Relatively Speaking

Family Business Boards: Demystifying the Process

By Stephanie Brun de Pontet & Jennifer Pendergast

Longtime readers of The Family Business Advisor® know how often we point to an independent board of directors as a critical ingredient to long-term success in a family business. Yet by most accounts, the vast majority of family businesses still do not have independents on their boards, and many never use the board they have in any sort of oversight or governance capacity.

Why does this pattern persist and what can we do to remedy it? First, let’s review the basics of business governance and then we’ll tackle some of the most common concerns we hear about from families when we broach the topic of setting up an independent board.

So what is governance anyway? A “governance entity” is usually a few individuals who represent the welfare of a larger group by providing oversight and broad strategic direction in a way that protects both the interests of the individuals and the group as a whole. In a business setting, a board of directors is the governing entity, providing oversight of management to ensure that the interests of ownership are protected.

In a family-controlled business, where management and ownership overlap, the interests of management are aligned with those of ownership—perhaps diminishing the need for tight oversight. While some argue that this is why a family business doesn’t need a board, this view is shortsighted. First, it is likely that over time not all owners will be involved in the management of the business, creating some possible tension between “inside” and “outside” owners that independent board directors could help alleviate. Second, while the overlap of management and ownership may reduce the need for oversight, the additional overlap of family relationships in a business context increases the emotional complexity of certain key decisions (from compensation to succession planning) that would be beneficially impacted by the presence of trusted independent board members.

Quoting the introduction of the Family Business Governance book by Aronoff and Ward: “A business that is well governed is free to work toward the highest and best objectives of business—maximizing profit, improving strategy, creating jobs, fostering employee development and serving all stakeholders, including shareholders, employees, customers, suppliers and the community.” As these are goals most business owners would hold dear, what are some of the common objections we hear to setting up an independent board?

Business owners fear that setting up a board will somehow rob them of the control and authority they enjoy in their business.

While the role of independent directors is to provide business leadership accountability that is distinct from family accountability, it is important to remember that directors in a business serve at the pleasure of the owners. Directors who have been recruited in a thoughtful manner and oriented to the needs of the business have no desire, nor any authority, to “take over” your business or even dictate how the business should be run. These individuals are usually selected for the wisdom and experience they can offer that is deemed relevant to your business’ needs. Directors are there as a resource for the chief executive—optimally, they are a sounding board to provide advice and insight when the company is faced with key strategic decisions.

Business owners may feel intimidated by the formality and accountability that come with a board.

While the work required to prepare for quarterly board meetings may feel daunting when you have never done it, it is an excellent way to set aside the necessary time and mental energy for strategic business leadership. Too often we see brilliant business people get bogged down in the details of managing their businesses, and they do not ever invest in the time needed to lead their businesses. As a result, the business fails to grow and evolve at the rate it otherwise could. An effective board of directors can help keep the business leader focused on the key strategic issues that should be his or her priority.

There are those business owners who actually want a board but feel overwhelmed by the process. Where would I begin, they wonder. Who would I ask?

While it may feel intimidating to set up a board of directors from scratch, if you break up the process into smaller steps it can feel manageable.

First, convene an owners meeting. All owners must be in alignment about what they want from a board and about their shared vision for the business (so they can clarify this for the board).

Second, determine the needs of the business going forward—are you facing a period of growth? Do you have to make a strategic change in your use of technology? Understanding the near-term needs of your business will help you determine the skill sets you want in your directors.

Third, draft a prospectus (typically about a three-to-five-page document) explaining why you are seeking outside board members, detailing a bit about the business (including the family’s involvement), explaining what you are seeking from a board and what you anticipate the time commitments to be, and clarifying compensation.

Even if you have already identified director candidates, it’s essential to complete this process. It ensures that the ownership group is on the same page concerning the purpose, role, and profile of the board. This document will help you recruit appropriate independent board candidates, and by constantly referring to it the entire ownership group will be reminded of why you are making this commitment to good governance.

Conclusion

Developing an independent board is a significant step in the life of a family business. In our experience, boards can be one of the most powerful tools in ensuring the longevity of the family business. Keys to a successful independent board include:

· Ensuring that all owners understand the role and responsibilities of the board and are ready to incorporate outside thinking into business strategy and oversight.

· Clearly specifying expectations of directors in advance of hiring them.

· Seeking directors who understand family business and have dealt with the major strategic issues your business will face.

· Committing the time and energy required to use the board effectively (prepare materials in advance, including a structured agenda, and actively facilitate the meeting to ensure input from all directors).

· Ensuring that owners provide ongoing input to the board on their vision, values, and goals for the corporation, and providing opportunities for board and owner interaction.

For more detailed information on the why’s and how’s of putting together a board, consider purchasing Family Business Governance available at www.efamilybusiness.com. Be on the lookout for an invitation to participate in the FBCG audio conference on boards scheduled for later this year.

Are Family Businesses Better Poised to Survive the Current Economic Crisis?
Some Hopeful Signs from the Auto Industry

Stephanie Brun de Pontent, PhD

The current economic crisis has impacted most businesses. The automotive sector has been particularly hard hit with a perfect storm of problems both old and new, which could bring down industry giants as well as countless smaller businesses that supply these companies. The stresses that North American auto manufacturers are experiencing due to the current credit crunch are coming on the heels of major sales declines in light trucks and SUVs due to a spike in fuel costs, along with a manufacturing cost structure that has long put pressure on the U.S. “Big Three.” The decline in auto sales also extends well beyond the U.S. market—companies around the globe are being impacted. While all this is largely discouraging, it may be of interest to note that among the larger players in the automotive industry, those that retain a meaningful affiliation with their founding families may be better positioned to weather this storm.
 

The best-known example of this is the Ford Motor Company, a publicly traded firm still largely controlled by the founding family’s descendents through super-voting shares. Though the family owns less than 3% of the outstanding stock, they control 40% of the voting rights—giving them tremendous authority on key decisions. Many institutional holders of Ford shares have taken issue with this arrangement—yet to date the family has held firm. In addition, many employees still value and respect the family legacy, providing the business with a powerful ally, which may be particularly critical to the company’s long-term survival in these turbulent times. In fact, during a recent visit by Bill Ford Jr. to a plant in Michigan, UAW Vice President Bob King was quoted as telling his people: “I hope everybody to the core of their being really appreciates Bill Ford and the Ford family, because as many other manufacturers were running away from existing facilities—running away from legacy employees, running away from urban areas, going to the South, and in many cases going overseas—Bill Ford and the Ford leadership team under his leadership decided to keep jobs in Dearborn, Mich.”
 

Despite this powerful endorsement, Ford remains plagued by many of the same issues as its two domestic rivals. However, it is widely acknowledged that of the three, Ford is in the “best” financial health. In fact, though it supported the government’s financial bailout, it has still elected not to take any federal money. Allan Mullaly, the current chairman, expressed confidence that the company had the financial stability to avoid bankruptcy certainly through 2010. That is not a glowing assessment, but it is certainly more than can be claimed by either Chrysler or GM.
 

In fact, Chrysler may soon cede 35% of its ownership to enter into a strategic alliance with a foreign auto manufacturer with important family ties in a position of relative health in this crisis. While American car companies have been fighting for survival for the past several years, Fiat Group automobiles turned a profit in 2007 for the first time since 2000, putting Fiat in a stronger position at the outset of the current downturn. Much of the credit for the turnaround of this family-owned Italian icon, producer of Fiat, Lancia, and Alfa Romeo automobiles, has gone to nonfamily CEO Sergio Marchionne and a strong team of nonfamily executives. Marchionne may seem an unlikely pick to turn around Fiat, as he grew up outside of Italy and was not involved in the industry prior to working at Fiat. Yet, Marchionne’s outsider perspective is one of the reasons cited for Fiat’s success.
 

When Marchionne joined the company in 2003, the business was in turmoil. Gianni Agnelli, the industrialist credited with building the company, died in 2003. When his brother Umberto died a year later, Gianni’s 28-year-old grandson John Elkann became leader of the family. Marchionne joined the Fiat board and became CEO under Elkann, following four failed CEOs in three years. With the support of the board, Marchionne shook up the Fiat culture quickly, firing 10% of the white-collar staff. Following the management changes, Marchionne focused on revamping the product line—which has helped to keep Fiat in a position of relative strength, even in these trying times. In fact, some of the new technology innovations developed under his watch are a large component of what may be driving the alliance with Chrysler.
 

A third example comes from a supplier to the industry. Magna International, Inc., the largest auto-parts manufacturer in Canada, still largely influenced by its legendary founder Frank Stronach, is posting major losses and anticipating a dismal 2009. However, this company is in a far better position than almost any of its rivals, in part because it has built up large cash reserves and has mostly avoided debt since the company nearly went under in the late 1980s due to excessive expansion. As with many family businesses, once burned, lesson learned—a lesson that may enable the business to emerge from this current downturn stronger than ever.
 

While certainly these three examples are very large companies and their size alone may offer protection, the reality is that large and small businesses are at risk today. Though some of the specific family-business advantages these companies have cultivated may differ—from strong employee loyalty to a willingness to make changes and innovate to a healthy balance sheet—the common theme to all these begins with the presence of a steady and long-term view that starts from the family. The lesson we can all learn from the struggling auto industry is that the ability to manage for the long term, a characteristic we often find in family businesses, may provide the right balance of stability and flexibility that is particularly critical for survival in these difficult times.

To Come Full Circle

By Shelly (Tarson) Wolfe

The phrase to “come full circle” is the first thought I have when thinking about my family’s business in 2009.  The economic climate is tough, but for some, hard times bring opportunity.  We may not recognize this at first, but the time to begin a new career, or to pursue a long desired dream, may be right now.  For many it will also be the time to begin a business of their own.  That was the case with my grandfather, Francesco Taurrazzo, aka “Frank Tarson” over seventy-five years ago.

An immigrant from Italy, my grandfather began our family business during the Great Depression.  It began simply as one man mixing bleach in a bathtub in his home on Burnett Ave., and delivering it to housewives on the north side of Syracuse.  At the time he was an out of work auto-mechanic with a wife and six kids to feed, and he was determined to provide for them.  Tough times demanded hard work, and he was the quintessential entrepreneur.

My father, Bob Tarson, grew up with this work ethic, and joined his father in the business when he was very young.  In his early twenties, my father added paper products to the growing list of laundry items, and the business, known as “Tarson Supply”, grew from there.  My mother, Joan, joined the business when she married my father in 1954, and her ideas and skills propelled the small company even further.  She added swimming pool chemicals to our product line, and set up our first tiny store in the late 1960’s, right next to where my father grew up.

Our business grew rapidly after that, and now many people recognize the name “Tarson Pool & Spas”.  We have six pool stores in central New York, along with “Tarson Paper & Janitorial Supply”, the business that started it all.  During the current economic climate I think about how my grandfather persevered, and turned hard times to his advantage.  I know my family must now do the same to compete in a world that is so different from where he began.  It is our strength as a family that has seen us through to the fourth generation, and keeps us evolving and changing with the times.  I don’t think he could have predicted it, but I know my grandfather would be proud.