Insights: Building a board of directors for your family business

It happens to a lot of family businesses. During their founding, there is no need to think outside the family. Then, as time goes by and your family business gets more complex, it becomes necessary to rely on a more professional board to play an active role in matters such as setting the company’s strategy and reviewing its management performance. But it’s not just about having a board for its own sake – the board must also have the necessary expertise and independence to challenge the company’s founders positively, acting in the best overall interest of the business.

So, a well-structured board of directors can be a cornerstone for the success and sustainability of any business. And that’s what I’m doing to discuss in this article. I’ll show why a board of directors is crucial, who should be included, and how it should function to provide the governance and strategic guidance necessary to thrive.

Putting together a family board is all about seeking out the necessary qualities and skills that align with your future objectives (not your history) and then ensuring there are clear guidelines within which they function. Let’s look at all of this in more depth.

The role of a board in family businesses

Family businesses face unique challenges that make a board of directors particularly valuable. These businesses often deal with intricate family dynamics that can impact decision-making and overall governance. A board of directors can help mitigate potential conflicts, create a structured decision-making process, and establish clear roles and responsibilities within the family and beyond. A board can also provide professional expertise and industry insights that might not be present within the family, offering a balanced approach to business strategy and operations.

This need for effective governance becomes particularly pressing in challenging times, such as economic downturns or global crises. A well-functioning board of directors ensures that a family business remains resilient and positively impacts all its stakeholders, including employees, customers and suppliers.

Why a board of directors in a family business is important

The importance of a board of directors cannot be overstated for businesses of all sizes and industries. For larger companies, a board offers essential oversight, strategic direction, and accountability, ensuring the business adheres to its goals and complies with legal and regulatory requirements. However, even smaller companies and those in niche industries can benefit significantly from having a board.

In family businesses specifically, a board provides additional layers of governance, helping manage complex family dynamics and bringing in external perspectives that can drive growth and resolve conflicts. The board can be instrumental in steering the company, setting long-term strategies and ensuring the business remains adaptable and competitive.

It’s a delicate balance. In family businesses, the board must ensure that the company’s activities align with the family’s values and (in the board’s opinion) the best way to achieve the business’s long-term objectives. These two things do not always align, and we will discuss how to mitigate this issue later in this article.

Why forming a family business board is so challenging

So, we have seen why it’s important, but that doesn’t mean forming a board is easy. There are two common problems:

• Priorities: Instead of prioritising the business’ future needs, owners may focus on family politics. When this happens, relationship dynamics dominate the all-important objective professional decision-making process.
• Role: Owners may not think enough about the role and mandate of their corporate board of directors, and because of this, they underestimate what the board could and should do for the family business.

In other words, owners often don’t know what a strong, functioning board could do for their business or how to design one. More often than not, they don’t think about board members in terms of achieving business goals but focus instead on which family members to include. This seems to make sense – after all, this is how the business started in the first place. But when a family-centred board is created, it is often dysfunctional, and the business suffers as a result.

With that in mind, let’s look at how to mitigate this issue.

Best practice when forming a board

External board members with backgrounds in finance, law or other industry-specific knowledge can enhance governance and strategic planning. When selected strategically, independent directors can contribute significantly to the board’s effectiveness. So, it is vital to ensure that roles and responsibilities are well defined for all board members and that independent directors are given the respect and authority they need in order to contribute.

Let’s look at a few of the specific qualities any family business owner should consider when they start looking to assemble a board.

• Strategic thinkers: Are the potential board members fully aware of industry trends and economic conditions? Do they understand their mandate and what the owners want the board to deliver? Can they look ahead to see early warning signs of disruption, then take that information, work out the implications, and plan scenarios to minimise risk?
• Future-focused: Boards should be put together with the company’s future in mind, not its past. The best talent will align with where a business wants to go, not where it started.
• Diversity of perspective: A diverse board will improve every level of decision-making. Diversity in age, race, gender, generation, experience and so on will all come into play when considering board composition.
• Balance between board members: Strike the right balance between family members and external professionals. Ensure none of your board are people you’re already working with – whether that’s a supplier, a lawyer, an accountant, etc. Avoid friends of the owners with no relevant expertise, and when it comes to executives (who often focus on operational issues), consider having only the CEO and the CFO.
• Number of board members: It’s about having the correct number of people – often somewhere between three to seven works well, but this may differ depending on the specific business.

 How the board should operate

Now we have established how we want our board to be composed, let’s think about what owners can do to ensure the board functions as it should:

• Establish clear guidelines and structures: Define the board’s roles, responsibilities and decision-making processes.
• Schedule regular meetings: Hold regular meetings to review performance, address issues and set future objectives to keep the board on track.
• Create committees or sub-groups: Consider forming specialised groups to handle specific areas.
• Ensure transparent communication: Maintain well-documented processes to support accountability and alignment with the business’s goals.
• Set metrics and reviews: Periodically evaluate the board’s performance to ensure it continues to add value to the business.

Circling back

First attempts at putting together a board for a family business often result in a group dominated by founders and family members, with independent advisors added much later on. My advice is to reverse this and ensure you have a well-balanced, independent board as soon as possible.

A board of directors is a vital asset for any family business, offering governance, strategic direction and expertise that can help navigate complex challenges and foster growth. By carefully selecting a balanced mix of family and external members and establishing clear operational guidance, a family business can leverage its board to enhance its performance, manage family dynamics and secure its long-term success.

Read: How AI can transform boardrooms

The writer is the founder and managing partner of Trade License Zone.