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Four Fundamental Questions for Family Business Board Assessments
12/04/2022
I once had the privilege of working with a CEO who was a third-generation leader of a private manufacturing company. He was managing two families and there were no independent directors on the board. At the request of this enlightened CEO, we formed an independent board of directors by defining the right criteria for the skills needed to provide the governance structure that would deliver intelligent oversight and a basis for generational transition. This initiative enabled strategic discussions around succession planning and financial success, which resulted in revenue growth of 250 percent in less than a decade.
In this instance we were setting up an entirely new governance structure. But evaluating the oversight needs of a private family company to ensure leadership effectiveness and business success should be a continual process, with board assessments at the center. Below are the four fundamental questions that family business boards should ask themselves when assessing their performance and effectiveness.
1. Are our board assessments being conducted annually by an independent firm focused on collecting relevant data?
The goal of this effort is to create an annual data foundation that provides insights into the board culture and ensures the right balance of skills. There will be a fine line that needs to be navigated to have honest conversations in a trusting environment for the sake of the company's survival and prosperity during these volatile times.
It is important that assessment interviews be conducted in a confidential manner that ensures candor. Assessments designed and delivered by an independent external entity are less political and will yield less biased, potentially more productive recommendations. Interviews conducted properly will insulate against any ill will within a family that likely shares personal, in addition to professional, moments.
It is best practice on any board to periodically assess the performance of the board, the committees, and individual directors—both those that are independent and those that are family members—so that the board can continually strengthen its ability to participate in the development of strategy and the deployment of capital, and ensure performance accountability.
2. Are our board assessments asking the right questions?
Effective board assessments require taking a hard look in the mirror. State-of-the-art board assessments are designed to shine a light on the overall effectiveness of the board and its culture. There should be questions that explore directors' abilities to participate in strategic conversations, regardless of whether the directors are family members or independent. Asking the same questions during the evaluation process across the board can ensure that every board member is held to the same expectations and that everyone is contributing in the boardroom. In addition, asking hard questions about board succession planning and the current state of committee charters is important.
A board assessment may ask questions under the heading of "Board Management" to ensure that governance structures and processes are working. For example, if a board assessment reveals that meeting agendas and materials are not being sent with adequate time for preparation and focus, then there's a clear "heads up" to take remedial action. Assessing whether information is easily accessible and presented in a clear and concise manner to the board will not only strengthen individual board member effectiveness but the board culture as a whole.
Finally, a critical component of these conversations is to ask focused questions about directors' experience in cybersecurity. If your current board does not include a person with this skill set, your board is exposed in critical ways, especially during this time of escalated geopolitical tension.
3. Is our board culture effective?
Gone are the days of playing golf or tennis with fellow board members as an element of board functionality. Remember that the next generation of business leaders will look to the tone at the top, set by the board, to make decisions about where and for whom these employees want to work. Good questions to ask may include: Does the culture of the board foster open and constructive deliberation? Are directors 100 percent prepared in advance of board meetings? Are key issues discussed in the boardroom or via separate sidebar conversations? Are all directors invited into board discussions? Are board and committee meetings respectful of individuals' time by starting and ending on time?
Is the board committed to an honest and rigorous assessment process? We recently interviewed Lynn Clarke, the 2021 NACD Directorship 100 Private Company Director of the Year, who has extensive experience with board assessments. She said she was stunned to learn that on one private company board, a few directors did not want to engage with the outside consultant that was hired to do an assessment. The consultant offered to spend all the requisite hours with each director—and two directors said that they did not have the time.
If your board members are not fully engaged, this impacts the board culture and the board's ability to work together effectively.
4. Is our board in a good position to validate strategy and conduct effective succession planning?
Validating strategy is of paramount importance and a key responsibility of each director. In a world laden with economic turbulence, war, climate change, and disruptive innovation, how do boards acquire the necessary data and find and choose new directors with the right skills and mindset to not only validate strategy, but to change strategic direction as needed?
All types of meaningful changes take extra time when you have underperforming directors. Difficulty in removing underperforming directors is among the greatest barriers to building and maintaining a high-performing board. Achieving balanced board composition requires an active approach and it is a process that demands expertise, creativity, and nuanced board-level communications during and beyond board assessments.
For private companies, where often board members are family members or have been there for a very long time, needing to offboard an individual director who is the "elephant in the room" is extremely difficult. However, yearly evaluations of overall board effectiveness and the assets represented around the boardroom table can support a continuous conversation about offboarding that is backed up by data. For long-term success, assessments are not meant to be a remedial review of just one person; they require a delicate but direct balance of asking the right questions, having the right dialogue, and strategically communicating findings and next steps to the full board in a manner that will achieve meaningful change.
Assessing and Reassessing
Board assessments can reveal some unflattering realities, but constructive dialogue that is data-driven can ensure that your private company will be able to succeed in the future. The information gleaned from any assessment should form the basis and criteria for the recruitment of new directors that can be extremely helpful to the future of the organization.
It is the board's responsibility to validate strategy and ensure effective succession planning. Without the collection of board assessment data to understand how the board is doing on these key roles and responsibilities, there will be no incentive to make critical changes that are essential in today's fast-changing environment.
While private company boards are not being held accountable in the public marketplace by shareholders, employees and core stakeholders of private companies are counting on management and board members to ensure a financially viable and dynamic future.
Stuart R. Levine is chair and CEO of Stuart Levine & Associates.