Key Issues for Governance and Growth on Family Business Boards

There are several aspects of corporate governance that are important to family businesses and may require different treatment than at venture-backed private companies or public companies. Examples were discussed at the recent NACD Private Company Governance Learning Series session where participants were asked to select the highest priority governance issue at their family businesses; not surprisingly, corporate strategy and succession planning tied for the highest priority issue with 30 percent of the vote for each. Other high-priority issues included recruiting and retaining key talent (11 percent), board effectiveness (11 percent), financial stability and cash flow (9 percent), corporate transactions (5 percent), and cybersecurity (4 percent).

Corporate Strategy

It is crucial for private company board members to review growth planning strategies and analyze the potential financial implications of various scenarios such as sale of the business, mergers and acquisitions, investment decisions, and bringing in outside capital and then make sure that the family shareholders understand all factors before making final decisions. It is also critical that the right people are sitting at the table when strategy is discussed and decisions are made. It is important to include more than just the chief executive officer and chief financial officer to make sure that multiple perspectives are included. Board oversight of family-owned companies is unique in that the impartial and fair treatment of the income beneficiaries is paramount as is acting in accordance with the vision and mission of the family.

Succession Planning

Succession planning is more challenging at family businesses than at other privately held and publicly traded companies. Public companies generally have a larger slate of internal candidates. The candidates also do not have to sit down at Thanksgiving dinner with the company owners. It is important to balance the interests of the family and the business. One interesting approach is to always interview external candidates as part of the succession planning process as a check on the quality of talent available in the market versus internal candidates.

Some companies will not allow family members to join the business until they have graduated from college and have four to five years of work experience at another company. The progress of family members, as well as their skill sets (e.g., sales, accounting, legal) and where they can add the most value to the family business are assessed. When hiring family members, it is important to establish a process and qualifications statement and to discuss an individual's desires and long-term goals at the family business. Investing in a family member's career at a family business requires a longer-term planning horizon, rotating the family member through various positions so that they obtain the requisite skills to eventually lead the company, if that is the ultimate goal.

If an external candidate is chosen, it is critical to be transparent about their future with the business especially if a family member is being groomed for the same role later on. An external candidate can act as an excellent mentor or coach for the next generation of family leaders, especially in the event of a large age or readiness gap for the next generation. It is important for the board to be transparent about the timeframe required to get the family members ready, and that part of the external candidate's job is to develop the family members.

Recruiting and Retaining Key Talent

Independent directors can play a significant role in ensuring that a family business attracts and retains the right talent and maintains competitive compensation programs. Using a director's personal network to find the right candidates can be a successful strategy. Directors can also meet with executive-level candidates to answer questions about the company and show personal interest in them. The discussions should include transparency about pathways for advancement. If a family member is going to be CEO for the foreseeable future, let the executive candidates know that the CEO position will likely not be available to them.

It is important for private company boards to establish committees, such as audit and compensation, to provide independence and an objective assessment of company processes and programs. It is critical that the compensation program is market competitive but also supports the family business vision and culture. Family and non-family employees should have the same structure for salary, annual incentives, and long-term incentives. The family employees could earn more from their shareholder distributions, but the other compensation opportunities should be the same as non-family employees. Not having a similar compensation structure across the organization can cause cultural issues and lead to feelings of frustration for non-family members.

Performance Evaluations

A key responsibility of any board is to evaluate the CEO's performance, which can be challenging when the CEO is a founder or family member. Evaluating the performance of a family member CEO requires a multifaceted approach. A useful tool is a scorecard with quantitative and qualitative goals where performance is evaluated on a very clear relationship to those goals. The evaluation cannot be purely quantitative as there has to be flexibility to deal with macroeconomic factors, such as supply chain issues and the COVID-19 pandemic. In addition, the CEO's leadership ability can be evaluated using a 360-degree review process. This process allows the CEO's direct reports to provide input on the CEO's effectiveness and indicate if the CEO's leadership style aligns with the mission and vision of the family business.

It is also important to evaluate the performance of each individual director as well as the entire board to ensure that the family is getting what they need from the board. The board's performance can be evaluated through an annual survey completed by the family shareholders and through a board member self-assessment. It is interesting to assess if there are differences between the responses of family members on the board and the independent directors. Also, the board evaluation process can indicate that it may be time for a board member to exit and a new member with a different skill set to join.

Corporate strategy, succession planning, recruiting and retaining key talent, and performance evaluations are just four of several issues that are intertwined and relevant to providing effective corporate governance at family-run companies. When discussing these issues, it is key for family business board members to communicate with all stakeholders in a transparent manner and to ensure that all relevant parties have a voice in conversations related to the business.

Susan Schroeder is a partner in the Los Angeles office of Compensation Advisory Partners. She is a 2022 NACD Directorship 100 honoree.