Reflective Advice
Thoughtful, Experienced Advice Dedicated To Small Businesses

For this article, an independent director (also referred to as an outside director) is a person not having a sufficient enough relationship with the family or management so to influence the individual?s independent, objective judgment in carrying out the responsibilities of a director.

As with any business, a family business exists to grow, succeed and create wealth for the owners. However, in a family business, family involvement can change the dynamics.  Some members become actively involved in day-to-day operations, while others may undertake supervisory roles acting through Board participation. Family ownership is unique in one fascinating sense. The “family” culture of long-term stewardship embraces the development and support of family members over multiple generations. Family influence and agendas can diverge with each member and impart a healthy emotional content to decisions. Most family businesses do not have a clear approach for decision-making and conflict management, especially if a matriarch operates the business. Matters of ownership, governance, management, succession and exit planning can become muddled by family differences and challenging to resolve. If professional managers operate the business, the lines between management and family may become blurred or conflicted because of the shorter-term view of professional managers seeking a liquidity event, contrasted to the family-centric, generational view. 

An efficiently functioning Board is essential for any company to be successful. Broadly, the principal role of the Board of Directors is oversight of strategic direction, financial performance and the selection and retention of the CEO and other senior executives. The Board also has an important role in establishing the governance and compliance programs for operating the business. Independent directors will seek to formalize decision and business processes to strengthen operational performance. Specifically, the independent directors can lead the institution of a well-administered governance program encompassing the framework for separating and resolving family concerns before becoming disruptive.

The appointment of independent directors brings fresh perceptive, deeper business skills, and heightened accountability. More importantly, the appointment inaugurates the setting of a clear boundary between family and business. An active outside director should build trust and possess an understanding and patience with family matters, freely air candid opinions and promote open and honest debate, especially in issues involving family members.   

In conclusion, a family owned and operated business should appoint independent directors to its Board to help ensure sustained generational success. Best practice suggests the appointment of two or more independent directors. A single independent director can become isolated and marginalized and have difficulty affecting family and Board dynamics.  While reaching family consensus to such an appointment can be knotty, the company can experience remarkable benefits.   

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