It is remarkable fact that many family businesses do not have boards, and that many companies (both privately and publicly owned) that have boards often find them to be quite ineffective. Why do these realities occur? Should owners of family companies invest time and resources to address this issue? 

Let’s begin by asking what is the purpose of a Board of Directors.  Most experts would agree that the responsibilities of boards include the following:  shaping the vision and long-term strategy of the company; identifying major threats and opportunities for the company; evaluating mergers, acquisitions and sales of business divisions; monitoring and evaluating strategy implementation in the company; hiring, evaluating and firing of CEO, succession planning and developing external relationships for the company.  Effective boards add tremendous value to the company through industry specific knowledge as well as general business knowledge, information about market, how to grow the company and a clearer and more objective picture of the value of the company in the market.  They monitor legal and ethical performance, and support the senior management team in meeting their goals.

In family businesses, I would argue that boards are even more critical.  Why?  First, they usually bring a higher level of knowledge to the company’s management team.  Second, they stabilize the business through their professionalism of separating the identity of the family or entrepreneur from the business, thus facilitating a deeper respect and loyalty from managers, employees, vendors and creditors. Third, they help reduce the family dynamics in critical business decisions, and fourth, they can professionalize the succession process, thus aiding family harmony.

Many family companies find that by creating a professional board with some combination of family and non-family directors helps separate the business from the family and facilitates more rational thinking and decision-making.  For example, in a company where Dad who was 75 years old was CEO and Chairman of the Board and the oldest son (who is 50) had worked in the company for close to thirty years and eager to become the CEO.  The father who was most proud of his son in general was quite unhappy about his son’s performance in some critical executive areas.  However whenever the father confronted the son, the son blamed some of his managers, the economic conditions, the competition etc.  In short the son refused to look at his own performance.  The son had been planning to succeed his father for many years and considered himself entitled to the promotion.

If Dad refuses to advance his son, he may lose not only his relationship with his son, but also the one with his daughter-in-law and his grandchildren. But Dad doesn’t trust his son’s business leadership, which of course the son feels in his heart and soul.

A good board would be of enormous value here.  First, it would change the decision of succession from “Dad” to a decision of the Board. Dad’s power in the evaluation and succession decision becomes one out of seven or nine votes.  This would allow for the family relationship to remain more intact regardless of business realities.  And, it could set up a strong, rational approach to the succession process and the development of a successor’s profile based on present and future needs of the company.

Of course, this is only one example.  There are thousands of excellent businesses and families that have been ruined or only grew to a fraction of their potential due to lack of an effective board.  Many family business boards are quite ineffective due to an inability to confront the family shareholders or because family shareholders are afraid to get outside opinions.  Are the family business leaders surrounding themselves with board members who not only are more intelligent then them and but also who can help build the business into its best vision?

In a recent study about boards published in Harvard Business Review by Nadler (May, 2004) it was found that although one of the major criteria for board effectiveness was ongoing assessment of the board by the board, only 56% of boards evaluated their performance on a regular basis and only 16% of them planned to address the identified needs!  Effective boards require time, competence and most of all learning.  And effective boards create competitive advantage and add to the bottom line.

The clear recommendation is that if you do not yet have a board – start to create it immediately.  And, if you do have one, insist on an ongoing assessment process.  It may be the single most important action you take toward preserving your business and family.