Shifting your board from ineffective to powerful: Do’s and don’ts
Can you quantify your board’s contribution to the performance of your family business? What about its effect on the family, in terms of settling disputes, creating policies, and providing transparency, just to name a few? Even if you can’t put a number on it, you likely have a keen sense of where to place your board on a scale from ‘inconsequential’ to ‘game-changer’.
Hundreds of studies with thousands of companies – both private and public – highlight that strong, effective boards are directly related to business performance [1]. Companies with strong boards practice continuous board and company improvement; they regularly upgrade their strategies, leaders, and other associates. They strengthen their balance sheets and prune operations to current and future top performers. They make prudent acquisitions. And in the case of family business boards, the best ones invest a lot of time and energy on family issues, which allows them to keep family issues unrelated to the business outside of the boardroom (spoiler alert: not all family issues must be kept from the board) [2].
But what makes for an effective family business board? Our data from dozens of board evaluations reveal patterns that hold across different contexts – despite differences in boards and their organizations, they face many of the same challenges.
What do the most effective family business boards do well?
When we evaluate boards of directors, we assess different areas of board functionality. These include factors such as diversity and depth of experience among board members, the board’s ability to engage in challenging conversations, and the intergroup dynamics that facilitate or hinder discussion and decision-making in the boardroom. From our own evaluations of boards and our own experiences serving on them, here are a few of the things that stand out in effective family business boards:
Clarity around the Board’s role and scope of responsibilities
Competent family directors that represent the shareholder group
Truly independent outside directors
Healthy group dynamics and strong relationships
Candor
Effective board agenda
Mutual Role Clarity
We frequently come across managers who do not understand the role of the board. Some view it as a rubber-stamping entity, others as a controlling decision-making body with unclear authority. Depending on the perceived role, managers adjust their messaging to avoid roadblocks and conflict – this directly affects the quality of information the directors receive, and hence the value they can add. Most boards would not benefit from engaging management in conversations around the role of the board, the relationship between the board and management, and getting feedback from management in terms of what interactions with the directors they find the most meaningful and helpful for their work.
The other side of the coin is ensuring that the board stays in its lane: We encounter many boards that struggle with the boundary between operational and strategic issues, and occasionally or more often “get into the weeds.” Former and current CEOs feel most comfortable in that conversation, but such operational orientation causes managerial confusion and interferes with managerial autonomy, which management often views this as a lack of trust. A good rule of thumb is that no more than 10% of the airtime should be devoted to operational or tactical discussions. If a board member has such advice, they should ask managers if they would like to hear it outside of the board meeting before offering it. Otherwise, managers often feel compelled to follow even the slightest hint of a directive offered in a board meeting. Explaining this rule of thumb to board members who can’t resist the abyss of tactical advice is the job of all other board members and the chair in particular.
Family Directors
While some family directors are highly trained and effective at performing their board role, others simply feel out of their depth. Therefore, they may go silent or become overly critical and disruptive, which damages boardroom culture and sends negative signals to those who interact with the board. To avoid such conflict, we must clarify the role of family members serving on the board. First and foremost, a family director – like any other member of the board – must add value in board discussions by being prepared and competent. But beyond that, family directors are also in a unique position to facilitate communication between the company and the family and provide clarity around family values and objectives. . Family on the board can also reassure family not in the company with regard to strategic and operational decisions and the company’s future – too often in the attempt to be relevant or carry favor with their own family branch, family members often attack the company and its personnel when in family conversations. Perhaps most importantly family directors are in a unique position to praise management for good performance. Little drives motivation more than appreciative comments like, “on behalf of our family, we highly appreciate your hard work.”
It is worth noting that sometimes the obvious – the most qualified family member – may not be the best choice. Family directors must be sensitive to family dynamics, able to deal with family conflicts, and they must be trusted by a majority to speak on behalf of the family. So, for example, while one family member may hold an MBA and have vast work experience, another may spend a lot of time nurturing close relationships across branches and generations. Hence, the latter might add more value, even if they first must learn the ropes of board work. There is an old expression we live by, ‘select for culture and intrinsic motivation, train skills and knowledge.’ Also, in terms of family director selection, we would advise against selecting family members for the purpose of branch representation. Not only is it not sustainable in the long term, but it also reinforces a branch mentality and the constant conflict causing comparisons that run counter to a unified, one-family philosophy.
True Independents
Many owners are reluctant to put independents on their boards, most often out of concerns of a loss of privacy or control or to avoid their weaknesses being identified. While understandable on its surface, we yet have to find an owner who regrets putting a qualified outsider on the board (caveat: who understands and resonates with the values and culture). True independent directors – which are not friends of the family or former employees – are unburdened by the weight of dependency or protecting a relationship. A true independent will choose candor and truth as they see it over avoiding conflict. Someone you have a pre-existing relationship with may be reluctant to voice certain concerns out of fear of damaging the relationship or losing something else. In other words, true independence means that the director will not sacrifice honesty or integrity.
It is much easier for true independents to hold family members accountable – particularly those working in leadership roles in the business. They can play an important role in mitigating family conflict in the boardroom and beyond, and they signal to management that the family is open to independent outside advice.
Family conversations can and often must be included in the boardroom. In addition to mediating fairness disputes, board members can help avoid future disagreements by setting expectations through formal and informal discussions with family members and by setting company policies that affect family members like dividends, return expectations, and employment and promotions. Board members can often provide perspective through personal stories. They can help the family reduce the emotionality of conflict by keeping the future top of mind and reminding the family that often what they worry about is too small for all the emotional energy they seem to invest.
Strong Relationships
A board of directors is a group like any other. This means that intra- group dynamics must be actively managed along with the board’s interactions and relationships with others.
Family business boards can become a vessel for family conflicts that can erupt in the boardroom. Disruptive emotional conflicts are much less likely to occur when independent board members are present. These independent directors can step in to redirect or moderate conflict; thus, we can avoid damaging fights that not only sever board reputation with management, but also interpersonal ties among board members. And remember two things: Relationships need to build over time and resolving any explosive family situation first requires trust and a strong relationship. And secondly, keep in mind that family members rarely fight about what they pretend to or think they are fighting about: a fight over dividend payouts is rarely just that; instead, it is more likely related to the feeling of being overlooked and ignored that the family member or even a whole branch has carried around for years.
Only when we invest in building and nurturing relationships and connections can we develop a rapport that supports difficult conversations rather than placates our natural desire to avoid them. Directors who have relationships that go beyond mere professional connections are more responsive and attentive – and very importantly, they are far more willing to engage in discussions about controversial and uncomfortable topics. The quality of boardroom discussions is a direct function of people’s ability to openly voice their opinions because they are not afraid that their comments will offend – which highlights the importance of nurturing strong relationships in the boardroom and beyond.
Embrace and Cultivate Candor
The best directors are strong communicators: they can make themselves heard and understood by their fellow directors and those that come to the board to present. They are not afraid to engage in controversial discussions and they can hold their ground when there is dissent while remaining open to different ideas and arguments. And importantly, they believe in candor which for our purposes means they willingly give and receive difficult feedback without drama.
In that same vein, many owners and board chairs struggle with necessary endings: They know that certain board members are underperforming or past their prime, yet they shy away from the difficult conversation that leads to the board member’s departure. There may be loyalty to past contributions or personal admiration for past heroics. However: Don’t postpone a necessary ending. We know one CEO who often says, “I’ve never fired anyone too soon.” You are not doing your board, your family, or the board member in question any favors by prolonging the inevitable. They very likely know they are not performing the way they should and if they’re oblivious to their lack of contributions, that’s even worse.
Leverage your Board Agenda
Think about how much time your board spends discussing the company’s quarterly financial results, such as whether your sales are above or below budget. While that’s important, this time would be much better used if the board challenged management’s thinking and focused them on strategic priorities. For example, has your management proposed to review market share growth (or loss) regularly, or suggested an annual report on “Innovation and business development initiatives,” or merely discussed their three biggest challenges for the coming quarter?
Set your agenda to prioritize key strategic success factors, independent of past developments or events unless they have a major impact on how you think about the future. Unless you are responding to big mistakes and crises, if events drive your agenda, it usually means you are addressing systemic issues too late. Management shouldn’t set the tone for the agenda, although happens all too often. All the critical items should be prioritized on the agenda and addressed regularly -- for example, middle management turnover, quality indicators, market share, image with customers, investment in innovation and upgrades to the business model.
Also, take a moment to think about the topics that have repeatedly been tabled – most boards have them (typically the last items on the agenda). If they are consistently postponed without consequence, they may not need to be an agenda item to begin with or they are important enough to someone and by not addressing them you are alienating stakeholder. Sometimes they are discussed outside of the board meeting and introduced as a fait-a-complis in the next meeting. But we must caution, that unlike the popular myth that decisions should be made before the board meets, this is an enormous red flag signaling a dysfunctional board.
And lastly, the general rule for agenda setting is all board members should have equal time per topic to talk. Set guidelines for how much time individuals and the group should spend on a topic and prioritize putting important strategic topics at the top of the agenda. In short, use your specified meeting time to maximum advantage.
Reflection Questions
Do you have clearly defined qualification criteria for family and non-family directors?
What does your board, your company, your family do to ensure that directors are equipped to successfully perform their role (e.g., on-boarding, initial and continuous training, mentoring)? What are you doing to ensure that they stay competent?
What do you do to nurture a productive relationship between the board and key functions in the company?
What does your board, your company, your family do to nurture productive relationships among board members (e.g., annual retreat, board dinners)?
Are all board members equally comfortable with expressing their views with candor? Do they participate equally in meetings?
How do the board and management deal with pushback and controversy? Should we improve our ability to deal with and provide constructive feedback?
Have you been waiting for any director – family and non-family alike – to retire, rather than proactively asking them to step down?
Going forward, what structural changes (e.g., term limits, qualifying requirements, code of conduct) can you make so that “necessary endings” are easier for yourself, your board, your company, and your family?
Do we leverage our agenda-setting process in a way that allows us to maximize our board’s value?
Final Thoughts
Boards can be powerful instruments to help family business owners and leaders reach and surpass their objectives, but they are often under-leveraged. It takes time and money to put a great board together, to keep it going, and to maintain and nurture relationships among board members and between the board and others.
Regular board assessments – either annually or biannually -- signal that family leaders will hold the board accountable in the same way they hold management accountable. Opt for a longer timeframe if the assessments begin to feel like a cumbersome mandatory routine. Assessments should create space for necessary conversations among board members and give each board member a voice in identifying what makes or breaks the board. And make sure your assessments are adding value; if they don’t, you need a new assessment system or service provider.
And while external reviews can provide an objective point of view, you may not need to hire an outsider to assess your board: Many self-assessment tools (some of them available for free) provide valuable insights into board effectiveness (e.g., National Association of Corporate Directors -NACD, boardroommetrics.com). Such self-assessments can be a first step towards improving the quality and contribution of your board and might give you some initial insights as to what works – and what doesn’t.
Board members sign up to serve on your board because they want to support you in making the right decisions for your business. Allow them to contribute fully, by making sure that board members are competent and trust one another. Encourage candid discussions and ask board members who no longer contribute to step down. You might be surprised how, by simply addressing the desire to assess and improve board effectiveness, conversations start to happen.
This blog post is based on the article titled “Four things that the best family business boards do well”, which published at familybusiness.org in 2021.
[1] A fiduciary board is a formal body with a legal responsibility to protect all shareholders, while an advisory board is informal in nature, and tasked with providing non-binding advice to management (Forbes, online, 2021).
[2] We will refrain from reiterating the well-known drivers of board effectiveness – there are fantastic contributions that cover these much better than we can. For further reading, consider the following articles published in the Harvard Business Review: “Building Better Boards” by David A. Nadler (2004) or “How Boards Should Evaluate their Own Performance” by Larcker et al. (2017).