The Board of Directors (BoD) in a family business plays a crucial role in the governance and sustainability of the business. Unlike non-family businesses, the Board of Directors of a family business must balance family dynamics with the company’s operational and strategic requirements.
A “family business” is defined here as any business in which a family is the main shareholder and/or has a decisive influence on the company’s strategy and/or operations by virtue of its position on the management board or the board of directors1.
Role and function of the Board of Directors
The Board of Directors of a family business is entrusted with a number of essential functions:
1. Supervision and Strategy
The Board must ensure that the company has an appropriate governance structure, including a robust control framework, sufficient levels of disclosure, and an adequate minority shareholders protection mechanism. It should focus on long-term strategy and avoid interfering in the day-to-day management of the business.
The board of directors is responsible for the strategic direction of the company and for ensuring that shareholders possess the necessary information to make informed decisions. It must also ensure that the interests of the family and the company are aligned, while complying with legal provisions.
2. Succession Planning
One of the Board’s critical roles is to plan the succession of directors. This ensures the continuity and stability of the company across generations.
Check our article on succession planning here.
3. Financial Resources and Internal Control
The Board is responsible for ensuring the availability of financial resources and the quality of internal control and risk management systems. It is also responsible for reporting to owners and other interested parties.
The family does not give instructions to the company’s management. The family’s involvement in the company falls within the framework defined by the family charter. The family’s interests in the development of the company may also be defended by a family council in regular meetings with the Chairman of the Board of Directors.
The Board of Directors helps establish a corporate culture that fosters transparency and trust, which are essential to the long-term success of the family business. Decisions must be taken on an open discussion and expert advice basis.
Configuration of the Board of Directors
The composition of the Board depends on the complexity and structure of the business. It is essential that it includes members from outside the family, with skills that complement those of family members, in order to ensure independent decision-making. It is generally recommended that the size of the Board should be manageable, i.e. between 5 and 9 members. This size allows for better communication, easier organisation of meetings and greater efficiency.
The Board acts as an advisory partner to the company’s CEO.
Membership Criteria
1. Diversity of skills: It is beneficial to include external members who bring additional skills and new technical expertise (i.e. unavailable within the family or the current management). They can also bring valuable contacts that can translate into additional business opportunities and sources of capital.
2. Impartiality and Objectivity: External members generally offer an impartial perspective, which is crucial to making balanced and fair decisions.
Challenges and Issues
The Board of Directors of a family business has to navigate through a number of unique challenges:
1. Conflicts of interest: Family dynamics can sometimes lead to conflicts of interest. It is essential that Board members are aware of these dynamics and work actively to manage them.
2. Commitment and Preparation: All Board members must take their role seriously and make the necessary preparation and contribution to each meeting. The lack of legal liability of external members can sometimes lead to responsibility issues, amongst others.
3. Balance between the Family and the Company: Maintaining a balance between the interests of the family and those of the business is a constant challenge. The Board must ensure that the decisions taken are in the best interests of the company, while respecting the family’s values and vision.
Best Practices
To maximise the effectiveness of the BoD, practices can be adopted:
1. Training: Board members must be regularly trained and educated on new corporate governance trends, regulations and best practices.
2. Limited mandates: Introducing limited terms for Board members allows new ideas and perspectives to be injected, and maintains a sense of fairness and equality within the family.
3. Specialised Committees: The creation of specialised committees, such as audit committees or remuneration committees, can help to manage specific aspects of governance in an effective and efficient manner.
To conclude
The board of directors in a family business plays a vital role in the governance, strategy and long-term future of the company. It must skilfully navigate between family dynamics and operational requirements to ensure the continuity and long-term success of the business. By adopting best practice and maintaining a balance between the interests of the family and those of the business, the Board can make a significant contribution to the prosperity of the family business.
The information presented in this article is based on documents specialising in the governance of family businesses.