Many family business leaders never question whether to have a board of directors. If the business is set up as a corporation, most of the time it is legally required to have a board of some kind. Even if not obligatory, it’s seen as the best way. A board of directors seems like something sophisticated, successful family businesses have. So they set one up.
In reality, a functional board of directors is not useful or appropriate for most smaller family businesses. That’s not because boards are bad. It’s because many family businesses, especially those still led by their founders, are not ready to accept outside guidance. In these circumstances, which are common, input from an active board is more hindrance than help.
If the law requires it, a family corporation can set up a non-functioning board to meet the legal mandates. That’s different from having a functional board. It’s more like a board of advisors than a board of directors. Its members can provide a sounding board for the CEO, but they won’t be empowered to tell the CEO what to do.
So when is a board the right idea? As a business grows in size and sophistication, the need for wise impartial counsel grows as well. Ideally, along with this growth will come expansion in the leaders’ ability to consider input from others. When existing leaders are ready to accept help from directors, and the needs of the business call for it, that’s the time to set up a fully functioning board.
It’s not enough to simply buy a big table and some chairs and nominate a few names for election to the board. For a board to work, the business has to be run professionally first. Decisions must be transparent. Doors must be open.
A board of directors is something many but not all businesses need eventually. When they need it — they need it. When a growing business reaches a certain size, the job of running it will inevitably become too complex for one brain or even a few brains to handle. At that point, the business can benefit enormously from having a board of directors with the experience to guide it through further growth.
Before then, not so much. Selecting a board takes time. Organizing and holding meetings soaks up energy and attention. Paying board members for attending consumes cash. And unless the business and its leaders are ready to pay attention to what the board says, all this investment is for naught.
Most smaller family businesses will do fine for many years, perhaps forever, with boards composed of independent advisors. This arrangement better suits the reality of the way the typical family business is managed. It’s a more appropriate use of resources, and it doesn’t close the door to setting up a more robust and influential board of directors should it ever become worthwhile.