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16 Sep 2014
APPOINTING AN OUTSIDER: THE NEED FOR AN INDEPENDENT ADVISORY BOARD IN A GROWING FAMILY BUSINESS
This post is by our colleague Greg Gunther from Gunther & Associates: Family businesses face the same challenges as any other enterprise. In a family business however, things can get complicated as decisions may be influenced by relationships and emotions, which would not be an issue in other organisations. This can create difficult situations especially when it comes to choosing someone outside the business to join a family business board.
When choosing someone to join the family business board, two options are usually considered:
  • Having an experienced and/or elder family member occupy the position; or
  • Appointing an independent director.
Option 1 is an obvious choice. The 2013 MGI Australian Family and Private Business Survey of 5,000 family businesses showed there is some reluctance to the idea of considering an external person as part of the family business board. 62% of the families surveyed do not have a formal Board of Directors. Of those who have a formal Board, 83% do not have a non-family, non-executive director on their Board. This may not pose an issue when everything runs smoothly, but when things get rough it can be tricky due to the uniqueness and complexity of a family business. A qualified adviser can bring a new perspective and help with the implementation of a corporate framework which will provide structure and clarity to the business.
Reluctance to appoint an independent director on family boards
It can be really tough at times to hand over the management and executive decisions of a family business to someone who is not a family member. In the survey 49% of the family firms surveyed did not have independent directors on their board due to their desire to retain privacy in the business, whilst 29% said that the skills required at Board level exist in-house. 11% of them weren’t able to find someone suitable, 7% said it's too expensive. This shows that the majority of family firms keep their boardroom doors locked, reluctant to let in an outsider.
Conflicting interests and family ties are often the main reason why business decisions become so complex in family businesses, and this is where an adviser from outside the business can step in. They can help to make the best decisions and balance the needs of the business with the desires of the family members involved.
Why families should consider appointing an outsider to their Board? The role of an independent advisory board in a family business can add a higher level of expertise and experience and help with the growth and expansion of family firms.
Here are the main reasons:
  • They facilitate the clarification of goals and roles.
The overlapping of ‘family’ and ‘business’ often blurs the path to making everyone accountable to agreed roles and shared business goals. Objective facilitation from an independent director allows for looking after the overall well-being of the family business and challenging the family in pursuit of its long-term and short-term objectives.
  • They offer impartial advice.
An independent adviser can confront issues and give their impartial and unbiased guidance on matters without any conflict of interest and tangled emotional issues.
  • They see what the family often miss.
Independent board members can often identify critical issues of concern like succession planning or a family dispute as it develops, and act as a mediator to work it through.
  • They can guide the future leaders in the family.
An independent adviser can also mentor a new generation of leaders and prepare them to lead and grow the business in the future.
  • They serve as an impartial channel for communication to all family shareholders.
An independent adviser can act as a mediator during major disputes that arise in family boards and help to resolve issues, especially if there is poor communication between family members. In conclusion, having an independent director on the board is something every family business should consider. They can add value by bringing a new perspective to the board and can facilitate better communication between family members within the business. Sources:
  • MGI Australian Family & Private Business Survey 2013
  • Governance of Family Wealth by Dennis Jaffe

About Greg GuntherGreg has helped many owners of small to medium-sized businesses in his role as a director, board member, mentor and consultant. He has an intimate understanding of the challenges and opportunities facing business owners today. With his compassionate nature and extensive experience Greg helps his clients to create a valuable business asset. Visit Greg’s website at www.guntherandassociates.com.au
Contact Greg at greggunther@guntherandassociates.com.auConnect via LinkedIn:
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