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When Can Family Members Serve on the Board?

As a reader of The Family Business Advisor, you know our advice is that family businesses should have an active board with excellent outside directors. Insiders, including family member and non-family key employees, should be kept to a minimum.

However, what is doable and what is desirable don’t always match. And in some situations, a larger, more inclusive board makes great sense.

To help you avoid family feuds over board seats, here is our experience-based advice about making directors of family members.

Two Different Outcomes

Let’s discuss two examples each with a different outcome. One is a large family business with participants from three generations. It had a long-standing policy that after 10 years of employment, family members became eligible to serve on the board. The board grew and grew as more than a dozen family members met the criteria.

The 13th, however, was unlucky. A grating personality cost him the support of the majority of board members, and he was not elected to serve. His defenders maintained that he was “no worse than some of the others on the board.” Soon the arguments escalated. Ultimately, the conflict over membership led to the sale of the business.

The other company, which was nearing its 100th anniversary, had a policy of electing two directors from each of eight family branches. The policy had been established two generations earlier, when there were only two family branches. Each branch got to choose who would represent it.

The board increasingly became an arena for much family drama, with branch pitted against branch.

This case had a happy ending, however, when the board was restructured to seven members, including outsiders for the first time. Branch representation was specifically eliminated as a criterion of board membership.

Not surprisingly, family conflict was significantly reduced.

Reasons for Taking Action

Choosing board members from the family is difficult at best. Some bad yet frequently used reasons for electing family members to the board are:

  • To reward or punish. “She’s been a good, loyal family member – let’s reward her with a board seat.”
  • To avoid conflict. “Gee, if we don’t put Phil on the board, there’s going to be trouble with Aunt Pat.”
  • To avoid hurt feelings. “Ann will be so upset if we don’t put her on the board.”
  • To demonstrate loyalty or love. “Eddie won’t hurt anything by being on the board, and he may feel we love him less if we don’t give him a seat.”
  • Because it has always been done that way. “Mother has a board seat, and I should have it when she’s through.”

Clear policies should be developed concerning board membership. Once developed, they should be communicated to all who might consider themselves candidates for the board. We suggest that when you are considering whether family members should be on a board, you should think in terms of family reasons and business reasons.

Business reasons for board inclusion are straightforward. If family members have relevant business experience or expertise, or if they demonstrate superior strategic or analytical thinking and business knowledge, they may be considered as directors.

Remember, the purpose of the board is to hold top management accountable, help the business plot its course through strategic planning, and serve as a sounding board on difficult challenges confronting the firm.

The best family reason for board inclusion is that a particular family member enjoys a high level of trust by the whole family. Such trust will build confidence and encourage the family to stand behind the company.

If a family member controls a significant block of stock, he or she might be considered. Indeed, when a business is held equally by three or four second-generations siblings, they might all sit on the board – as long as they don’t set a precedent for branch representation. That can be dangerous because branch interests can be seen as more important than the interest of the whole.

On the other hand, a family member who is able to capture and articulate the goals and vision of the family as a whole might be considered.

Grasping Family Goals

The best family-business boards focus on accountability strategy and helping the CEO grapple with tough, thorny issues. As a family grows and stock is spread among more owners, having a few more family members on a board along with a substantial number of solid outsiders may make sense.

Shareholder relations become a more important issue for the board. A family voice or two in addition to the chairman and CEO’s may help the board to better grasp the family’s goals and perspectives. Including a broadly and deeply respected family member may provide a way for catalyzing trust in a fractious family.

As long as family members don’t take up precious board slots that should go to more qualified people and are capable of making real contributions, a small number of family owners on your board of directors may improve board functions and shareholder communication.

 

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