Developing an Independent Family Business Board — Doug Baumoel

Best practice for any family business seeking to transition to the next generation is establishing good governance that is appropriate for the particular circumstances of the family and its enterprise. But, practically speaking, how does this evolve? Consider the following case of a family-owned manufacturing firm and the factors that led the founder to invest in the development of an independent board. The family had just finished a six-month family business consulting engagement and now had a basic management and ownership succession plan in place. In addition, a family bank was set up to manage a vacation property, help avoid family conflict over money, and as a resource for entrepreneurial family members not in the family business. Satisfied with the work done to date, the founder asked, ‘What’s next?’

State of the business The family business in this case is complex, with over 500 employees and several international offices. It is a C-Corp, and several employees own a small amount of stock. The company was founded on the strength of the founder’s proprietary technology and had grown rapidly in its 25-year history. Although senior leadership had accomplished a great deal in bringing a start-up from an idea to a $150 million operation, they understood that the next growth phase exceeded their direct experience. The company had a technology advisory board that consisted of a group of key technical leaders within the company, select outsiders from academia, and others with expertise in investment banking and intellectual property. There was also a statutory board of directors that met on occasion to review tax and ownership matters. To meet future challenges it was clear that the next phase of work would need to focus on corporate governance. Accordingly, Andrew, the company’s founder, and CEO was asked to consider building a formal, independent board of directors. His initial reaction was: ‘Why would I spend time and money creating a board that I would have to report to, and who would decide my salary?’ Andrew’s reaction was not atypical for private company leaders who are unfamiliar with controlled-company boards. To help Andrew better understand why an independent board made sense at this point in the company’s evolution, several reasons were presented.

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