No matter how successful they are, businesses can often benefit from something new. Maybe the owners need more tailored guidance or wish to take the firm in a fresh direction. Or a new generation is set to take over the reins.
Enter an independent board of advisors that can provide a fresh set of eyes. But family businesses need to be ready to embrace these new decision-makers.
Rod Senft, who set up an independent board for his Vancouver-based single family office, Tricor Pacific Capital, says success of the process is dependent on the sophistication and evolution of the high-net-worth family.
“The first thing you have to do is ensure that your family is engaged on the board – you have to get them engaged and up to speed first,” he says. “You want it to start off collegial as you move toward professionalization.”
“I don’t think it’s fair to get independent advisors engaged until you get your house in order.”
Securing buy-in from all family members can be a tough sell. In his case, his son, who is now a doctor, initially found the board meetings challenging to attend as he juggled medical school and his family life. “Today, he’s an anesthesiologist, and he carves out time to make sure he’s present,” says Senft. “He realized the importance of the family business to his own personal success.”
Family offices stand to benefit from independent boards, which can bring invaluable insight and experience to a long-standing business. And that in turn can introduce objectivity, better decision-making and good governance into the mix.
But challenges can arise when family dynamics are dysfunctional, the CEO or family members feel threatened by the arrival of independent advisors, or there’s a fear that family secrets will become public knowledge. It’s why experts suggest families do some soul-searching to assess their readiness before making the leap to the establishment of a board.
Why set up a board?
“There are lots of well-documented benefits of having a formal board,” says Douglas Byblow, president of Forthlane Partners, a multi-family office in Toronto. Family dynamics – factors such as sibling rivalry, issues of fairness and poor communication – can be a key rationale for introducing independent non-family directors, he says.
Other times, a CEO may feel like he or she is losing control of the company and uncomfortable with ceding power. These issues can prevent family businesses from focusing on the key issues they need to address.
“The introduction of independent board members can help to professionalize business meetings and to keep the meeting focused on business, not family issues,” says Byblow, who is based in Calgary.
“The board is there to protect the interests of shareholders,” says Arthur Salzer, CEO and co-chief investment officer at Northland Wealth Management, a family office in Toronto. “As CEO, you have to respect them.”
Baby steps to an independent board
The move to an independent board can be done in stages.
“A family business board can be an excellent tool to support learning and development of the family’s rising generation and to facilitate an orderly transition of the business from one generation to the next,” says Byblow.
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A board also presents an opportunity for the family’s patriarch or matriarch to assess the decision making and leadership qualities of their children, he says. But he cautions that the process has to be managed carefully to ensure the right processes and habits are being instilled in the next generation.
Salzer says that some families opt to have family members join boards of trustees on family-run foundations where they can learn the ropes and how to make critical business decisions. “A board of trustees can be a great place for family members to learn,” he says. “You can start as early as late teens.”
How a family office can help
A family office can play a big role in helping the family understand the human capital side, says Salzer, and how choosing the right people can make a big impact on a business’s financial capital. It can also help teach families how to iron out any family issues.
A family office can assist by aiding the family’s decision-making process without necessarily having any decision making authority, essentially supporting the family business to establish and implement effective processes and structures around the governance system,” says Byblow. This can include:
- Establishing meeting agendas and meeting codes of conduct.
- Preparing and circulating meeting materials.
- Documenting the decision-making process.
- Sourcing and coordinating specialist advisors.
- Flagging legal, financial and reputational risks.
- Preventing important issues from slipping through the cracks.
“The family office is fundamentally a risk management tool,” says Byblow.
Whom to select for an independent board
Although some families lean toward selecting board members from among their friends or family, Byblow says that can make a board susceptible to “group think” at a time when outside viewpoints are best. He says that while a family’s knowledge and expertise is invaluable, the careful selection of board members with diverse backgrounds is optimal.
As complexities grow and a business increases in size, more sophistication is needed, he says.
Whom to choose as a board member comes down to the type of business, says Salzer. However, he suggests a mix of individuals with a knowledge of accounting or finance, those who understand legal roles and responsibilities, and people with wide-ranging professional experiences.
“A lot that goes on in compensation is not about numbers,” he says. “It takes a lot of skill sets.”
In the end, families should ensure that they don’t lose sight of what’s truly important, says Senft. “The ultimate goal is to have a harmonious family.”