Choosing wisely

You’ve made the pivotal decision to establish a board, recognizing the key benefits in helping your family business plan for succession events, navigate changes and manage increasing complexity. You’ve laid the groundwork, assessing your current and future business and reflecting on how the board can create value—key steps I outlined in my last post.

As you envision that first important board meeting, you’re filled with excitement at the thought of all the board will accomplish. However, as you look at the empty chairs around the boardroom table, it hits you: You have big decisions to make about who will fill those seats and how to get started.

First, consider the type of board you are establishing—whether it’s a board of directors or board of advisors—and how this choice will influence the skills and experience needed among members.

• Board of directors: Directors hold fiduciary duties, meaning they are legally obligated to act in the best interests of the business. It’s crucial to select directors who have strong decision-making skills, a solid understanding of corporate governance, and relevant industry experience.
   
• Board of advisors: Advisors don’t have fiduciary responsibilities and serve more as consultants, providing guidance on various issues impacting the business. It’s important to choose advisors who bring a breadth of knowledge and excel at communicating actionable insights.

Whether you choose a board of directors or a board of advisors, it’s essential to solidify your vision for the business and identify existing gaps in leadership expertise. This ensures your board will add real value rather than merely checking a box to fulfill a formal or legal obligation.

An effective board can help you plan for succession, mentor new and existing leaders and support your vision and strategic plan—making it important to approach your search for candidates thoughtfully. For example, if you are focused on improving operations, consider enlisting a board member with experience in a senior operations role in a related industry. If you need more support increasing your operating profit, recruiting a former chief financial officer to the board can be a strategic decision.

Defining your selection criteria will help you attract the right candidates. Reflect on these questions:

• What expertise and knowledge will help your business achieve its strategic plan?
• Into what experiences and perspectives would it be helpful to gain insight when innovating new products and services?
• What similar industries may provide new perspectives and broaden your network?

Now that you have identified the necessary skills and competencies, you may find yourself thinking of trusted people in your orbit. As you picture those boardroom chairs gradually filling up, pause here: Are your family members taking up most of the seats? If so, consider what impact that might have on the board’s effectiveness and objectivity.

While there’s often a high level of trust and loyalty among family members, keeping it all in the family has its downsides. A board predominantly comprised of family members can lead to conflicts of interest, lack of diversity in perspectives and challenges in succession planning, with personal interests potentially impacting decision-making. Be mindful of your ratio of family members to independent (non-family) members, striving for a balanced mix.

Additionally, consider representation. The board should represent the interests of your stakeholders and customers, so you should consider factors such as gender equity, age, ethnicity and race, and social and professional backgrounds. Cognitive diversity is another key component of a well-rounded board. This requires you to include people who bring different perspectives and who approach problems in unique ways to help drive creativity and innovation.

As you anticipate seeing talent and diverse members gathering around the boardroom table and getting ready to work, it’s time to focus on the finer details that will ensure your board’s effectiveness.

To further organize the board and its composition, you will need to define the total number of members (again, considering the family member/independent ratio). Outline each member’s roles and responsibilities—key positions such as secretary, treasurer and timekeeper are essential for effective governance. It’s also important to determine how board members will be compensated, as this can influence recruitment and retention.

On the logistical front, develop structured plans for meetings and establish protocols for sharing information among members. Additionally, think ahead to the future of the board and develop a process for replacing members who retire or leave to ensure continuity.

To help ensure the success of your family business board, consider involving a family advisor. Creating a board can be complex, and a trusted advisor can offer valuable insights and guidance throughout the process. Together, you can establish a board that goes beyond formalities and actively drives the success of your business.