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Adding Nonfamily to Your Board

Nonfamily members can help keep your board of directors on the right track.
December 1, 1997
URL: http://www.entrepreneur.com/article/14890

Shepard Lee says his decision four years ago to put together a board of outside directors was one of the best things he's ever done in business. Today the board advises his Westbrook, Maine, car dealership, Lee Auto Malls, which was started by his father and a partner 60 years ago.

"I serve on a number of different boards and saw the value outside board members bring," says Lee, 71. "Throughout the years, I kept thinking that I should have one, too. But I was ambivalent. While I knew I needed a group of outsiders to talk to about the larger issues, like how we should be positioning ourselves for the future, I've always been my own boss and I didn't want anyone telling me or my [family] what we could and couldn't do."

Lee's ambivalence is shared by most family business chiefs. They pride themselves on their independence. They pale at the thought of giving up either family or business privacy. And they see the process of group decision-making as inefficient and unwieldy.


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).

Ready To Board?

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.

Joining The Team

Any person asked to join a family business's board should be concerned about protecting the future success of the business and keeping the family intact, says Hawkes.

"Because it's important to select someone who understands the spirit and the mission of the business, choosing the right person or people for a board becomes more art than science," says Zaudtke.

Before casting the net for potential board members, it's important to draw up a "job" description. "Each company's requirements will be different," says Hawkes. Some companies might want to shore up their weak areas--like inviting someone with broad knowledge of how technological advances in the 21st century will impact the business's industry. Others might want a person with business experience in global markets.

Hawkes theorizes that after the job description is developed, the names of people who fit the description will begin to surface. "If the [company's] lawyer, accountant or business advisor is selected, that person must change hats when they go into the board room," says Hawkes.

Choosing the CEO of another family business to serve on your board is not mandatory, "but it certainly is helpful, especially if the board is involved in succession issues and the outside board member has already been through the process," says Zaudtke.

On paper, a great case can be built for outside board members. "But unless the family business's CEO treats these members as the important investments they are and shares information needed to understand the business, outside board members are of little value," warns Zaudtke. In an effort to keep them up to date on the industry, Lee provides each of his outsiders with a subscription to Automotive News and has managers present reports for them at each meeting.

How one makes use of an outsider depends, of course, on the person's skills, knowledge, connections, and the needs of the business. The outsiders can be used for practical matters, such as chairing the compensation committee, "which removes the possible friction of one family member deciding the salary of another," says Hawkes. And they can be most helpful with strategic planning (succession planning and beyond) and revealing trends and business insights that will affect the family business.

Lee couldn't be happier with his decision to bring in outside board members. "The six people on my board are some of the brightest, most respected and most trustworthy people I've ever known," he says. "They've provided me with guidance for the last four years, and I know they will continue to do that for my younger partners."

Contact Sources

Cloudhawk Inc., (207) 871-7055, dhawkes@cloudhawk.com

KPMG Family Wealth Institute, (612) 305-5686, dzaudtke@kpmg.com

Lee Auto Malls, 200 Main St., Westbrook, ME 04092, (207) 856-6685