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).
- Aspen Family Business, www.aspenfamilybusiness.com
- Crowe Chizek and Co. LLP, www.crowechizek.com
- Hintzsche Feed, Grain & Fertilizer, www.hintzsche.com, firstname.lastname@example.org