to the risks and responsibilities already outlined, the board’s role in decision-making is a collective one, meaning that a board must learn how to make decisions consensually. In other words, a high degree of teamwork is required.
This places an obligation on every board member to become familiar with their co-directors, their particular skills and abilities, their background and personal styles. As with any team of people with varying experience and approaches to problem-solving, there’s no guarantee that a board of directors will automatically become proficient at collective decision-making. Those directors with more dominant personalities may need to reign in a desire to impose their views on the group, while those with quieter dispositions could need to become more assertive.
The role of the Chairperson is important in ensuring the board’s decision-making is effective. The Chair should act akin to the head coach of a football team, understanding the experience and abilities of each director to ensure that the group works together effectively. A good Chair will make it their business to ensure board meetings are not dominated and that every director is encouraged to participate actively.
4. Understand The Board’s Role As Custodian Of Culture
The culture of a family company is often a source of great strength, having been safeguarded and handed down from previous generations. Typically, this culture will involve overt concern for the company’s various stakeholders including suppliers and employees, as well as active support of local communities.
New directors might believe that this culture is the sole domain of the family owners or day-to-day management, but it’s essential that the company board plays an active role. New directors should be careful to act in a manner supportive of the family business culture, both within the company and to external parties. Directors should hold each other accountable for being custodians of this culture; this might include a regular agenda item citing examples of how the culture has been demonstrated.
5. Be Inquisitive…And Supportive
An aspect many new directors find difficult is the board’s role to hold management to account. This includes a duty to test the assumptions behind any recommendations made by the leadership team or CEO; in this respect silence is not golden, and the board should not accept at face value every piece of information presented to them by management.
At the same time, a board also has an obligation to provide support to the CEO, to ensure that the CEO is provided with the resources the company requires, and to regularly enquire how the Board can assist the CEO to deliver the business strategies it has endorsed.
New directors sometimes struggle with these seemingly contradictory obligations, and it can take time to learn how to achieve a balance.
Directors need to feel free to ask probing questions when warranted, but as the team from Monty Python might say, nobody expects the Spanish inquisition!
About the Author - Robert Powell FCA GAICD is the founder and Managing Director of Family Boards Pty Limited, a specialist consultancy helping family companies achieve best practice in board governance and risk management. He an accredited specialist adviser member of the Family Business Association (AU), a Graduate of the Australian Institute of Company Directors, and a Fellow of Chartered Accountants Australia and New Zealand.