• Richa Arora, Author |
4 min read

Many entrepreneurs and family business owners have exceptional skills and talents. Those with a passion for making the world a better place adapt to adversity, see new possibilities and implement innovative strategies. But who’s supporting the entrepreneur and owner to bring their long-term vision to life? Even those with exceptional skills and talents need a support system, and in today’s rapidly evolving business environment, that can take the form of a board.

When the right team is assembled, boards play an important role in the family business, providing guidance and oversight with the owners’ and families’ best interests at heart. Establishing a strong and effective board can help owners:

  • Navigate their toughest challenges
  • Manage their succession plan
  • Prepare their business for long-term success.

In this post and others to follow, I’ll lay out the critical considerations necessary to ensuring that, when the time is right for you to establish a board for your family business, you’ll be taking every step with confidence, each one onward and upward.

Understanding boards in family-owned businesses

The first thing to recognize is that family business boards are unique from the boards of publicly traded companies, which tend to focus specifically on increasing shareholder value. A family business board requires a governance model that considers the complexities and integration of ownership, family and business, and that also tends to emphasize long-term continuity.

Family business boards will often include a mix of family members (owners and non-owners), family leaders and independent experts. Since some board members will wear many hats (for example, as a family member and CEO), independent experts—meaning they have no ties to the family or the business—help support objectivity.

When considering whether to establish a board, one of the first questions owners ask is whether they should set up an advisory board or a board of directors. An advisory board is a non-voting entity that can provide independent input without assuming fiduciary duties, whereas a board of directors will have legal and fiduciary responsibilities to the business. While each has advantages, the maturity of the family business often influences the type of board owners feel comfortable initiating. For example, small- to medium-sized businesses that are starting to formalize governance may feel more comfortable with the concept of an advisory board than with a board of directors.

What can a board do for you?

When I talk about boards with my family business clients, a common concern they have is about the board’s level of power and control. They often worry they’ll have to relinquish control over the business. But that isn’t the case. Owners retain the power to remove board members if they’re not serving the best interests of the business, or if they’re consistently underperforming in their role.

Size is another concern. Many owners believe their business is too small for a board. My advice here is to consider events on the horizon rather than the current scale of the business. If leadership succession events and major transitions are due to occur in the next five years, an effective board can be instrumental in helping the family business navigate these changes and thrive.

Research suggests those transitions are indeed on the horizon for many family businesses. In the 2023 KPMG Private Enterprise™ Business Survey, 73 per cent of Canadian family businesses said they expect to transition their business to new leadership in the next three to five years. The survey also found that a high percentage of family business leaders (71 per cent) feel the rising generation is not ready to lead.

In light of these trends, a board can play an instrumental role in the success of the family business, including with the following:

  • Managing leadership succession: the board can lead the successor selection process and provide development opportunities.
  • Mentoring a new CEO: a board can support the CEO with expert knowledge, bridge the experience gap and ease the transition. Similarly, if the founders hire a non-family CEO, the board can play an instrumental role in the recruitment process.
  • Mitigating potential conflicts: with ownership, family and business all intertwined, board members can mitigate conflicts that might arise from family members’ emotional ties to one another and the business. A board takes responsibility for decisions that impact family dynamics and garner an emotional response from those impacted (for example, family compensation, family-employee performance management and dividend policies).
  • Driving accountability: an effective board will seek to balance family interests with business interests and provide the leadership team with support and advice during major challenges. A board can also enhance the accountability of owners and leaders to measure performance (for example, requesting quarterly reports to track the implementation of the strategic plan and progress against key performance indicators).
  • Building brain trust: the members of the board can innovate alongside leaders and owners by bringing their knowledge and expertise to advise on how new ideas align with the business strategy—whether that’s growing by acquisitions, developing new products or expanding into new markets.

Finding the runway

Establishing a board is a multi-step process, each one crucial to laying a strong foundation for your family business. Stay tuned as we proceed to explore the roles and responsibilities of individual board members, the initial steps in board formation and—last but certainly not least—the telltale signs that the time to start building your board has indeed arrived.

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