Setting Up an Effective Board Room
What decisions happen in the Board Room?
The role of the Board Room reflects its position between the Owner Room and the Management Room. A board should ensure that managers are operating the company in a way that accomplishes the objectives set by owners. You can identify which decisions are important enough to ask the board to focus on by a simple litmus test: Is the decision so significant that a bad choice could place the business at substantial risk? Board-level decisions typically include these issues:
- Hiring or firing the CEO, which many board members consider to be their single most important decision
- Planning management succession, whether within the family or with nonfamily employees
- Setting appropriate executive compensation, including that for the CEO and the CEO’s team (if the executive is an owner, the board should separate compensation for management from returns to the owner)
- Approving business strategy recommended by the CEO and “material” decisions such as acquisitions and loans
- Ensuring proper regulatory and legal compliance
- Setting annual dividends in light of the policy set in the Owner Room and that year’s business performance
The board should oversee the business, not run it.
Most jurisdictions have a legal requirement to appoint a board, but sometimes it’s just a formality for companies. There are good reasons to go beyond the basic legal requirements and to create a board that will actually help guide and advise your business. Various types of boards can be helpful in a family business; you don’t need to automatically default to a classic big company board setup. The table above outlines the different options you might want to consider.
Who is in the Board Room?
You may be tempted to limit your board to family members in an effort to keep the details of your business private. We recognize that bringing on an outsider is a big step for family businesses, but we urge you to consider adding at least some independent voices to your board. Independent directors can change the dynamic of a Board Room to make it more professional, help you manage the careers of family members in the business, and bring complementary expertise to board discussions, to name just a few benefits.
Who should be on your board then? When your business is sufficiently large and complex, adding independent directors or advisers is one of the few universal best practices that we will highlight for every family business. Remember, as owners, you’ll always have the right to fire an independent if they fail to serve your interests. You’re still in control. Whichever configuration you select, make sure your board is composed of people who understand the interests of owners and who can wisely guide and oversee the business in the board-level decisions.
“No buddies, no business” is a good rule of thumb. You shouldn’t have your golfing buddy on your board. Nor should you have an adviser who sells services to your company. And a board with several members from management lacks an independent perspective. Management shouldn’t oversee itself.
*Adapted from the Harvard Business Review Family Business Handbook by Josh Baron and Rob Lachenauer. Pages 63-65