Why do I need a board?
Non-executive or independent directors can assist with some of the issues most family enterprises face since they can speak without fear of retaliation other than being removed from the board.
“I am the founder and have controlling interest in the business… why do I need a board to dictate to me how I should run my business?”
This is a common condescending expression by owners when pressed on the need to set up a real, authentic board. Family enterprises form the backbone of any economy, as it represents more than 75 percent of all businesses in any country. Unfortunately, the governance model is almost exclusively dependent on what the founder (or the next generation owners) wants. Where the owner goes, the rest follow and the old adage clearly says it all… if an owner tells his subordinate to jump, the natural reaction of a beholden executive is to ask, “How high?”
While today’s business culture isn’t as dictatorial as it has been in the past, there are still a lot of traditional thinking happening, especially amongst the silent and baby boomer generation (born before 1945 then 1946 to 1964).
The mistaken notion of losing power and ownership as a result of having non-family members in the board continue to stoke fear on owners, effectively subsuming growth in favor of control and confidentiality. This universal mindset is obviously untrue as safeguards are always available.
The bottom line is this: family businesses should have an active board with non-family members (or advisors) if they intend to stay and thrive in a complex environment. One wrong decision can change the course of business overnight.
For those unfamiliar with the 1997 Asian financial crisis, most of the companies that defaulted were family-owned. A case in point is the Asia Pulp & Paper (APP) owned by the Widjaja family from Indonesia. The group defaulted on the back of a staggering $14-billion debt in 2001.
Despite the family debacle, they have since recovered and investors are showing renewed faith in the group. The combined market value of 12 family-controlled companies listed on the Singapore and Jakarta exchanges has held steady and is estimated between $15 billion and $16 billion.
I am personally aware of this major turnaround as a colleague currently sits as an independent director in one of its listed companies. Their primary objective is to embed a corporate governance (CG) culture starting at the board level and highlighting the principles of transparency, accountability, integrity, fairness and independence.
In my W+B Family Advisory work, I always challenge business owners to nominate non-family members so they can provide value and strategic advice. These directors must also have the independence to challenge decisions when family and personal issues get mixed with the business.
The other role is also to impose discipline and check on entitled owners who may whimsically make poor judgements to the detriment of the business and the other shareholders/ relatives.
Non-executive or independent directors (NED/ ID) can assist with some of the issues most family enterprises face since they can speak without fear of retaliation other than being removed from the board. This allows the ID to speak their mind and raise sensitive issues minus the emotional clutter that’s prevalent in many family enterprises.
Family expert Prof. John Ward accurately pointed this out in one of his articles, “The realm of business is dynamic and unpredictable. Companies are constantly reacting to evolving markets and competition. Family businesses face the added challenge of balancing business and family issues in strategy. Business change inevitably creates stresses that impact both management and ownership interests. In this setting, the board of directors has the special role of assuring the strategic alignment of business and ownership interests.”