The Importance of Independent Directors & Good Corporate Governance for Family Businesses
When many people think of a business having a professional board of directors, they envision a large Fortune 500 corporation. But as many successful owners and leaders of family businesses already know, a business of any size can benefit from a board of directors with independent directors.
A board should provide an objective view for senior management, which can be extremely beneficial for a family business that employs a number of family members in senior roles. It is important that when a family business decides to create a board, the composition includes independent directors with expertise and insights in key areas that can add value to the business. Regardless of whether a company’s legal structure requires a board to have independent directors, their careful consideration and inclusion can have many benefits, which are outlined below.
ACCOUNTABILITY OF SENIOR MANAGEMEN
The establishment of a board means that the CEO and the rest of senior management are accountable for their decision making through increased transparency of all major developments at the family business. For most boards, this usually involves a formal evaluation of the senior management, including the CEO. The board’s real value in terms of evaluating senior management is less about being critical and more about providing constructive feedback. An efficient board should enhance leadership and stability at the senior management level.
TIMELY DECISION MAKING ON IMPORTANT ISSUES
A board implements a ready-made formal structure that ensures key strategic, operational and financial developments—such as acquisitions, key personnel decisions, and changes to dividend
policy—are discussed on a timely basis. Boards can discuss a broad array of issues, whether they be relatively near-term operational issues or longer-term strategic planning initiatives.
Having a board in place allows senior management to address contentious issues early on, which can be a real advantage compared to companies that allow important issues to linger or be ignored completely.
ACCESSIBILITY TO EXPERTISE IN KEY AREAS
Independent board members should be selected for their skill-set and expertise in key areas (i.e. finance, technology, etc.) that they can bring to the board, including their network of industry and
professional contacts. They are more likely to provide a critical perspective and to challenge the status quo, which is important as it will allow other board members to feel empowered to share
their views more openly. One key statistic that highlights the importance of having independent board members is that 73% of family firms looking to grow aggressively have non-family nonexecutives (Source: PwC).
SUCCESSFULLY ADDRESS BUSINESS SUCCESSION ISSUES
A board of directors provides a family business with the structure to facilitate a successful transition in leadership from one generation to the next. A board is more likely to identify future succession issues and prepare for them years in advance. Independent board members can also act as mentors to the next generation of family business leaders as they prepare to take on additional responsibilities.
The fact that no family businesses are alike often applies to boards of family businesses. The composition of the board should reflect the maturity of the family business and be organic in
the sense that it should be allowed to change over time. As the business grows in complexity, the board should also become more dynamic to handle the increasing level of strategic challenges and
developments that can occur. Based on the industry a company is in, some boards may require more insight and expertise in a specific area, such as finance or technology.
Silvercrest, through the relatively recent addition of Seán O’Dowd as a managing director and family business advisor, now has the ability to consult with family businesses on the creation and
composition of a board of directors to help companies continue to expand their business. This is just one of the many corporate finance related services Silvercrest offers clients to help enhance
and grow the family business/legacy for future generations.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. O’Dowd No part of Mr. O’Dowd’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed.
© Silvercrest Asset Management Group LLC
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