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Newport Board Group, an Advisory Firm Serving Middle Market Companies, Releases 4 Steps to Success for Family Businesses

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Newport Board Group, an Advisory Firm Serving Middle Market Companies, Releases 4 Steps to Success for Family Businesses

Why Family Businesses Need an Outside Board Member

PR Newswire

SAN FRANCISCO, May 14, 2018 /PRNewswire-PRWeb/ -- Family companies often operate as small fiefdoms under the control designated family patriarch or to use a business term, the CEO. Few family-owned companies have a formal board of directors and for those that do have boards, CEOs tend to populate them with family members, friends, and internal management. The theory for not establishing a board is that board members do not know the business of the company, cost too much, are not part of the family and often do not provide value. In some cases, those conclusions can be true. But in many cases, the establishment of an effective board and the inclusion of outside non-family board members have saved many a company from ruin.

It is estimated that less than 5 percent of middle-market companies have an established board or advisory board, the primary reason for such a low percentage is that small and middle-market businesses believe they are smart enough not to need a board, think it is too expensive, or believe it would constrain their decision-making abilities.

With the demands on CEOs — including ongoing regulatory changes, pressure from family and other founders, the rise of new competitors and business models, and the need to transform businesses at an ever-quickening pace — it may be time for you to get some help and add an outside director to your board.

Outside directors bring outside experience and perspective to the board. They keep a watchful eye on the inside directors and on the way the organization is run, and provide guidance as to risk management and good corporate governance practices. Outside directors are often useful in handling disputes between inside directors, between family members or between shareholders and the board.

The Four Roles of Corporate Boards

Family owned companies have different needs and expectations from outside board members. Frequently, outside board members can help to resolve family owner disputes and act as an independent mediator. Board members in these companies can frequently help generate company sales through their contacts or help raise capital. Whatever the need, there are typically four key roles that a board should play in a middle-market company. An outside board member with experience frequently is needed to help define and implement the following:

1. Identification and Direction
Even subtle shifts in a company's competitive position have a way of changing everything: what form of leadership is called for; what constitutes success; what risks are to be managed; and what regulatory requirements must be met. This doesn't mean that a board should hold frequent, formal strategy sessions. It does mean that boards must be alert to defining moments that represent opportunities for it to add value or, conversely, lose the trust of the CEO and other stakeholders.

These defining moments don't usually involve a simple choice between clear alternatives. They require the board to formulate new options or look at old options in new ways, uncovering their implications. To be effective on the occasions when the company has come to a turning point, directors must have taken the time and made the effort to build collective understanding among themselves. The board and CEO must fundamentally see themselves as a team, who share a set of tools for collaborating and a common approach to leadership.

2. Teamwork
There are real challenges to getting a board to act as a team. Members represent diverse backgrounds, agendas, skills, and stakeholders. Family companies may have family board members with very differing interests: some may want to sell the company, some may be looking for a stream of dividends and some might be focused on the growth of the company. Even with years of being part of the same family, they may know one another only superficially, spending time in each other's company for a few hours a year at holidays in relatively formal settings. Many directors tend to be uncomfortable differentiating themselves from their peers. Their discomfort rises in direct proportion to the stakes they perceive. Peter Drucker long ago counseled that teamwork begins not with focusing on relationships or structure; it starts with goals, then crafting the mechanics to achieve them.

Boards have a mandate to exercise their powers collectively, even though members are required to make their judgments as individuals. Boards that work as a team build a bridge between members' personal viewpoints and collective decision-making. Good governance occurs when a team rises to the occasion in the company's defining moments. With the exception of the board's reserve powers, such as its power to select, reward, and remove the CEO, the CEO is an integral member of the team.

3. Tools
There is a self-perpetuating cycle that sets in when the family board members and CEO are out of alignment. The CEO thinks, "They get so lost in the weeds … how will I ever get them to see the big picture"? The board thinks, "There is something he's not telling us … we need to drill down. He is getting paid a salary and we are getting nothing."

To be truly effective, the board as a whole needs a shared sense of the conversations they should be having along with tools to guide how the conversations are conducted. Bear in mind that people talk at roughly 1,200 words a minute but think at around 450. It's one thing for directors to speak their mind. It's quite another for everyone to be really prepared to change their mind. Most boards need to improve their capacity for dialogue: synthesizing, sharing airtime, listening rather than rehearsing, inviting other perspectives, exploring assumptions, and setting aside efforts to convince and convert in order to really listen and reflect.

4. Leadership
The board chair must pay attention to the appropriateness of the agenda, the robustness of the pre-work, and the legitimacy of the conversation. At points of chaos or closure, a capable chair will find ways to strengthen the voices that tend to be outgunned and draw in those who have unspoken perspectives.

Consultants estimate that 80 percent of any improvement is in the process itself, rather than the solution. Board chairs and members can improve their process by directing their efforts, in defining moments for the company, on reframing issues, forging a real partnership between board and CEO, and leading a more authentic dialogue that will help the company seize opportunity.

If your family company is experiencing growth or governance challenges, one of the first courses of action should be to consider adding an outside non-family member to your board. If you do not have a board, establish one as the first step.

Michael Evans is the Managing Director of the California Offices of the Newport Board Group.

 

SOURCE Newport Board Group, LLC

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