Family Business Boards: Manage Cost to Maximize Value

Through this past pandemic year, the cost of board meetings has gone down. Now may be a great time to invest in advancing the capability of your board. Why? Consider the economic incentive: with the shift to more virtual web-based meetings, travel and meeting costs are down. Meeting schedules can be more flexible and make more efficient use of CEO and directors’ time. These savings could be reinvested to enhance the value of the board for the company, e.g., by adding independent directors who help sharpen business strategy and support the performance of the CEO. Given the new opportunities (and market uncertainties) appearing as companies emerge from COVID-19 lockdown, investing in strengthening the board could be a smart move—if board leaders sharpen their practices for both managing costs and maximizing the board’s strategic value.  Here are some steps to consider:

Practices for Managing Board Cost

1. Determine the ideal board size and composition to enable company growth. For example, six to eight directors with three or more independent members is a typical recommendation for private companies.

2. Create an annual board calendar that includes a combination of virtual and occasional in-person meetings. Set a minimum total number of meetings for the year and allow flexibility to add more virtual meetings as may be needed and approved by the board chair.

3. Set total annual director compensation in line with market rate, as informed by private company director compensation surveys. Avoid compensating family directors at an above-market rate for their board service as a special owner benefit.

4. Pay directors an annual cash stipend and consider paying additional meeting fees only for special purposes, such as extraordinary additional time for board committee work. Consider offering outside directors long-term incentive compensation, such as phantom stock or stock appreciation rights, only when it is expected that they will bring vital contributions to accomplishing specific company goals and when there are strong reasons to align their personal interests with the goals of the company.

5. Protect the CEO against the hidden cost of inordinate director demands on her time outside of board meetings by enabling the chair to serve as a liaison and “buffer” between individual directors and the CEO.

Practices for Maximizing Board Value

1. Establish a shared expectation that every director, family and non-family, is responsible for adding value to the business through quality board dialogue and by enabling timely, informed decisions. Some companies document a statement of Expectations of Family Directors, which includes diligent preparation for meetings, seeking first the best interests of the company, maintaining confidentiality, and representing the best interests of all shareholders.

2. Have an annual board planning session with the CEO that identifies key challenges facing the company and specifies related board priorities and achievement goals for the year ahead. E.g., one board planned to challenge and support shareholders to update their estate plans so that the company could reserve cash for redemptions while also acquiring real estate.

3. Assess whether the skills and experience of the current directors are broad and deep enough to accomplish the board’s achievement goals. If there is a gap, determine whether the needed additional skills and experience can best be filled by hiring a short-term advisor or recruiting an additional board member.

4. Design board agendas that state the goals for each meeting as determined by the chair, and carefully allot meeting time to efficiently address the topics. Use regular “executive sessions” following each meeting when the chair meets alone with the outside directors to hear their view of meeting effectiveness and receive their input for the chair’s discussions with the CEO and coaching with the family directors.

5. Involve all directors in a structured annual board evaluation that 1. identifies progress in the board’s productivity and professionalism relative to where the board was a year ago, 2. evaluates board achievement in relation to its established goals and priorities, and 3. considers adjustments in the board’s relationship with the CEO and family shareholders that could reinforce informed alignment among the key parties of the governance system.

“How will we go from the board we have to the one the business and family will need?” asked the newly appointed chair of a third-generation family company who attended a recent NACD conference. She recognized that boards need to evolve, and board leaders need a developmental roadmap to lead that process.  Advancing the capability of a family business board takes careful thought and planned investment—but the rewards can be great. Raising the level of board skill and sharpening meeting focus can provide valuable guidance and support for the CEO, improve business strategy, and enhance share value for the family owners.

When is the right time to build advanced capabilities in a family business board? Because this work takes time, the simple answer is “do it before you need it.” While there are defined perspectives that help answer this question of “when” in a disciplined way, the road always starts with a first step. New savings and efficiencies wrought by adaption to a pandemic can provide a stimulus and moment of opportunity to help assure the continuity and growth of a great family business.