Does Your Family Business Need a Board of Directors?

Does your family business have a board of directors? Does it need one?

I recently participated in a panel discussion at the Private Directors Association Houston Chapter.

We covered various topics related to Private Boards of Directors – here’s a recap of our discussion.

What is the difference between public and private boards?

The main difference between a public and private board is regulation and cost.

A public board is governed by the Sarbanes-Oxley regulations that are controlled by the Securities and Exchange Commission (SEC).

This makes it more expensive regardless of the company’s size.

However, both public and private boards serve the business’s best interests and ensure duty of care, duty of loyalty, and duty of obedience.

Perhaps the most important difference is that with a private family business board, you may eat Thanksgiving dinner with one or more of your fellow board members!

What is the difference between a fiduciary board and an advisory board?

A fiduciary board is legally bound to act in the company’s and its shareholders’ best interests. An advisory board provides non-binding recommendations and advice.

As a result, a fiduciary board has more decision-making power and is held to a higher level of accountability, whereas an advisory board primarily provides guidance and outside perspectives.

It’s important to note that both types of boards are there to make recommendations that are in the business’s best interests.

What is the role of a family business board of directors?

Building trust and establishing a clear understanding of the role of a board is crucial for family businesses.

Your board serves the business shareholders by overseeing the business value growth strategies and protecting the interests of the business.

You can help establish a successful and productive relationship by understanding that:

• Family shareholders are in charge
• The board is responsible for making recommendations that are in the business’s best interest

What is the ideal number of independent and family directors that serve on a board of directors?

We recommend keeping the Family Board a small group of 5 to 8 qualified directors.

Three of the directors should be independent from the family shareholders.

Why are family businesses reluctant to have a board?

Family businesses are often reluctant to establish a board of directors with more structured governance practices. There are several reasons families hesitate to form a board, including:

• Confidentiality. Sharing the inner workings of the business and being open with non-family members can be a challenge for many family businesses. Financial information and confidential business practices are often kept within the family, making it difficult to bring in outsiders.
• Accountability. The board’s role is to provide oversight and hold the business leaders accountable. Some family business owners may resist this scrutiny, especially if they suspect they already know some of the issues and don’t want to be held responsible for them.
• Control. Some family business leaders believe that once a board is in place, they will no longer be in control. It’s important to remember that the board is elected by the shareholders and can be removed if they are not fulfilling their duties.

While forming a board of directors may be uncomfortable for family businesses, it can also bring many benefits.

How can a board with qualified family and independent directors benefit your family business?

A qualified board of directors can bring many benefits to a business, including:

• Diverse outside perspectives. Board members can bring a fresh and diverse perspective, potentially from different industries or skill sets, which can help businesses improve.
• Access to subject matter experts. A board can connect your business to other experts such as attorneys, tax advisors, wealth advisors, environmental advisors, and potential customers.
• Strategic thinking. A board can bring in experienced and strategic thinkers who can challenge the norms and standards of a business. This encourages innovation and stretches its strategic thinking.
• Financing. From a commercial banking perspective, a lender is likely to be more comfortable knowing that a board of directors provides a higher level of governance and financial and risk oversight. The presence of independent board members can increase the lender’s confidence in the business and potentially result in a better rate or easier underwriting.

In conclusion – a strong and effective board of directors can bring invaluable insights, connections, and expertise to a business, helping it grow and succeed. The presence of a board can also enhance the company’s credibility and improve its prospects for securing financing.

Ferguson Alliance offers advisory and fiduciary board set up, board facilitation, and independent board members. For more information on these services, book a complimentary call with one of our family business advisors here: book a call.