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Nearly one-third of family businesses don’t have a board of directors or advisors to guide strategic decisions and assist management with transition issues, a new study has found.
Developing a governance structure is critical to professionalizing a family business, according to the Pacific Family Business Institute, which conducted the study. A board acts as a “brain trust” in which intelligent, resourceful people work on the company, not in the company, the group said.
In-depth telephone interviews were held with nearly 200 family businesses across the Pacific Northwest. The companies have been in business an average of 45 years, and over two-thirds have annual revenues of more than $5 million.
Approximately one-third of family businesses interviewed have a formal board of directors, another third have a less formal board of advisors and a third don’t have a board.
Ideally, the report said, members are chosen to serve on the board because of their expertise and the relationships they offer – not because they are a friend or family member.
“Board members are skilled at working together to solve complex problems, and they help to ensure that family dynamics do not overly influence important business decisions,” the report said.
Advisors can also be an important part of successfully transitioning leadership from one generation to the next, a process that can sometimes take five years or more. Receiving guidance and encouragement from outside advisors can be essential in planning the succession process, which can bring about the continued life of the business – or its end. The study found that 59 percent of the companies interviewed have a succession plan in place.
The majority of those with a board of directors have four or fewer members on the board. Larger companies with higher revenues are more likely to have more than five.
Half of the boards meet twice a year, and 40 percent meet just once a year. The other 10 percent meet more often and “get together 25 to 30 times a year” or “every night at the dinner table.”
The board members at most companies are not compensated (87 percent). Only 27 percent have incentive plans for non-family senior management. Those that do have incentive plans tend to offer bonuses, health insurance and perks but rarely equity-like compensation.
The Pacific Family Business Institute recommends that more family businesses develop equity-like incentive compensation plans for non-family senior management to create an ownership/partnership climate for achieving company goals.
Compensation should be affordable to the company and fair to the board member, based on performance and objectives for the position, and tied to a market-value system.
The vast majority of the businesses in the study (82 percent) are completely owned by family members with the rest having more than 50 percent of the business owned by family members. Businesses in the retail, service, construction and hospitality industries were more likely to be fully owned by family members.
Nearly one-third of the family businesses in the study have voting interests, with another 23 percent having both voting and nonvoting interests. The CEOs of family businesses are virtually always a family member, with 45 percent of companies having a first-generation CEO and 38 percent having a second-generation leader. In three-fourths of the businesses, that CEO owns a controlling interest. Interestingly, most companies call their leader president (63 percent), followed by owner (18 percent) and CEO (11 percent).