Build A Strong Board For Your Company

Kirsch CPA Group

Mar 18, 2019

Building a Strong Board

A strong board of directors provides financial guidance to a company, develops long-term priorities and elects executives to run the operation. To accomplish these goals, directors need to meet frequently and take an objective look at how the business is being run.

Yet most family-owned companies don’t take advantage of building a strong board to run their business.  In survey results from an American family business survey* of 1,143 firms, less than 60% of business meet on a quarterly basis to discuss long-term priorities.

Number of Meetings a Year

  • None: 13.4%
  • One to two: 49.3%
  • Three to four: 19.2%
  • Five or more: 10.1%

In addition, 58% of the survey respondents thought with a strong board, they were able to make outstanding or good contributions to value-added decisions for the business. Family businesses are missing out on the long term advantage of planning.

Involvement in the operation of a company is critical. Family business boards need to plan successions, advise the senior generation, monitor the younger generation, keep shareholders informed, structure governance and keep an eye on the bottom line.

According to the survey, family boards tend to be small — 87.5% have four or fewer directors with 90% including multiple family members.

Of course, you don’t want to keep relatives off the board, but you shouldn’t limit the group to the family. Consider bringing in some outside expertise to ensure the business stays on track and that decisions aren’t influenced by family relationships. Accountants and lawyers may have valuable experience to offer the board.

Some of the pitfalls of a family board include:

  • Secrecy — no sharing of vital information.
  • Lack of understanding of the board’s role.
  • Using outside directors only to advocate a family member’s position.
  • Weak board management.
  • Poor selection of outside directors.

Stay objective when adding outside directors and look for people with specific expertise that will aid your company. For example:

  • A construction company could bring in directors with knowledge of financial, safety and union matters if it doesn’t already possess that expertise among family board members.
  • A publishing enterprise might look for directors with retail, printing and electronic publishing expertise.
  • A service based business may add an accountant and marketing expert to expand the expertise.

Anyone considering joining the board of a family-run business should consider the following dangers:

  • One relative or group may try to make pawns out of outsiders.
  • Family culture and dynamics can be difficult to understand.
  • Outsiders may be relegated to business-only decisions.
  • Issues such as succession, family governance and family councils may be difficult to comprehend.
  • The Sarbanes-Oxley Act increased litigation risks and the cost of directors’ and officers’ liability insurance increased as a result. It’s important to comply with the provisions of this law.

One Final Note – New Mindset Required

Outside directors can help provide a “real world” look at the company’s performance and direction. However, outside directors are only strong if you allow them to have differing viewpoints. If they are merely “rubber stamping” the views of family board members, they are wasting time, as well as any compensation you provide.

*Survey conducted by the George & Robin Raymond Family Business Institute and the MassMutual Financial Group.

Kirsch CPA Group

About The Author

Kirsch CPA Group provides accounting, tax and business consulting to small and medium enterprises.

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