The continuing success of a family firm is best assured if it is headed by an effective Board … One with competent, independent-minded, outside directors on it [1]

As the above quote from noted governance expert and former chairman of Cadbury Schweppes the late Sir Adrian Cadbury highlights, governance academics and commentators alike have long stressed the need for boards that want to be more effective to include directors from outside the organisation, i.e. non-executive directors (NEDs). It is usually further recommended that these NEDs be ‘independent’ based on specific criteria. For example, an independent director should have no ties to the family, the employees or the company in general (e.g. not a supplier or business adviser) apart from being on the board [2].  However, it is often the case that many NEDs appointed to the board of a family-owned company will be family members or will have business ties with the company, even if this constrains the board’s ability to monitor management and provide independent advice.
Under Australian law, each incorporated entity will have directors, and hence a board, but the degree of formality, size and composition of these boards varies considerably. The options for family-owned businesses with respect to boards are:

• The all-family board, composed solely of members of the family—informal, e.g. meetings are for legal purposes only and held around the dining room table or formal, e.g. meetings have agendas, meeting papers, etc.
• The family-dominated board, chiefly made up of members of the family, plus managers (executive directors) and advisors who represent the family (NEDs).
• The partially independent board, comprised predominantly of family members and their representatives, but with a few independent directors as well.
• The independent board, which contains a majority of individuals with no ties to the family, the company’s employees or the company in general.
• The advisory board, which generally has no decision-making authority and is established to give advice to the legal board.

As recently released research from KPMG and Family Business Australia shows, 52 percent of family-owned businesses surveyed have a formal board, which is up from 39 percent in 2011 [3].  This is a positive sign, however, there is also a trend for family businesses to appoint NEDs from within the family, with 72 percent of non-executive directors being family members, which is more than 50 percent higher than in 2011 (54 percent).

While having family members on the board is highly desirable in a family-owned company, as the business grows and becomes more complex, the board will be called upon to play an active role in matters such as setting the company’s strategy and reviewing its performance. In which case, the board will need the expertise and independence to drive strategy and challenge management proposals. This is usually when the family board becomes more organised and open to non-family directors.

Adding non-family, and especially independent, directors to the board can:

• Give the company access to skills and experience that it may not otherwise have—a non-family director can bring objectivity and outside experience to bear in board decisions;
• Open up important networks for the business;
• Help to ensure that the overall governance of the family company operates effectively, fostering open and constructive debate and assisting with strategy and succession planning.

Highlighting the drawbacks of a family-only board will help to make the case for bringing on non-family directors. For example:

• There can be a lack of formal governance processes, e.g. board meetings around the kitchen table;
• There is often a lack of role clarity and difficultly separating day-to-day management from the strategic direction of the company, and with that of the family council;
• Key stakeholders, e.g. employees, suppliers, often have perceptions of favouritism, cronyism and nepotism in relation to board decisions;
• Tensions between family members can impede good decision making;
• There is a potential for groupthink [4].

However, reaching family consensus on non-family appointments can be difficult—a balance must be struck between finding individuals who are respectful of the unique aspects of family ownership and those who are also prepared to challenge the executive team and prevent groupthink. In general, I would recommend that any director should be selected based on skills, rather than bloodlines or perceptions of independence. Building the right board requires an understanding of director competencies, which involves consideration of the directors’ experience, skills, attributes and capabilities.

Director competencies [5] encompass two distinct areas: technical competencies and behavioural competencies.Technical competencies are a director’s technical skills and experience (‘what you need to know and are able to do’) such as accounting or legal skills, industry knowledge, experience in strategic planning and risk management. Behavioural competencies are a director’s capabilities and personal attributes (‘how you apply what you know and your personal and interpersonal skills’).

As such, prior to appointing or reappointing anyone as a director, I recommend that the board should:

• Consider what competencies and skills the board as a whole should possess, recognising that the particular competencies and skills required for one board may not be the same as those required for another;
• Assess what competencies and skills each current director possesses to form an opinion as to the total skill set, since not every director can contribute equally on every one of skills required on the board;
• Consider the character of directors and their fit with the current board and organisation culture.

When choosing directors for their board, families have two main options—family or non-family directors. Family membership on the board is expected. However, having all or a majority family membership may not always be in the best interests of either the company or the family as a whole, if the board lacks the necessary skills. Overcoming the reluctance to the idea of considering an ‘outsider’ on the board may take time but it can be beneficial, especially for acquiring a new perspectives and challenging current thinking.

This article has been provided by James Beck, Effective Governance. James is an FBA Accredited Adviser.

The advice is designed to be general in nautre.