Building a Board of Directors: When Is the Right Time?

By January 17, 2013Governance

If you ask almost any family business advisor to identify the right time to form a board of directors, the answer will be forthcoming almost instantaneously. “Right now.” This is because the conventional wisdom is that all family firms need a board of directors.

In fact, however, there is no hard evidence to suggest that a board is helpful. In many circumstances a board is a distraction and may even be harmful. That’s because while many family businesses may benefit from having expert and committed directors to draw upon as a resource, many more firms and individuals are simply not ready to incorporate the input from a board.

In my experience, about three-fourths of the family businesses that engage family business advisors have a great deal of groundwork prior to effectively utilizing a board. Unfortunately, the widely accepted best-practices of family business call for almost all firms to form and utilize a board.

The more apt question is, “Are we prepared as a family business to benefit from a board with independent directors or advisors?” For instance, it’s not uncommon to find family enterprises that don’t produce financial statements. It is extremely unlikely that any knowledgeable, discerning director candidate would consent to sit on a board of such a company. Before a company can attract quality board members, it has to reach a minimum level of business practice competence.

At smaller family firms — say, those with less than $75 million in annual sales — an equally serious obstacle is often the attitude of the current family ownership and leadership. In my experience, virtually all of these organizations are committed to the idea that they are unique and that no one from outside the organization can understand them. This idea is, simply put, harmful.

Until a company and its leaders acquire enough sophistication to realize that they can, indeed, profit by listening to others, it is pointless to go to the trouble of organizing a board of directors. Preparing for an effective board is similar to developing best practices when it comes to open communication, defined roles and accountability, financial controls, strategic planning, managing acquisitions and divestitures, developing talent and other universal business concerns.

None of this is to say boards are bad. Boards can be lifesavers, especially through a tough succession transfer. But independent directors on a board are not helpful when the ownership group is not ready. For smaller, less advanced businesses, a more appropriate solution is a board of advisors. Similar to a board, advisors should not be limited to paid employees of the family enterprise, or paid professional advisors such as accountants and attorneys. Eventually, as the organization becomes more sophisticated, leadership will move toward a professional and more independent board.

So don’t be misled by the conventional wisdom that every family business needs a board of directors. That’s down the road for most companies. It is helpful, but if not created correctly and at the right time, a board is usually a waste of time and money that few businesses can tolerate.

REGENERATION can help you consider a board of directors or other governance issues.

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