So what tips the balance in favor of bringing outsiders into a family business's board of directors? Sometimes, it's just a matter of size, says David Zaudtke, executive director of KPMG Family Wealth Institute, a financial planning firm in Minneapolis. A successful business grows so much that it can find itself without enough family members or top-level managers who can provide insight into all the areas it needs. Other times it's rapid change in the industry or some specific need that prompts the head of the business to appoint an outside board member who can provide information and advice. "If, for example, a family business decides to expand internationally," Zaudtke says, "perhaps it would want to bring someone onto the board who knows the market of the country that the company is expanding into."
But the most common reason for opening up the board of directors to outsiders has to do with succession. "Outside board members aren't usually brought in until the founder or head starts to feel fragile, when he or she starts wondering what is coming next," says David B. Hawkes, an outside member on four family business boards and co-founder of Cloudhawk Inc., a family business consulting firm in Portland, Maine. "It's in succession that outside members can be most helpful in bridging the issues of family and business."
Because family business heads are skittish about plunging into a position where outside board members determine the affairs of their family or their business, they often start in one of two small ways: with one outsider on the board or with an advisory board.
"Appointing one outsider for a limited term allows the family a trial balloon," says Hawkes. If that person adds to the depth and growth of the company, other outsiders can be added to the board later.
Establishing an advisory board with no legal responsibility or liability also lets the family dip a toe into the knowledge pool of outsiders. An advisory board can provide a wealth of useful ideas and insights that the family business can act upon if it chooses. If ignored, the board may fizzle as its members become discouraged that their advice is being ignored. Lee, understanding the delicacy of the advisory board, doesn't call his board an advisory board--though it really is. His "board of directors" doesn't have liability or the authority to fire the CEO.