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Family Business Boards Crucial to Decision Making

It is much easier to come up with the don’ts than the dos. When it comes to decision making process, it is far easier to identify bad practices than it is to develop good processes. In the past few articles I have suggested the perils of Groupthink a common family business paradigm, and offered two questions that help keep family firms focused on the ownership and management decision making processes (Is this business for sale? for owners and Whose decision is it and how will they decide? for management).

True or false: If it’s good for the family, then it’s good for the business, and vice versa? FALSE! I am sure you can think of many situations where decisions are made that favor one system over the other. There is a delicate balance between family and business in decision making. So, what processes can be installed to examine those decisions and offer the best outcomes?

The decision making process needs to offer objectivity. It needs to be fair. And it needs to be empowered. Above all, it needs to consistently offer good outcomes.

Families guilty of Groupthink can’t be truly objective. Autocratic decisions generally lack some fairness. And any decision without ownership consent is void of empowerment.

Maybe that’s why statutes require corporations to have boards! Boards offer a decision making process and structure that should offer the ability to improve decision making. That is, of course, if the board is a true board and not one of those rubber stamp deals…you know – the annual social dinner where nothing of importance is discussed and yet the CPA or corporate counsel manages to enter annual meeting minutes into the corporate minute book.

For the purpose of this article, we will discuss corporate governance. You can make the parallels to your business entity and structure.

If a true board is developed, and that board meets regularly, then decision making becomes more about how to decide – process. Good dialogue gaining pertinent data and debating differing points of view becomes a process to gain good decision making outcomes.

Thinking about how to form a board has changed. In years past business owners put key family execs and the company’s professionals (CPA, attorney, banker, insurance agent, etc.) on the board. The thought was that the outside professionals would offer objectivity and counter-balance to the family. Truth is that the hired professionals are put in a very tenuous position: if they speak their mind and their thoughts are counter to the power structure, then they stand to lose their professional engagement. Therefore, they often elect to remain silent on the most critical issues in favor of keeping the appointment! That isn’t what a board should be. In fact, one of the functions of a good board should be the vetting of the company’s professionals and evaluating their performance. So, it really doesn’t make any sense for them to be a director. However, their presence for input and reporting at appropriate meetings should be regularity.

Suggesting active boards to clients is often met with strong resistance. Purpose, empowerment and cost are the common objections. Let’s dismiss cost because I have yet to see a board that didn’t cover its cost many times over by adding to the bottom line. Empowerment is an issue for family firms that aren’t used to using outsiders for decision making. Breaking though the thought that Groupthink might just be a bad thing is difficult for many. One way to overcome this objection is to form an advisory board that acts like a real board without the legal clout. As soon as an advisory board acts unlike a board of directors, it’s doomed. Additionally, as soon as ownership treats an advisory board like it has no authority, then there is no real point! One of the goals of an advisory board should be to morph into a real board of directors. Boards without owner empowerment are sterile and generally do not last. However, if forming an advisory board as a trial adds some comfort for ownership, then so be it.

That leaves purpose. Here are the ten top reasons to have a board:

10. Add Objectivity
9. Overcome Groupthink
8. Provide a platform for separating family and business issues
7. Maintain perspective on succession planning
6. Set deadlines and hold everyone accountable
5. Hire, evaluate and terminate outside professionals
4. Act as company ambassadors to the larger community
3. Establish compensation policy
2. Set strategic direction
1. Provide evaluation of business performance and drive better outcomes

Obviously the list could go on, but if a board handles these issues, and offers a place for dialogue and debate, then good decision making is bound to follow.

Here is the place to have those difficult conversations that are so often unspoken and lead to paralyzing conflict.

Next article: Developing your board.

Richard Segal

Rick Segal is the principal at Segal Consulting. He holds an Advanced Certificate in Family Business Advising with a Fellows status from the Family Firm Institute. Rick is the founder of the Family Business Council and its affiliated study group. Reach Rick at [email protected] or by visiting www.segalconsulting.biz

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