Boards Next Generation Development Article

Board Membership for the Rising Generation

By Dennis Jaffe and Robert Davies

The major concern of family enterprises— whether in the first, second or even third generation—is how to plant the seeds for continuity over subsequent generations. One of the most common ways that family enterprise leaders do this is to appoint younger family members to the board as a means of honing and testing their leadership potential and revitalizing the business. But simply appointing the next generation to the board isn’t enough. Setting the next generation up to learn and grow as future leaders through board participation can be a highly effective strategy to ensure family enterprise continuity. For any next generation family member to succeed, there must be a thoughtful approach to which board they’re appointed to, how they’ll be selected, how they can prepare to participate and what they can do as board members.

Succession

Succession is an important issue in board positions: from the elder board members who have wisdom and experience, and have often worked in the business, to a new generation of owners. The family wants to develop the leadership skills of the new generation, as they’ve been educated and exposed to new business models and have a different set of skills and perspectives. Their input can revitalize the family enterprise and help to adapt and innovate.

Forming a board provides the owners with added talent and insight to guide the enterprise as it grows and expands. The owners can appoint former CEOs, academic leaders and wise elders from larger and more diverse businesses who can help the business innovate and develop to the next level. Young family board members can benefit both from the experience of elder family members and independent non- family board members and learn from them.

Responsibilities

The boards of a family enterprise accept added responsibilities rarely present in a start-up or public company. They’re called on to manage family relationship issues that include:

The new generation must consider:

Four Tasks

We propose four tasks for the family to prepare and appoint the new generation to their enterprise boards:

1. Set clear expectations, rules and policies for ownership and delegation to boards. Each board has a function and a purpose, and membership isn’t a prize but a responsibility. An owner isn’t guaranteed a place on the board. The family must send a clear message to the young family members who are looking ahead. What should they expect, and how can they become engaged in family leadership?

A family enterprise is a hotbed of assumptions about what it means to be an owner and when and how it will happen. As young family members grow up, they need to know the reality. This doesn’t mean a detailed financial picture of their inheritance, as some family elders fear, but rather a clear statement of what’s expected of them.

At the most basic level, a young family member should know what it will mean to become an owner. If they’re taught the purpose and role of each board, and its relation to ownership, they can become motivated to prepare themselves. They can also ask questions and learn about what it means to be part of the family enterprise. Many families talk about the role of the new generation as not just owners but as stewards. They enjoy the benefits of ownership and participate in the family wealth but with the added responsibility to pass it on to their children. They’re expected to take care of the assets and even add to them.

Before a young individual can make the commitment to develop skills and knowledge, they must learn that ownership and board membership aren’t automatic. They’re earned, because the family needs its decision makers to be competent and able to lead the family along new paths. They need to become active stewards who can add value to the family enterprise.

Until they’re educated, young family members are unclear what this role requires. For example, many just assume that when they inherit ownership it means they’ll be “in charge.” It’s a prize and an affirmation to them, not a responsibility. They haven’t learned that an owner has limited rights, especially with a small or non-voting share, or when they’re beneficiaries of a trust. Family education begins with discussion of the rights and responsibilities of ownership.

They also need clarity about the difference between being employed by the business and being on a board. For young family members, being on the board allows them to prepare for service while also pursuing their career or family. They don’t have to choose one or the other.

Too often, families don’t clarify the rules and educate their rising generation. This can be a source of great misconceptions and eventual conflicts. Young family members must make choices about their careers, and if the elders want the family enterprise to have a place in their lives, they must prepare. They want to know:

While they may not share all details of their estate plan, most families are comfortable sharing basic policies about family wealth. For example, when and how will inheritance take place:

It’s especially important to clarify the expectations for working in the family business. Being an owner, working in the business and becoming a board director are separate roles. Some families encourage family members to work in the business to be considered for board and governance roles but others have a rule that family members can’t work in the business but can only participate in boards. Young family members want to know when they can expect ownership. Also, if ownership is in a trust, they need to understand their role as a beneficiary and the role of the trustee. There are also policies about a spouse’s role and passing ownership to the next generation.

2. Define board composition and roles of family and independent directors. To fulfil its purpose, the board needs capable members. There may be little room for members of the new generation. The board wants to balance older and younger owners and independent members. The effective board has clear policies for appointing these different categories of director. Also, the policies need to specify whether family board members are selected to represent a family branch or for their capability. Sometimes families define board positions for categories—a next generation family member or a married-in spouse, for example.

Family owners set the composition of the family board, by specifying:

The board typically contains three categories of members:

The owners define the number of board members and most important, the mix of roles between independent directors and family members. Most boards contain from six to 12 members. They start with perhaps a pair of independent members joining the family, and over time, their number grows with the business. There are also policies for selecting family members, in relation to generation, family branch and terms of office.

Young family members look ahead to how they can become board members and what they need to do to make themselves available. Older family owners look for who’s most capable to carry the torch to lead the enterprise for another generation.

While older generation family directors often work in the family business and may have many years of experience, increasingly, younger family members bring their own experiences and capabilities. They often have been to top business schools and develop professional skills, with internships and employment incorporating new technology and global issues that can be useful to the business. They may have investment ideas and be part of networks that lead to new opportunities. They have new ideas for innovation that may challenge the long-term family leaders. They also have a long-term perspective as they’ll actually have to live with the effects of their choices. How does the board decide who are the most qualified young family members and recruit them to the board?

Families often appoint by branch, in age order. On its face, this seems fair and reasonable. Sometimes they select those who work in the business. We would argue that this can lead to less-than-ideal outcomes that aren’t perceived as meritocratic nor transparent and that don’t optimize the pool of candidates.

Other families maximize the number of capable candidates from an early age. Around their late 20s or early 30s, family members with an aspiration to be part of the governance one day and who’ve shown from their early life choices and outcomes that they have potential can be brought onto specific development processes.

The owners need to think through whether they want family members to represent all shareholders, family shareholders, branches or themselves. This will be a source of great concern and emotional investment within the family. Because they all feel a psychological ownership of the enterprise, family members who are owners or expect to be owners want to have a voice and path to influence. They have a visceral sense of what they consider reasonable and fair about board membership.

Issues also arise concerning the balance between experience and inclusion. Because ownership tends to remain in the older generation, the key owners and family board members tend to be older. They cite their experience and voting power to retain their positions. But long-serving board members create a conundrum for the family:

Families want rules that allow succession and don’t support “board members for life.” They introduce term limits and retirement ages that make room for new members. They may also slightly expand the number of board members as ownership grows.

The board includes non-owners who bring important business and financial skills and experience to the owners. These include independent members who bring capabilities the owners don’t have. As objective non-owners responsible to the business, they’re fiduciaries, and they help resolve disputes among family owners.

The family owners seek independent directors with new ideas who will challenge them to do better. This can be a challenge for family owners who’ve inherited from the founding generation excessive faith in their own ways and aversion to risk and change. The recruitment of independent advisors is often a shock to the owners. The questions asked by the candidates cause them to reflect on their choices and policies.

How do the owners decide which family owners and independent members to appoint to the board? The answer varies with the stage of development of the family, how many owners and how much diversity of views they hold and with the complexity of the business and financial assets of the family. If the family has a single large legacy business, they want directors who can facilitate business development and expansion. If the family has sold the legacy business, bought other businesses, has different kinds of assets including property and many other ventures, they may have several boards to attend to and the need for an integrative holding company board. Each board has different needs.

3. Prepare family members for board roles. Board membership isn’t usually open to the very young. Experienced board members and family members occupy key director slots, and the business needs their experience. Family members should understand that board membership may not be available in the early years of their career. But they need to be looking ahead and preparing from their early career. To be ready for a board slot that opens when they’re in their late 30s or 40s, family members should expect to wait and prepare for a decade or more.

Families define requirements for board membership to make it clear that being on the board is a real responsibility, demanding a level of professional skill and experience. Some of the common requirements include:

The board, owners and family each have a role in setting up these committees and policies. The young family member who thinks they may want to be on the board or who has an interest in learning about the business can participate in activities that develop their understanding of the business. This participation offers them a way to make their interest clear inside the family.

A family development committee may be formed to organize the activities for development and assess which family members have met the requirements. This committee sets up a series of learning activities for family members. They include internships and summer jobs for young family members and education and outside employment to develop their capability and experience. They might pursue specialized workshops and attend conferences about family enterprise and board skills and find opportunities to serve on other boards. Each young family member pursuing their own career can develop an impressive resume to bring to the family.

Traditional business capabilities are essential. But families have personal relationships, and family history is often riddled with grievances, politics and competition. A member of a family board is more than a businessperson; they must connect with family members who aren’t owners and mediate competing agendas and personalities. Families must assess the board candidate’s ability to work with others. A family board member must have emotional intelligence and skills of cooperation, compromise and respect for others to sustain the family. The assessment process for board members must include this capability, and sometimes this skill hasn’t been valued or common in earlier generations.

A common family policy is to prohibit rising generation family members from working in the business (to avoid conflicts) but recognize that knowing the business is important to being a good board member. How can younger, family members contribute to business boards when they have no experience in that business and are often 20 years younger than other board members?

A young family member may not be comfortable waiting patiently until they’re 45 to be on the family board. Two opportunities have been offered to family members as they prepare to serve on boards.

First, some families offer family members a chance to attend and observe board meetings. This is sometimes paired with being assigned a board member as a mentor to meet with and learn about the issues the board is dealing with. Some families rotate observers every two years to give everyone a chance to learn. The observer role isn’t passive; observers are often mentored by a board member or asked to contribute ideas or get involved in projects.

In larger families with complex and diverse family assets, this is paradoxically made easier by the presence of not one, but several board options. There may be a board for a legacy business, another for real estate and investments, the family office, a family foundation and management of family activities. A young family member may visit and learn from different boards and perhaps join one of these subsidiary boards as a prelude to membership on the primary board of directors. There are family members attending or serving on boards who visibly demonstrate readiness for greater responsibility.

After serving as a board observer, or as an alternative, families have created Junior Boards. These groups, which can be appointed or take volunteers, are a sort of seminar to learn about the business. Junior Board members learn about various aspects of the family’s business and investments, meet executives who talk about business challenges, make visits to projects and are even sometimes asked to do a study or take on a project. This allows family members to actively learn about the business, often while they also work elsewhere (or in the family business). They also allow family members to demonstrate their maturity and readiness to be a board member.

It can be inspirational and motivating for young family members to develop their capability to be a board member. A family committee task force can assemble potential candidates for boards. But the reality is that even when the family only considers qualified candidates, a large family enterprise can contain more candidates than available slots. This can lead in several directions. Some families consider introducing term limits and asking long-serving directors to consider stepping down. Other families slightly increase the size of their boards. They can then set a timetable for available director positions.

But a family committee can’t appoint family directors. The appointments are usually made by each board interviewing and selecting from available candidates. To prevent conflicts of interest and inter-branch rivalry, the independent directors may make the selection. But appointment of new family directors is always a sensitive issue for a family and can lead to tension and conflict.

4. Nomination of family members onto boards. Families that have dozens of current and future family owners find it imperative to organize the process. They often separate this process into two areas:

It’s key that next generation family candidates feel the process is fair, meritocratic and has consistent standards across family members. The objective for the development and selection committees isn’t just selecting the right candidates, but also having the candidate pool feel good about the selections made, whether one of the chosen or one who’s deemed to require more time to get over the bar.

The family sets up a task force or committee to assess capability and select new directors. This will need to dovetail with existing nomination structures. It could be the same group, or it could be a group specifically tasked with the assessment, selection and removal of family members. The family must address questions such as who recommends, who decides and if the current board (or its chair) has to be consulted first or even have a veto on a family member.

Nomination criteria are notoriously difficult to define, but family members should bring relevant experience, be representative of the family values and bring the emotional intelligence that makes board tick. Those making the appointments should both know what’s expected of board members as well as know the candidates well. The relationship between those that develop the next generation and those that appoint is crucial and isn’t an end of process event but a continual dialogue, over the years, as the next Gen talent pool grows and develops.

Operation and Assessment

This article has focused on young family members’ preparation, composition and selection to the family boards. But the issue of how the board operates and the assessment of family performance is another area to consider. Just having the right members of a family board doesn’t ensure the board does its job effectively. The board is formed, and the family must create a safe, candid, future-oriented and accountable process to make it succeed. That will be the topic for a follow-up article.

This article was originally published in Trust & Estates July/August 2022 issue