Towards board excellence: Lessons learned from family business board evaluations
Can you quantify your board’s contribution to the performance of your family business? Even if you can’t put a number on it, you should have a keen sense of how much your board has supported leadership in reaching their objectives. This is beyond the direct and indirect roles the board plays in defraying family conflict and building family unity.
When we evaluate boards of directors, we assess important areas of board functionality. These include things such as diversity and depth of experience among board members, the board’s ability to engage in challenging conversations, and the intergroup dynamics that facilitate or hinder discussion and decision-making in the boardroom. Since we mostly evaluate boards in privately-owned companies – often family businesses – we generally include the family dimension in our analysis, since family board representation adds a layer of complexity to board functioning.
Despite differences in boards and their organizations, we find striking similarities. For example, most boards struggle with respecting the boundary between operational and strategic issues and tend to “get into the weeds.” Most directors are more comfortable with operational details than strategic issues; current and former CEOs in particular have a hard time holding management accountable because they often identify with them and have trouble giving them enough room to make decisions and take actions. To no one’s surprise, this operational orientation often interferes with managerial autonomy, which management then views as a lack of trust. Another similarity is that management may not fully understand the role of the board and the scope of its responsibilities. This can result in presentations that lack focus and consequently fail to effectively leverage the board’s combined experience and expertise. Both lengthy and insufficient board packages and pre-reads are other frequent points of contention, as is a superficial understanding of the main risks facing the company.
To get the board to what may seem like an idealized level, it is imperative that the board holds itself accountable, not just company management. External evaluations that are deep in data and insight can greatly strengthen the board’s contribution. Rather than discuss such processes here, we prefer to offer four key learnings from our board service and board assessment experiences that cut across most family business boards of directors.
#1 Ensure Family Director Competence and Role Clarity
Family directors often are not “professional” board members who know the ropes of board work. While some are highly qualified and effective at performing their board role, others feel out of their depth in understanding and adding value to critical board issues. When we do board evaluations in family firms, we often hear statements like, “If I wasn’t a family member, I wouldn’t serve on the board.” As a consequence, these family directors can go silent, which makes them less productive. Since the quality of a board is a direct function of the input of the individual directors and the group dynamics that determine the value of board discussions, going silent limits the impact of the entire board. In other cases, as you likely have seen, people who feel inadequate in their roles and who feel that they cannot live up to expectations become overly critical of themselves and others, confrontational and defiant. Such board members disrupt board meetings, damaging boardroom culture and sending negative signals to members of management and others who interact with the board. Making sure that family directors are equipped to successfully perform their roles, that is, that they have the necessary, business, family, and individual competencies to make sound decisions for the business and the family is a non-negotiable requirement for an effective board.
Family directors – like all members of the board – must add value in board discussions by being prepared, knowledgeable, and sensible. But family directors are also in a unique position to faciliate communication between the company and the family, communicate family values and objectives to board and management, and praise management for its performance - little drives motivation more than comments like, “on behalf of our family, we highly appreciate your hard work”. Clarifying a family director’s role allows the board to properly leverage these individuals.
Family directors can be remarkably valuable assets; family serving on the board shows internal stakeholders that the family is invested in the business, and instrumental in overseeing strategic decisions. To external stakeholders, it signals continuity and stability, particularly when members of the next generation step up to take on board roles. Family members’ long-term perspective is needed to assure sustainability. Family board members typically are well-suited to ensuring the company adheres to core values even in turbulent times, and well-prepared family members can bring invaluable insights into the boardroom.
#2 Manage Group Dynamics and Nurture Strong Relationships
A board of directors is a group like any other. This means that there are intragroup and intergroup dynamics to be actively managed, as well as the board’s interactions and relationships with other individuals or groups, such as the top management team. Only when we invest in building and nurturing relationships and connections can we develop a rapport that supports difficult conversations. And here again, we see that family businesses are in a unique situation to form close relationships with board members.
We know several boards of directors that organize annual offsite meetings for their board members – and a few even invite board members’ spouses (and even children!) to these gatherings. They turn these meetings into three- to five-day events with plenty of time to work, relax, and build relationships. While that may seem like a waste of time and money to many, let us assure you of one thing: People who have deep relationships, ones that go beyond mere professional connections, are more responsive and attentive, and very importantly, they are far more willing to engage in discussions about controversial and uncomfortable topics. They know that even when they have disagreements in the boardroom it won’t damage their otherwise stable and strong relationships. The quality of boardroom discussions is a direct function of people’s ability to openly voice their opinions because they are not afraid that their comments will offend. One caveat is that relationships must be managed so board members do not become so close as to worry that disagreement would threaten highly desirable friendships that they feel they cannot afford to lose.
There are no shortcuts to building relational strength – it takes interaction, communication, and time. Make sure you create these opportunities for board members to connect inside and outside of the board room, and refrain from framing the board as a purely business-minded decision-making body that has no space for emotionality and personal connection.
#3 Promote Candor and Transparency and Leverage Setting the Agenda
We often come across boards whose members gush over each other’s personalities or contributions, or about the absence of conflict during board meetings and how well they all get along. That’s great, but often it’s not the whole story. Through our work with family firms, we’ve learned that lots of private backroom conversations take place between board members and the Chair, who then takes it to the CEO or other members of the executive team. While this politicking may have some advantages, constantly avoiding confrontation prevents the entire board from having difficult conversations that could strengthen their relationships and improve boardroom conversations in the long run.
Consider using your board agenda to encourage candor and transparency. Set your agenda to prioritize key strategic success factors, independent of actual developments or events. Unless you’re responding to big mistakes and crises, if events drive your agenda it usually means means you’re addressing systemic issues too late. Think about how much time your board spends discussing the company’s quarterly financial results, such as whether your sales are above or below budget. While that’s important, this time would be much better used if the board challenged management’s thinking and focused them on strategic priorities. For example, has your management proposed to review market share growth (or loss) regularly, or suggested an annual report on “Innovation and business development initiatives”?
You can see that the board agenda can be an important instrument for improving candor and transparency, and the overall board process. Management shouldn’t set the tone for the agenda, although this often happens. All the critical items should be prioritized on the agenda and addressed regularly -- for example, middle management turnover, quality indicators, market share, image with customers, investment in innovation and upgrades to the business model.
#4 Embrace Necessary Endings
In “Necessary Endings,” Dr. Henry Cloud’s states that “life generates too much”, indicating that we generally have too many opportunities, too many relationships, too many options – and that we find it very hard to “prune the rose bush” by ending some of these engagements.
Many owners and board chairs struggle with this exact problem: Despite knowing that certain board members are underperforming or past their prime, they shy away from the difficult conversation that leads to the board member’s departure. They may be loyal to their past contributions or care about them personally, or remain hopeful that they’ll turn around and prove their worth after all.
Don’t postpone a necessary ending. We know one CEO who often says, “I’ve never fired anyone too soon”. You are not doing your board, your family, or the board member in question any favors by prolonging the inevitable. They very likely know they are not performing the way they should be -- and if they’re oblivious to their lack of contributions, that’s even worse. You owe it to the other board members, and the company, to select someone for the board who contributes at a high level.
Another important point: Many family businesses we work with have defined director tenures, as well as age limits – usually around 72 or 75 years. Without the right guidelines, you risk family directors (in particular) serving for 30 or more years. It is better specify a re-election period, with a maximum of perhaps 12 to 16 years. Of course, if you have a truly indispensable board member, shareholders can vote with a (super) majority vote to extend their tenure past the agreed-upon limit. From our experience, annual re-elections or elections for a regular time period – usually three to four years – also work well. Annual re-elections may sound tedious, but, much like board evaluations, they remind board members that they are being held accountable and motivate them to improve.
Final Thoughts
Boards can be powerful instruments to help family business owners and leaders reach and surpass their objectives, but they are often under-leveraged. It takes time and money to put a great board together, to keep it going and to maintain and nurture relationships among board members and between the board and outside constituencies.
Regular board assessments - either annually or biannually - signal that family leaders will hold the board accountable in the same way they hold management accountable. Opt for a longer timeframe if the assessments begin to feel like a cumbersome mandatory routine. Assessments should create space for necessary conversations among board members and give each board member a voice in identifying what makes or breaks the board.
And while external reviews can provide an objective point of view, you don’t need to hire an outsider to assess your board: Many self-assessment tools (some of them available for free) provide valuable insights into board effectiveness (e.g., National Association of Corporate Directors NACD, boardroommetrics.com). Such a self-assessment can be an invaluable first step towards improving the quality and contribution of your board and might give you some initial insights as to what works – and what doesn’t.
Board members sign up to serve on your board because they want to support you in making the right decisions for your business. Allow them to contribute fully, by making sure that board members are competent and trust one another. Encourage candid discussions, and ask board members who no longer contribute to step down. You might be surprised how, by simply addressing the desire to assess and improve board effectiveness, conversations start to happen.
A longer version of this article can be found at www.familybusiness.org.