Governance after the transfer - the importance of an effective board

Part 5 in a series…

Soon after I began to work for our family business, I attended my first board meeting. Board members were my dad (the Chairman and CEO), our accountant, our lawyer, and a local businessman. My dad read his prepared report, there was some quiet and polite discussion, and the meeting was adjourned for lunch.

You may sense from my summary description that I, young and aspiring lawyer-turned-business leader, found this board structure and process less than ideal. True. But first, let’s start with what was right:

1. There was a board! Many controlling owners – particularly, first-generation entrepreneurs – don’t have a board of directors. These owner-managers make strategic business decisions on their own, believing that a board would interfere or meddle in their business.
2. The board included an independent director. The local businessman in question brought important experience and perspective: he too ran a manufacturing company in a construction-related industry, he was a half-generation older than my father and had weathered more storms, and he was also on the board of the Company’s bank.
3. The board received a report in advance of meetings, including quarterly financials and a letter from the CEO discussing the Company’s performance and strategic issues. Copies went to the Company’s banker and to the trustees of the shareholder trusts.
4. There was an opportunity for open discussion of performance and strategy.

When I stepped up to the role of President and took over board meetings, I had two primary objectives:

1. To increase the number of independent directors, in order to gain access to greater outside perspective. I was painfully aware that I had no formal training in manufacturing, finance or sales (or much else other than law, for that matter) and wanted experienced sounding boards going forward.
2. To increase discussion. I would come to realize that my father’s board reports had synthesized a great deal of information, but they expressed only one point of view and source of information. I felt board members needed a broader perspective on the issues facing the Company. I expanded the board book to include reports from treasurer and heads of manufacturing, sales and marketing, worked to frame the issues more clearly, and included specific strategic questions on the agenda.

Did I achieve my objectives? Mostly. I did enlist several more outside directors, from diverse industries and with diverse expertise. (But in my search for greater subject-matter expertise, I discounted the value of the broad experiential wisdom that the local business leader had brought to my dad’s board.) Discussion did increase, particularly as I learned to frame the questions better. My board gave me moral support, a safe sounding board, access to skillsets and experience I otherwise would not have had.

For a successor just taking over management of a family business, I can offer the following suggestions:

1. You need a board. Enlist a group of outsiders with relevant experience who are willing to devote the time to meetings and the necessary preparation. Big names aren’t necessarily the best board members, particularly if they come with big egos.
2. Prepare for meetings by creating a board book. Send it out at least a week in advance. Creating the board book may be the single most important task you take on each quarter. Putting together the reports and agendas forces you to step back from the day-to-day stuff and focus on the bigger strategic issues facing your business.
3. Make sure you include at least one constructive critic who is willing to speak up. Finding independent directors isn’t enough – to be really valuable, an independent director needs to be willing to voice observations and concerns that will make you, the business leader, uncomfortable and defensive. Recognize that this advice and perspective is more valuable than all the pats on the back combined.
4. Encourage discussion. Think hard about your biggest strategic dilemmas, greatest fears. Board meetings shouldn’t focus on what’s going right, but rather what’s going wrong, or might go wrong. Excuses are useless – frame the issue, outline your response, and ask for feedback and recommendations.

I’ve focused on the value a good board can bring to a successor manager, but the board is even more important to next generation shareholders, particularly if they aren’t actively involved in the business. A good board will hold management accountable and push for better performance. A good board can also provide a critical balance point between the interests and needs of family shareholders, and the interests and needs of management (a topic I’ll take on in coming weeks…)