Ten Myths About Outside Boards
by Drew S. Mendoza
“The best thing we ever did was put independent, outside directors on our board. I sure wish I’d done it sooner. It would have saved us a lot of grief and a lot of money.”
Family business owners tell us over and over again of the tremendous benefits they gain from having CEOs of other companies on their board. They acclaim the strategic stimulation. They recognize the value of an objective perspective on family business topics such as succession, family compensation and shareholder involvement. Most of all, they appreciate the empathetic counsel they get as they struggle with the loneliness of leadership.
We wonder, then, why so few family businesses have “outside boards.” Our research suggests that only 10 to15 percent of medium-sized private companies have the three or so outside directors necessary for a creative, effective board. We often ask: “Why?”
We hear these answers most often — and here’s how we respond.
1. No one that good would serve on my board.
Business owners are often too humble to believe they can attract CEOs of other, usually larger, dynamic firms. “Why would they be willing to help me?” they ask.
In our experience, when one business owner approaches another wanting help with the interesting challenge, the inclination is to want to say “Yes.” There seems to be an almost fraternal instinct of mutual support. Besides, business leaders know how much board membership benefits them as a growth and learning experience. As they learn about your business, they think about their own. They enjoy learning from other leaders on the board.
2. I don’t even know people I can ask to serve.
That’s very frequently true — and that’s a good thing. Usually, the better you know board candidates, the less appropriate they are.
Good directors are much easier to find than good friends. You should start by defining the background and experience you are looking for, rather than confining yourself to people you know.
When what you’re looking for is clear, get help from others — friends and suppliers as well as professional advisors such as your banker, lawyer, accountant, consultants, etc. — who will be eager to help you identify candidates.
3. The current family and employee directors will feel hurt.
If existing board members are asked to leave, they may feel disappointed but they should understand why the change is being made. Board meetings should be only one of several venues for keeping key people informed and involved. Executive committee meetings should fill that need for key managers; family meetings fill it for family. Occasionally invite key managers or family members to board meetings. Share agendas and minutes with them. They shouldn’t have to be on the board to be in the loop.
4. I can’t keep meetings interesting enough.
You surely have at least one important strategic question every three or four months. That’s the best agenda possible. If you struggle to identify important issues, ask the directors for help. Let them propose some topics for discussion.
5. I might need to remove a director — and I feel that firing a director would be very uncomfortable.
Dissatisfaction with outside directors is far rarer than you might think. Our surveys suggest that business owners are unhappy with an outside director in one percent of all cases. Still, we recommend clear, limited terms (i.e., one to three years) and a mandatory retirement age, say 65 to 70 (exceptions can be made when warranted).
6. Boards are too much work.
Preparation typically takes three to four hours per quarter. However, the financial and management reports you develop for board meetings should be valuable to management as well. Preparation also forces some “strategic reflection” which owners tell us is very valuable in its own right. Many family business leaders say that the discipline required by board meetings that demand thoughtful preparation is one of the most valuable aspects of the entire process.
7. We’re growing too fast. A board will slow us down.
Your board should include other “fast growth” CEOs. They will encourage you to slow down if they think it’s for the good of the business. Fast growth situations need good boards more than anyone. They can help anticipate the future problems and requirements of your growth.
8. Directors’ liability insurance is too much hassle and expense.
Few existing boards have — or need — D & O insurance. Corporate indemnification is often quite sufficient. The unprotected exposure for directors of private companies is infinitesimal. If liability is still a serious concern, form an “Advisory Council” of the same people to serve the same purpose.
9. Outside directors don’t want to be drawn into resolving family conflict.
Correct. They don’t. But we find that the mere existence of a distinguished, respected, outside board lessens family conflicts dramatically. And, when there is a conflict, the board encourages resolution; it doesn’t — and shouldn’t resolve family conflicts itself.
10. I don’t want to give up control.
This is the most frequent underlying concern. Business owners perceive that control rests with the Board. In reality, it rests with the shareholders.
As you see, the objections of business owners to having a board are based more on myth than fact. Real obstacles do exist—such as family politics or a partner’s lack of enthusiasm. In those cases we recommend starting with an Advisory Council and letting the concept prove its own value. We believe it’s the best investment you can make in your business’ future and in your family’s security.
Remember, every business owner on your board understands that no business or management is perfect. Who could be more empathetic and encouraging than those who “walk in your shoes?”
Drew Mendoza, is the managing principal of The Family Business Consulting Group, Inc. He was the founding director of the Loyola University Chicago Family Business Center, recognized as a leading think tank on issues unique to business-owning families.
Reprinted with permission of the authors from The Family Business Advisor. (c)2004 Family Enterprise Publishers, http://www.efamilybusiness.com. All rights reserved.