Pivotal Moments for Family Business Boards: Getting Beyond the Cost of Harmony
“We cannot afford the cost of harmony!” said Bruce Dayton, chair of the third-generation family business that eventually became Target Corp. Dayton was speaking to his brothers, also directors, about their tendency to focus board conversation on topics that would keep the family comfortable. “Without commitment to a challenging strategy and a more capable board to help us achieve it, we will become five brothers owning a smaller and smaller business together. Imagine what would happen to our family harmony then!” It was a pivotal moment for that board, the company, and the Dayton family. Changing customer preferences, new technologies, and the need to compete in larger markets demanded a new growth strategy—and recruiting independent directors who would sharpen that strategy and enable them to attract the talent and capital needed to succeed.
“Family business” does not always mean “small business.” In the United States, there are hundreds of substantial family-owned companies that have thrived for multiple generations. Cargill, Kohler, S.C. Johnson, Mars, and Levi Strauss are some of the multi-billion-dollar family businesses that have succeeded in part because of their ability to develop a sophisticated governance structure, utilizing boards with highly capable family leaders and independent directors who attract top-flight management talent. These are “elite performers,” and there are many more family businesses who aspire to also become upper-tier, agile market leaders.
Today, many successful family-owned companies are also reaching such “pivotal moments.” But family business board capability does not advance by natural evolution. That requires skilled champions who, in the words of one owner, “will help us go from the board we have to the one the business and family will need.”
A champion’s first tool: envision an improved board conversation. The acronym F.A.I.R. provides an easy-to-remember method to evaluate and improve the quality of board conversation. The most valuable conversations move beyond information reporting to a dialogue between directors, owners, and managers that is Future-focused, Accountable, Informed, and Respectful.
Accountable refers to the practice of mutual responsibility. While the CEO demonstrates accountability in reporting to the board, the directors are keenly aware of their responsibility for company oversight on behalf of all shareholders, as well as to customers, employees, and lenders. Accountable board discussions ask probing questions and give feedback in a candid, direct, and constructive manner. When making decisions, accountable discussion gives management clear and specific responses and avoid indirect statements that could be interpreted as “yes, but no,” or “no, but yes.”
Informed means doing the homework. Great board discussions are held among directors who are well-prepared, study the meeting materials, and commit time outside to learning about the business and exploring what is happening in its markets. “I am always willing to be accountable to knowledgeable people,” said the non-family CEO of one hugely successful family business. This was his tactful way of saying that he would not be as willing to accept the direction of a group of board members who did not understand the matters at hand.
CEOs benefit from informed board discussions where directors:
Receive timely, accurate information about company performance and its standing relative to industry peers and use this information to develop thoughtful questions.
Understand the key drivers of value and risk for the business.
Bring relevant knowledge from special expertise or complimentary experience.
Respectful describes both an attitude and a manner of action. It includes respect for the distinct roles held by various board members, such as the chair, director peers, owners, and managers. It is also expressed in conduct, including attentive listening and constructive comment. Respectful actions include preserving confidentiality, valuing directors’ time, and supporting the board’s process in getting its work done. In family business, it also means not personalizing debate of emotionally charged issues. Company executives benefit from respectful board discussions that:
Avoid micromanagement—respecting that there are some decisions that belong to management and not to the board.
Understand that it is sometimes necessary to make decisions quickly despite a lack of certainty.
Unite the directors and management to support board decisions once they are made, supporting one another in the execution.
By adapting practical ideas and tools being developed by some of the most successful family companies, more NACD members can become champions for advancing the effectiveness of family-business boards.