[Board members] hold management accountable for articulating and realizing a vision and business strategy that is in line with the values and mission set forth by the family.Mark R. Richards
Family businesses thinking about a fiduciary board get concerned about “losing control”. This is a misconception unless the owner is transferring control to the incoming board members. Rather, a fiduciary board owes a duty to serve the shareholders. They hold management accountable for articulating and realizing a vision and business strategy that is in line with the values and mission set forth by the family. Done right, it sets up the business for longer-term success and creates a formal governance structure, which enables the business to fortify its identity. This strengthens the business and facilitates relationships with owners, extended family, and key constituents. Though many decisions await the board chair
tasked with implementing a fiduciary board, it can be broken down into three phases and eight key steps.
A first step is setting board duties focused on oversight activities to verify the business and its senior team is operating within prearranged parameters. The board chair should document which occurring activities will benefit most from regular review. Areas to consider include:
- Reviewing and approving the strategic plan, and monitoring its performance during the year.
- Selecting, evaluating, compensating, and, if necessary, replacing the CEO and directors.
- Ensuring plans exist for management and director succession.
- Reviewing and approving transactions not in the ordinary course of business. Businesses delineate the degrees of freedom management has in approving these transactions after which the board gets involved.
- Verifying the right systems are in place and operating appropriately such that the business is protected and running legally and ethically.
- Validating board effectiveness, and assessing its skill gaps to meet future business needs
The board chair defines the skills most needed going forward. These skills are used to formulate a director profile. Take a closer look at the company’s strategic plan. Where is it headed? Is the business early stage, high growth, or more mature? What are the family values and mission? Are they seeking to extend family ownership into future generations? Asking these types of questions helps identify the key skills needed. Consider including functional attributes and industry expertise. Any top-performing board should seek out the right mix of diversity to create perspective. It is also important to seek out independent directors. You can’t afford a conflict of interest, or to be the “genius with a thousand helpers” as described in the book Good to Great by Jim Collins.
You will need to offer competitive compensation to attract qualified directors. For private companies, this is typically all cash. It is customary to add a premium to base board compensation for committee chair assignments due to increased responsibility and workload. If used, an outside search firm can assist with determining reasonable compensation levels. Consider simplifying board compensation by eliminating meeting fees and including them in a single quarterly payment made in arrears. It reduces administrative tracking and its associated costs. If you think meeting fees are needed to get board members to show up then you have attracted the wrong people, or need to be clearer on expectations.
In advance of recruiting outside directors, the company will need to establish its Director and Officer’s (D&O) insurance policy. Reaching out to a qualified business insurance broker is a good starting point.
Determine how many outside directors are needed to fulfill the boards’ duties. An odd number of total directors is typical. Unless the business is particularly complex, or large there is no need to go beyond seven board members. The larger the board the more challenging it is to schedule and productively facilitate it. Consider the frequency and duration of meetings based on the amount and type of work to be completed. Give thought to the standing committees you need (e.g., audit, compensation, nominating/governance are the most common) as this will factor into recruitment.
[Onboarding programs] are important for making a good first impression, and ensuring new board members come up to speed quickly.
A board chair seeking independent directors will often “phone a friend” and use their network to identify possible candidates. Another approach is to use an outside search firm. A retained search firm will extend your reach and leverage time. They will reduce selection bias and work quickly. Another less obvious advantage is avoiding the awkward task of rejecting people approached, but not selected. The use of an outside search firm implies trust as you lose some control, and the fee structure can be expensive. A third option is to utilize the University-based Family Business Center resources to assist in providing recruiter-like tools at less cost.
Onboarding programs introduce new directors to the company. They are important for making a good first impression, and ensuring new board members come up to speed quickly. The scope of an onboarding program is a function of business complexity. Most include visits to the company’s major operations where product lines are reviewed and they meet the senior team. Additional meetings with investors are recommended, especially if they weren’t included in the interview
process. Corporate materials should be made available online, and include the charter, by-laws, articles of incorporation, historical financial statements, resumes of fellow directors, etc. [Onboarding programs] are important for making a good first impression, and ensuring new board members come up to speed quickly.
Board chairs aren’t born. Rather, they develop into the role through a lot of hard work
They include tools used to improve productivity. An online board book is paramount. Minimize scheduling conflicts by implementing a “rolling” twelve-month meeting calendar. Directors can’t fulfill their obligations if absent, so set attendance expectations up front and don’t tolerate board members who aren’t prepared, arrive late, or miss scheduled meetings. Once the pandemic is under control, telephonic participation in place of attendance needs to be managed carefully too. Board chairs aren’t born. Rather, they develop into the role through a lot of hard work. Creating a fiduciary board appears daunting, but is easier to manage when the process is broken down into manageable parts and the bigger picture is seen. Utilizing this three-phase, eight-key step approach provides greater clarity to the overall process and facilitates the right sequence of events so the process runs smoothly