Speak to family business owners about boards of directors, and you'll likely get a wide variety of opinions about whether boards should even exist and, if so, who should be on them. Certainly, it's considered an anomaly for first-generation family firms-and often for second generations as well. Is a board necessary when the founder or the founder's son or daughter is running the company? Why? Even when family businesses do start thinking about further professionalizing their businesses in terms of boards of directors, it often happens slowly. Notes Colette Lombard Hoover, a principal of Oakbrook Terrace, Illinois, accounting firm Crowe Chizek and Co., who advises family businesses with her husband, Edwin, "Development of a board of directors is more of a process than a single act."
That's part of the advice the Hoovers gave client David Hintzsche, president of Hintzsche Feed, Grain and Fertilizer, a Maple Park, Illinois, agricultural supply and grain elevator company. Hintzsche's father and uncle started the business in the early 1960s, and the company is now equally owned by six shareholders: David, his three brothers and their two cousins. For years, the six of them constituted their own board of directors. Then the Hoovers advised that outside board members might make a valuable contribution to the company's growth, suggesting a board of five members.
The Hintzsches pondered their own roles. "We talked about the size of the board and how we'd work it if we only had three members of the family on it," says Hintzsche. "We decided that we'd always want both families represented, so if our number on the board was pared down to five, we'd have two members from my family and one from my cousins' family. We thought maybe we'd rotate membership as long as everyone wanted to serve."
Ultimately, though, the Hintzsches left themselves on the board and added three outsiders, for a total of nine members. They developed criteria for their outside board members, but not for themselves. "We're all in our 30s and 40s now, so the issue isn't pressing yet," says Hintzsche. But he admits they'll have to do that in the future-when, and if, the third generation comes into the business.
Down The Line
It's in that third generation, when many cousins or a number of branches of the family are shareholders, that you generally have to establish criteria for family board membership, experts agree. If you don't, you could wind up selecting members based on personalities rather than qualifications, and that can become dicey or downright destructive for the business.
Of all the criteria for a family board member, the most important is that he or she have something to contribute as far as setting policy and direction-not getting involved in the daily operations. "You don't want to use this position as a training ground for the next generation or as a reward just for having the right last name," explains Edwin Hoover. Younger family members need day-to-day training in management, not governance, and don't necessarily have the experience or expertise the family business wants from people who take the long view of the company's growth.
In fact, when looking for effective board members, whether in or outside the family, you want to find people with the credentials, capabilities and experience to take the company where it needs to go in five years.
Is it important that family members selected for the board be part of the company's management team? Not at all, according to Hoover, who doesn't even believe in a management board of directors. "If managers are doing their jobs, you're getting their input anyway," he says. "The purpose of a board member is to bring additional capability and insight to the company." Hoover mentions one family business where the board chair is a sister who is an attorney in another state. "And she does an outstanding job of heading the family business's board of directors," he says. "Another important criteria for membership on the family board is understanding the priorities of the family and being able to promote them," says David Bork, a family business advisor in Aspen, Colorado. "People need to realize the real differences between being a shareholder, a manager and a governor in a family business." Bork suggests that the topic be addressed and explored at family council or forum meetings.
Ideally, the council or forum would vote for family board members after reflecting on where the company sees itself going and which members of the family have the value-added knowledge or experience that would help the business move in that direction. The board members would likely have term limits or make the position a rotating one so that the company would have the flexibility to restructure its board.
Also, agree the Hoovers, the rules governing family membership on the board shouldn't necessarily be different from those governing other board members. And although they recognize the difficulty in separating family from business, the Hoovers assert that creating and adhering to a formal policy when it comes to family membership on a board of directors is crucial to the success of the board as well as the business.
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).