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Managing Owner Expectations About Sitting on Boards


Managing Owner Expectations About Sitting on Boards

Dear Advisor,

We are going from my father as the first-generation sole owner to 10 sibling second-generation owners with diverse perspectives. We have always had a predominantly independent board and are now getting family members pressuring and clamoring to be on the board. The independents and some family members see this as a serious challenge as we already have three family members on the board. How can we manage this?
 
I don’t see any way to have an effective board with 10 owners. The group is too large to manage and the culture could become more like a family meeting than a boardroom discussion. You may even run the risk of losing independent directors who do not want to serve along with 10 or more owners. Beyond that, you are setting an expectation that all owners deserve a position on the board, which certainly will not be manageable in the third generation.
 
I would encourage you to do the following:
  1. Have the family clarify the role it expects family board members to play and define the qualifications they must bring to the table. Consider the responsibilities of a family board member.
     
  2. Consider the appropriate model for getting family members on the board. If people are concerned that they won’t have an opportunity to serve, you can consider a rotation model in which people have terms and they are replaced by others. Or you can have the family elect board members who serve for set terms. It is important to reinforce with shareholders that family members do not sit on the board to represent their own interests but rather to represent the interests of the owners as a group. Then everyone should not need to sit on the board.
     
  3. Have the family take responsibility for defining the vision and objectives for the firm at the family level. Aspects to consider: How long do we want to be in business as a family? What role do we want family to play in the business? What are the rights and responsibilities of ownership? Who can be an owner of the business? What are our financial expectations of the business? The family should deliver this information to the board so that it understands the owners’ expectations and interests.
     
  4. Consider asking independent board members to share their perspectives with the family concerning the appropriate structure and composition of the board. Assuming they are advisors whom the ownership group trusts, their input could be valuable and respected.
By clarifying the family’s expectations of the business, the role and responsibilities of directors, and the process for selecting directors, hopefully you will be able to manage second-generation owners’ expectations concerning board seats.
 

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