Active Boards Can Help Family Businesses in Transition
By: LARRY D. HAUSE & CARY J. TUTELMAN, Ph. D. , CJT Company
February 2004
The job of a Board of Directors is to direct. This seems obvious since “direct” is implicit in the title. But that is not what usually occurs when family businesses are in transition. Most often Boards are simply inactive. They are viewed as legal requirements of the business, not a valuable transition asset. Or, Boards attempt to control family business managers. Last, Board members often work exclusively with management, but shy away from directing owners.
n a well-designed transition plan for a family business, the Board is active, directing managers and owners. Directing though is not control. Rather, directing is being a balance point between managers and owners, making sure that each of these groups fulfill their responsibilities. Unfortunately, this relatively simple concept is difficult to put into practice. And one of the biggest barriers is the fear founders have giving the Board a significant level of involvement, independence or control. Since founders are typically fiercely independent, they choose not to have a Board at all.
The problem with having no Board is there is little room for the founder to transition from his or her role as owner/manager. While a founder may plan to remain in charge until retirement, it can be tough on the founder and the business for the founder to let go of the business all at once. Letting go is a lot to ask someone whose company has been a centerpiece of his or her life and who has had power and control for a long time. Often, these founders never let go, or do so reluctantly and with great difficulty. Without an alternative, we believe this resistance makes sense.
For many founders, the transition from day-to-day management to the Board is a good first step. This allows the founder to contribute to the company at a higher level—approving plans, facilitating discussions, etc.,—without being responsible for implementation and results. It also provides successor managers and owners with the confidence of having the continued guidance and input of the founder. Acting as the Board, the founder can exercise appropriate power and control and continue his or her transition at an appropriate pace.
When a founder takes his or her place on the Board, directing and managing must remain separate functions. Although the founder may not feel ready to give up involvement in management, employees can get easily confused when directing and managing are commingled. If the founder agrees not to manage from the Board, the founder is ready to support a Board that directs by being a “balance point.”
A Board that is a balance point, has three functions. First, the Board must direct the shareholders to prepare a unified statement of their needs, values and goals. Second, the Board directs management to develop and implement strategic and annual plans and ensure these plans are consistent with the needs, values and goals of the shareholders. And finally, the Board must identify differences among shareholder plans and management plans, directing the owners and managers to resolve their respective issues.
A Board that is the balance point recognizes that, although its authority comes from the shareholders, it has a duty to both the shareholders and the company. The Board’s purpose is not to carry out shareholder wishes, nor is the Board responsible for performing management’s job: to manage and grow the company. The Board operates as an “independent” body, accountable for requiring shareholders and managers to fulfill their functions, and then clarifying, synthesizing and balancing the plans of the two groups.
Founders who’ve been defensive and closed to the idea of creating a Board should reconsider. Having a Board that actively directs managers and owners offers the founder an ideal position from which to guide his or her transition and the transition of the business.
Further information on Boards is made available by The Board School. TheBoardSchool.com has information about available classes and resources.