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How Do We Pick Outside Directors for Our Board?

Dear Advisor:

We are seeking outsiders for our board for the first time. We are concerned that people outside of our industry won't understand our business.  At the same time, we don't want to share information with people inside our industry for fear they will use it for their ends. How do others handle this dilemma?

Congratulations on your decision to include outsiders on your board. Their addition can do much to aid your family business over the long term.

First of all, remember that your board's purpose is to provide oversight, not to replace management. Those of you actually running the business should have specific insight, experience and knowledge at a much deeper level than your directors. Outside directors should bring knowledge, experience and judgment related to the challenges that you expect your family business to be facing now and in the future.

For example, you believe that your business needs to improve its strategy but you've had little experience at strategic planning. Outside directors cannot create the strategy to make you successful in your industry, but they can help you to understand and implement a strategic planning process. Other areas where the right outsider can help include finance, real estate, organizational structure, supplier and customer relations and importantly, family/business issues.

Seek individuals for your board who lead businesses larger than yours in similar but unrelated industries, who have dealt with issues you expect to face in the future, and most important, who are willing to understand your family's goals for its family business.

In helping a scrap metal recycling business find outside directors, we once suggested the CEO of a family-owned chicken processor. Both businesses collected their raw materials in specific geographic areas from relatively small suppliers and produced a commodity which was then sold to large customers at determined prices. Both were third-generation family businesses with growing numbers of shareholders. Both faced environmental issues. While chicken might not seem similar to scrap metal, the businesses had great commonalities. Their leaders were able to provide considerable value to each other.

Good luck on building and using your board.
Craig E. Aronoff





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