Writer’s Note: Previously, Part One of this two-part series pointed to the value a board of directors plays for a Family Business. If you missed it, I suggest you go back and take a look.
Decision making for family firms can become complicated and convoluted. One way to help keep focused and appropriate is by forming a real board of directors to navigate the murky waters. For the board to maximize its effectiveness, it needs to have some outside talent…otherwise the board is nothing more than either an executive team, or a kitchen-table chat room. Finding the right outsiders and establishing the rules of the road for the board will enhance its functionality and productivity. In the end, the effectiveness of the board should increase bottom line results.
How many directors should we have and how many of them should be outsiders? Common thinking is that the number of directors should be an odd number to avoid tie votes. A well-run board doesn’t take many votes and contrary to common belief votes are not the best decision making method for this situation. When we vote, unless it’s unanimous, we have winners and losers. If the vote was unanimous, we really have consensus. If it isn’t unanimous then those in the minority may not be inclined to buy-in to the resulting decision. So, a well run board should try to reach consensus That being said, votes are sometimes necessary and having an odd number of directors makes sense.
The larger the board, the more difficult it is to manage and administrate, but usually more input for sound decision making is better. Most closely-held companies take a look at the obvious inside board members and add a minority of outsiders. As an example, if you have three active family members in your business you should consider two outsiders. Or, if you have three active family members and a non-family president you want to include, then you should consider three outsiders.
Often the inside directors are obvious and generally they are owners and future owners. If that number is too large, then perhaps future owners can alternate terms to give them board experience and be inclusive. Sometimes key non-family executives are included as directors like a CFO.
The more difficult task is finding talented outsiders. For the most objectivity, they should be strangers! They should not be Dad’s college roommate, or his golf buddy. They should not be the kid’s Godparent. They should be talented, successful business people or professionals who can help your business grow and prosper. At this point, most ask where do you find those people and why would they want to be a director for my business?
Most people who are asked to fill such a position are honored and willing. If they are successful, they are willing to give back and share their expertise. You should also pay them not that they need the money (if they do need the money, they are not a good candidate).
To find outsiders you should profile the type of individual that makes the most sense. Think about age, gender, education, experience, etc. You should use the profile to fill in areas of your business where you may be lacking, or you will be needing expertise. If you know you will need a banking change, you might want to find a lender. Or if you have always had a difficult time with marketing, you may want to find someone in that field. It is not to get free services, but rather to gain expertise on how to best address the company needs.
Once you have developed the profiles you need in writing you need to share them with anyone and everyone who might lead you to those folks. Use your professionals, your social networks, your business associates, etc. Solicit nominees. Informally interview your nominees and if they pass the test, then set up a formal interview with all of the internal directors you have selected. Chemistry is important! Be sure that you develop a board that can speak openly. Select wisely.
You should definitely compensate your outside directors. You should calculate the hours of anticipated time required and pay them approximately what you pay yourself. It is important to pay them for two reasons: one they will take the position much more seriously, and two you will feel more comfortable insisting on accountability and be willing to terminate for non-performance. I prefer to pay by the meeting because it is clean.
Should you compensate your Inside directors? This is a bit more controversial. If you have your board meetings during regular business hours for which your employees are already being compensated, then it’s reasonable to consider their board time to be included in their regular compensation. If you are holding your board meetings during non-business hours, then you should consider compensation the same as your outside directors.
In any case, all expenses should be covered for all directors especially offsite meetings
Your board will need by-laws and confidentiality agreements. Be sure to discuss all the legal aspects with your corporate attorney. Also be sure to provide errors and omissions coverage for your board.
What’s the agenda?
Boards have certain statutory requirements and those should naturally be addressed. You should also hammer out an executive compensation policy. The board should be used to consider anything that isn’t a daily operational procedure (that’s management’s task). Overall company performance, financial reporting, budgeting, fringe benefit programs, growth, organizational development and succession are all good topics.
One last thought: Establishing a board isn’t easy, but it is so very valuable. It is much easier if you use an outside professional to facilitate the process.