Outside boards of advisors can give family businesses a real competitive advantage. "They bring independence and objectivity to the business that family members can't," says James Hutcheson, founder and president of ReGENERATION Partners, a family business consulting firm in Dallas. "Because relatives share similar experiences, they usually don't bring differing perspectives to the business." Outside board members do. They can infuse the family firm with a fresh perspective and new areas of expertise.
Despite their potentially powerful value, many advisory boards fizzle or their members part company. Or they fail to make any meaningful contributions to the family business. Why? Here are some common reasons:
- The owner or CEO doesn't have a clear, articulated purpose for board members. The mistake in this scenario is so basic, you'd think it couldn't happen. But it does. Board members must know what they're expected to do. Their raison d'Ãªtre depends on the needs and goals of a company at a particular time. During different periods, members might concentrate on strategic or succession planning, provide expertise in growth areas, serve as intermediaries in a tense relationship between nonmanagement owners and company management, serve as a resource for innovative management and business techniques, or simply widen the perspective of a family business. But unless the board's purpose is clearly spelled out, members will fail to be of any use to the family business.
- The right people aren't on the board. A family business defeats the purpose of an outside advisory team if too many insiders are on the board. Charles Collat, chairman and CEO of Mayer Electric Supply Co., a third-generation electrical wholesale and distribution company in Birmingham, Alabama, understands this well. He's been carefully selecting outside advisors since he took over the company's leadership 20 years ago. Collat, 67, looks for candidness and competence. "Although I trust my lawyer and accountant to be forthright, they're paid by the company," he says. "I want people who can be totally open." Collat has added to his board heads of companies from around the country and within the industry--people willing to give Mayer Electric guidance and direction.
"To determine who should sit on your board, ask `What's the company's weakest point?' or `What strengths do I need to bolster?' " suggests family business advisor Kent Graham, a partner with Los Angeles law firm O'Melveny & Myers. "Once you know what you need, you can seek people who fit the bill."
Of course, a company's needs change, making it important for family businesses to alter their board's makeup. "Being an advisory board member isn't a lifetime role," says Hutcheson. "A wise family business leader sets term limits--even though the terms could be renewed."
- The board isn't taken seriously. This scenario is played out too frequently. The family business head understands that an outside board would look good on paper and might even be useful, but he or she is threatened by others' suggestions about how to run the business. The problem, according to Graham, is that if you put together a board of strong, independent people and don't listen to what they have to say, quality people will just walk away from the task. The family chairperson has to be comfortable with the fact that while board members don't make decisions, they are invaluable when it comes to influencing, fine-tuning and validating the business.
Ilana Diamond, 40, president of Sima Products Corp., a second-generation manufacturer of consumer electronics accessories in Oakmont, Pennsylvania, is comfortable with that idea. She credits her advisory board with pushing her company. "One member suggested we look at ways to reduce our bank credit line. It was an obvious way to increase profits, but we were spending so much time on the daily issues that we overlooked it. Once we focused on it, we significantly decreased the amount of interest we paid," Diamond says.
"Later this same board member asked what I was going to do with my time now that things were going so well. `You should get out of the office more and start thinking about the next steps for the company,' he suggested. He was right," Diamond admits. "That's when I started focusing on e-commerce--our next growth sector."
- Critical information is withheld from the board. In addition to not taking board members seriously, leery family business heads can sabotage an advisory board by not providing members with enough information to make valid suggestions or provide useful insights. Board members expect to see the company's financials, tour its facilities and meet family members, especially those being groomed for succession. They should also hear reports from senior management members on high-priority subjects, and they should be given materials to review far enough in advance of their regular meetings so they can make significant contributions to the discussion.
It's not necessary or even wise to wait until a scheduled meeting to discuss problems or issues with advisory board members. "If something comes up, such as a lawsuit," Hutcheson says, "you'll want to get on the phone or have lunch with your members and tell them about it. You might be able to get some invaluable advice from someone who has experienced something similar."
- Board members aren't properly compensated. Fees for board members vary significantly depending on the size of your firm and what you're expecting the advisory board to do. Graham says it ranges from $1,000 a meeting to $15,000 a year.
Both Graham and Hutcheson agree, however, that compensation goes beyond financial remuneration. "Outside board members' compensation expectations are different from those of paid advisors," says Graham. "They are flattered by being thought of as a valuable asset. They like the opportunity to network with other knowledgeable people. And they often feel they are learning something from the experience."
Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).
O'Melveny & Myers, (310) 246-6820, email@example.com
ReGENERATION Partners, (800) 406-1112, http://www.regeneration-partners.com
Sima Products Corp., (800) 345-7462, http://www.simacorp.com