Enrique Soriano

Inside Family Business

STUDIES have shown that firms in which founding family ownership remained performed significantly worse than nonfamily or management-controlled firms. The findings of this research follow earlier findings that seemed to point to effective governance requiring active, caring oversight in addition to independence.

“If there were only one ‘success strategy’ I could recommend to a family business, creating an advisory board would be that strategy. In times of crisis, the advisory board can act as a safety net for both the family and the family business,” said top family business expert Don Schwerzler, founder of the Family Business Institute.

A successful Family Business Advisory Board, sometimes also referred to as a board of advisors, consists of an objective and experienced business person or people who are not family and/or managers of the business. It is a small group of people who meet periodically during the course of a year to offer advice to a company. Members of a board of advisors do not usually have a share in the company, and unlike a board of directors they do not bear legal responsibilities for the company. Generally, small and family-owned businesses use a board of advisors to get outside advice from someone that does not have any immediate involvement in running the organization.

An experienced board can help relieve tensions and resolve problems such as the following:

• Continuing disagreements between family members

• Broken communication between generations

• Narrow way of viewing things

• Emotionally charged decision making

• Problems are attacked without objective perspectives

• Distorted assessments of each other’s talents

• Loss of commitment to the family and/or business

• Questioned motives

• Analysis paralysis

However, a family business need not experience problems to benefit from a board of advisors. According to Richard Randal, there are lots of opportunities that an advisory group can help the business capitalize on:

• to bring additional depth and breadth to planning for the future

• to provide specific assistance in assuring the continued success of company operations

• to aid in the selection and development of the next generation of owners and leaders

• to help expand and diversify the business

• to counsel regarding succession and retirement plans

The requirements for success are not complex and the benefits can be great. Generally, the first hurdle is the decision to bring in outside advisors, to share sensitive information and to listen to possibly uncomfortable input in front of a group of people. Once that hurdle is cleared, the road to success with advisory boards is well-marked and well-travelled. Owners who go down that road will find a new source of energy, ideas and experience open to them.

How does an advisory board operate?

An advisory board is not governed by legal statute, so it can operate pretty much however you want it to. Think of it as being like an organized group of consultants.

As such, you and your Board members have lots of scope to define how you will operate.

But, like any relationship, if it is to function effectively, there should be some planning and guidelines. Here are several suggestions and thoughts for your consideration.

Duties. They will be exactly what you want them to be. Always incorporate the board member’s functions into a job description, for the same reason that all your employees should have a job description. It might even be appropriate for particular member’s descriptions to vary somewhat according to the expertise they are bringing to the board. Every member of the board should be intimately familiar with your business plan. Their job description should include a requirement that they reference their advice within the context of the business plan.

Leadership. In the early stages, and with smaller family businesses, the CEO will probably provide leadership and direction as to what is required from the advisory board. However, over time and with increasing size, there is merit to allowing a board to develop its own leader. A larger board will have a certain amount of internal interaction and dynamics and in some circumstances might need to perform some of its functions somewhat separate from management. Your family business’ needs will dictate how this develops.

Size. Whatever you need to get the job done. Size and composition of your board can, and probably should, change over time with your changing circumstances.

Authority. Unlike directors, no authority is needed to carry out statutory requirements. So an advisor needs only the amount of authority that is consistent with his / her duties. Planning their tasks and job description should identify whatever authority is needed.

(To be continued)

(Professor Soriano will be sharing his experience in a family business forum today, Oct. 21, entitled Wealth Shall Not Pass Three Generations at the Holiday Inn Hotel (Glorietta) Ayala Center. For please visit www.wongadvisory.com or contact Allen at 09228603186 for details. Slots are limited.)