growing a healthy family business
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GROWING A HEALTHY FAMILY BUSINESS. Family Business Governance. Scott E. Friedman Managing Partner, Lippes Mathias Wexler Friedman LLP Founding Principal, Next Gen Advisors, LLC Executive in Residence, University at Buffalo Family Business Institute. - PowerPoint PPT PresentationTRANSCRIPT
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GROWING A HEALTHY FAMILY BUSINESS
Family Business GovernanceScott E. Friedman
Managing Partner, Lippes Mathias Wexler Friedman LLPFounding Principal, Next Gen Advisors, LLC
Executive in Residence, University at Buffalo Family Business Institute
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“...an active outside board has been the single most important element in [the
business owners] effort to reach beyond mere subsistence for enduring excellence.”
John Ward, Creating Effective Boards For Private Enterprises
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Ownership
Family Business6
74
2
31
5
On the positive+ side of business.
Three Circle Model
Renato Tagiuri and John Davis; 1970s
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On the positive+ side of business.
“By and large, the idea that our minds are susceptible to
systematic errors is now generally
accepted.”- Daniel Kahneman
“Fight or
flight”Blink!
Predictably
IrrationalSelectiv
eAttentio
n
Imperfect
Memories
“Little white lies”
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“Confirmation Bias”
We prefer evidence that confirms and supports our existing beliefs, while ignoring information that could challenge or refute them.
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The value of a board of directors:
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Decisions backed by a experienced and respected board of directors can provide stakeholders and employees with confidence that decisions are smart, principled and objective.
Benefit of a Board of Directors - Credibility
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Benefit of a Board - Accountability
“Feet-to-the-fire” accountability regarding business matters and living out the core principles
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Benefit of a Board - RelationshipsBoard Members can increases your network of:
Potential suppliers Customers Sources of capital Professionals Others who may help the business
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Benefit of a Board – Succession Planning An effective board can:
Help identify appropriate criteria for a successor,
Help the family identify candidates who can fill the criteria
Provide interim leadership in the case of an unexpected illness or unexpected death of a family business leader
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Benefit of a Board - Dispute Resolution
The Board can serve an important role in mediating continuing disagreements between family members
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Other Benefits of a Board - Subject Matter1. Strategic planning.2. Monitor performance of company, CEO to assure competent management3. Consider major decisions (mergers, acquisitions, new business lines, financing, etc.)4. Approve budget and related capital decisions (including dividends)5. Review and approve compensation of senior management.6. Approve authority level of CEO.7. Approve succession planning and, ultimately, appointment of successor.8. Approve intergenerational transfer plan (e.g. retirement plan and estate plan).
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Other “Intangible” Benefits of a Board
1. Challenge leadership to “do even better.”2. Empathetic advisor.3. Different perspectives can provide unique insights.4. Stabilizing influence.5. Can help educate stakeholders.6. A symbol of a new era of “professionalism” in the business.
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Best Practice:Selection Criteria - General
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Boards should be built around the specific needs of the family business (e.g. high tech, international, manufacturing, etc.).
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Best Practice:Selecting Directors - Do’s
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1. The best candidates for your board are from larger private businesses that have surmounted the hurdles that face your business. They can help prevent you from making mistakes that they may have made or learned about.
2. Age: a balance of age (between 40 and 65) can lend freshness, perspective, continuity, etc.
3. Gender: depending on constituency of shareholders, diversity can be helpful (but be careful about creating a board with loyalties to individual stakeholders!).
4. Experience: cover crucial areas of needed expertise (but complement, don’t duplicate).
5. Facilitator: consider how board members will interact and if one or more members will have the personality to help “facilitate” board meetings.
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The following candidates should generally be avoided: 1. Competitors or potential competitors. 2. Friends. 3. Retired businessmen (may “lose touch” with current reality and board status may become too important and, so, jeopardize honest feedback). 4. Academics and people from Non-for-Profits. 5. People who are too busy to devote time that is necessary.
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Best Practice: Selecting Directors - Don’ts!
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“Vetoing Board Selections”
When establishing the board of directors, key stakeholders should be comfortable with all prospective board members. If a key stakeholder is not comfortable with the candidate, the candidate should be rejected. This helps insure that the new board begins on a positive footing.
The board, however, should not be established to insure that individual constituencies are represented. An outside facilitator can be useful in ensuring that the selection process goes smoothly.
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Best Practice: Size of the Board
Rules of thumb: 1. 3 - 5 directors for most family businesses;
2. 5 - 9 directors for larger, more complex, businesses.
[there are no fixed rules]
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Best Practice:Frequency of Meetings
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Generally depends of the needs of the business. At least quarterly meetings are recommended.
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Best Practice:Where to Hold Board Meetings
Board Meetings should be held away from the business premises to avoid interruptions.
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Best Practice: Committees of the Board
Larger businesses should consider forming committees, including:
Audit committee: review outside auditor’s report.
Executive committee: officer compensation, executing legal documents, etc.
Nominating committee: recommend candidates to fill board vacancies.
Planning committee: review mission statement and develop strategic plans to pursue mission.
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Best Practice:Directors’ Fees
There are no fixed rules. It is generally accepted that some fees should be paid to acknowledge a director’s contribution. Typical fees are between $500 - $2,000 per meeting, plus expenses for attending meetings.
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GROWING A HEALTHY FAMILY BUSINESSBest Practices - Miscellaneous
Include up to three nonfamily members
Quorum for decision making (50%) with majority vote
Board members should recuse from vote on a matter which he/she is particularly interested in
Term limits for family businesses who are just getting started with a board
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Myths about BoardsMyth 1: Outside directors usurp control.Fact: Outside directors serve at the pleasure of the shareholders and can be replaced at will.
Myth 2: Outsiders can’t be trusted with private family information.Fact: Professional management requires some disclosure. Start the “disclosure process slowly, with directors of high integrity, and gain confidence in the process.
Myth 3: Outsiders will be unable to understand my business.Fact: Different perspectives can be an asset, not a liability. Experience is
always valuable.
Myth 4: Outside directors will create more “red tape” and slow down operations.Fact: Directors should not interfere with operations but, instead, on long term
strategic planning.
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Tips to Make Boards More Effective
1. Define board’s functions and authority;2. Share your business problems;3. Prepare for board meetings using agendas, handouts, etc.;4. Agree on action plans and timetables to implement decisions reached at board meetings;5. Encourage board members to challenge the CEO, not simply be “yes” men;6. Encourage probing questions: (how would decision mesh with our strategic plan; is company meeting its potential? If not, why not? How can we take advantage of this problem
to create an opportunity? Etc.?)7. Disclose potential conflicts of interest and abstain from votes, where necessary;8. Offer suggestions, not edicts.9. Welcome board assistance as a great opportunity, not as a “necessary evil.”
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Board of Directors vs. Board of Advisors
Legally required to function in accordance with formal bylaws
Far less formal – typically meet whenever requested to do so by the CEO
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Authority Organized and functions
according to laws of the jurisdiction in which the business is organized
Neither required nor governed by law – state law does not require advisory boards that are established at the discretion of a company’s leaders; CEO has power to choose/replace/terminate advisory board members w/o shareholder or member approval
Board of Directors vs. Board of Advisors
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Fiduciary DutiesBoard of Directors vs. Board of Advisors
Board members owe fiduciary duties to the company and its shareholders
No fiduciary duties Can more comfortably
focus on serving the CEO
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Quality of FocusBoard of Directors vs. Board of Advisors
May be more motivated to help a company succeed due to legal obligations to shareholders
Are usually compensated financially for their service
Receive more info from company and therefore are able to make better decisions
Can’t be held liable for the advice they provide
Serve without compensation
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LiabilityBoard of Directors vs. Board of Advisors
Legal duties and responsibilities to the company they serve
Directors and officers insurance as protection from personal liability ($$$ for the company)
Do not face personal liability for mistakes made while advising the company
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Family Council [ Governance for the Family]
A forum to ensure that important information is shared, questions are answered and minor disputes are resolved before they become major disputes
Membership is open to all adult family members including those who are employed by the business and those who aren’t
Spouses of adult members should be included
Serves as link to the Board of Directors
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Family Council – Common TopicsWork/family balanceUniform guidelines for employment of family membersPros/cons of employing spouses in the business Family compensation policiesPolicies, issues and decisions that will affect the familyMerits of requiring family members to enter into
prenuptial agreements Succession planning, retirement planning, financial
planning and estate planning
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GROWING A HEALTHY FAMILY BUSINESSFamily Constitution
A formal arrangement of important family documents to include:
Statement of valuesMission and vision statementsCore policiesCode of conduct
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Getting Started: The “Board Notebook”An introduction to the Family Business in order to help directors “get oriented” and prepared for
meetings. Consider including information on the following:1. Business history and strategy;2. Industry overview;3. Ownership chart;4. Organizational chart;5. Biographies of key players;6. Business Plan/Strategic Plan;7. Summary of vendors, competitors, customers, etc.8. Key financial information;9. Budget10. Estate valuation;11. Miscellaneous (union info, litigation, real estate, etc.);12. Key issues facing Board;13. Board agenda (scheduled meeting dates, key issues, etc.)
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Final thought:
Effective governance can be defined as creating processes that make revolution unnecessary.
“Family Business Governance,” Craig Aronoff & John Ward
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Scott E. FriedmanManaging Partner, Lippes Mathias Wexler Friedman LLP
Founding Principal, Next Gen Advisors, LLCCo-Founder and Executive in Residence, University at Buffalo Family Business Institute
665 Main Street, Suite 300Buffalo, NY 14203
(716) [email protected]