A Real, Working Board is a Must

To ensure the survival of the business in the next generation, a real board must be in every business owner’s to-do-list before any transition happens. An authentic board is a powerful antidote to avert the next generation curse, punctuated by the Chinese version, “From peasant shoes to peasant shoes in three generations”, and highlighted by an even more striking Mexican version, “Father-merchant; son-playboy; grandson-beggar”

It is therefore important that family members be acquainted this early due to the fact that family dynamics (unconditional love, equality) naturally encompasses management (performance, meritocracy) and ownership (stewardship mindset) interests. Initiating a board comprising a mix of family and non-family members can accelerate the governance process minus the emotional baggage.

The objectivity of non-family directors or advisors during deliberations far outweighs the concerns and fears that business owners feel when adding them to their boards. However, it is not unusual for owners to resist having non family members and some of the reasons are highlighted below:

  • The perception of losing control
  • The issue of sharing confidential information with outsiders
  • The perceived cost of having a Board 
  • The Ignorance of family members on how a real board operates
  • Their limited knowledge on how to separate Ownership and Management
  • Their limited knowledge on how to connect Family, Business and Ownership  

I don’t blame owners if the closest non-family member they can field in the Board are schoolmates, club friends or those individuals who may have a long history of personal friendship with the owner.  This set up is very common in Asia and it is a good exercise to start board alignment. But having qualified and impartial directors can also provide very valuable contribution to any major decision making where the business is solely influenced by the controlling shareholder.

The first value these non-family board members can provide is for them to align the vision of the founder(s) and the goals of the company.  When making critical decisions, non-family members’ interest can always singularly focus on what’s best for the business.

There is an old adage, “what’s best for the family may not necessarily be best for the business.” A good example is when family members decide under the pretext of a board decision granting them a bigger dividend share at the expense of reinvesting the excess earnings in a new factory. Any inordinate financial decision can have dire consequences.

Second, the objectivity of non-family directors during board meetings will spare directors/family members from making irrational decisions naturally teetering towards personal or branch related interests. In a board comprising an all-family member cast, it can be quite a challenge reaching an agreement on major decisions. The only exception is when the leader is still around to break any deadlock.

But until when? What if the leader suddenly falls ill, becomes incapacitated or dies? How prepared is the family in making the right decisions without polarizing other siblings? One poor decision by untrained family members in the board can set back the growth of the business and put family relationships at risk.

In summary, it pays to have a non-family and impartial director who will:

  • Help minimize potentially damaging problems
  • Impose and institutionalize the observance of clear boundaries
  • Be effective in creating a line demarcating family issues from business matters

When a family is committed to stewardship and legacy building, the key is to have a board whose overarching mandate is to display single-minded loyalty to the company bereft of conflict and personal gain. Under corporate law, it is recognized as a director’s fiduciary duties.

esoriano@wongadvisory.com 

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