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Keeping it in the Family?How Independent Directors AddValue to Family Businesses

n Executive SummaryFamily businesses form the bedrock of economic activity around the world.Family ownership can provide an outstanding foundation for commercial successand long-term growth. Inspired by a sense of purpose and tradition, and largelyimmune from the gyrations in sentiment and reporting demands that come with astock market listing, family-owned businesses can think, plan and operate longterm.Equally, however, the relative lack of external pressure and scrutiny can allowfamily companies to grow complacent, sclerotic and unable to keep pace withchanging times.Likewise, as family businesses expand and enter new markets, and as the reins ofcontrol are passed on to the next generation, the skills and experience needed toensure long-term profitability can outgrow a family’s management skills.One solution is to appoint independent non-executive directors to the board.Such directors serve a number of functions. They can heighten accountability,provide alternative perspectives and bring to bear critical experience from avariety of markets and business situations.They can also act as a link between a non-family executive team, the board andthe shareholders, and help to ensure that the overall governance of the familyenterprise operates effectively.But the move towards independent non-executive directors is not always easy.Discord can arise where non-executives feel marginalised from key decisions, orwhere communication between family members and non-executives is not freeflowing.This paper concludes that the success, growth and well-being of a family businessis enhanced not just by appointing independent non-executives, but deploying,motivating and involving them appropriately.info@odgersberndtson.com | www.odgersberndtson.co.uk 3

Some familymembers seethe business asthere to satisfytheir needs,but it shouldbe the otherway around. Anindependentdirector with theright personalitycan ask thequestion: whatdoes this do forthe business?the role itself is much broader than simplyimproving governance. “You do not wantindependent non-executives to be theresolely for governance reasons,” says oneindependent director. “You want them beon the same side of the table discussing theissues that are going to take the companyforward.”Independent directors can play a vitalrole in business development, providingfresh perspectives, a strategic overviewand opening up valuable networks for thebusiness. They can also act as a soundingboard for the non-family CEO and mentoryoung or aspiring family executives, passingon experience drawn from a wide range ofcompanies and business challenges.Who Should Serve?Serving as an independent director ina family business is unlike other nonexecutiveroles and requires particularskill and subtlety. The family environmentis an emotional one, with a high degree ofemphasis placed on relationships, trust andloyalty.As one independent director highlights:“The role of the non-executive director is asa member and representative of the board,but able to consider also the needs andconcerns of shareholders, both those onthe board and in the wider family. This is aunique yet delicate role.”Independent directors who make thesuccessful transition from non-family tofamily owned businesses appreciate andunderstand the family ownership structureand the idiosyncrasies that can accompanyit.Family businesses often have their ownstyle of communicating and resolvingconflict which may be foreign to somenon-executive directors. An independentdirector in a family business must be askilled and diplomatic communicator whocan defuse tension where necessary.“There are occasions where differentparts of the family might think you aretaking sides,” says one independentdirector. “Try to disarm them – the valueof the independent director is his or herindependence. You must be seen to be evenhanded with all.”Another adds: “Independent directors mustbe direct but able to gain the trust andrespect of the family at the same time. Theycan say what they feel behind closed doors,but they should never embarrass the familypublicly.”A successful independent director willfit the culture of the family business – itis essential that the values of the nonexecutivedirector match the values of thefamily.Do they understand and appreciate theculture, history and ethos of the business?Will they be a safe custodian of our valuesand our wealth? Are they comfortablecommunicating with family members?These are the questions family membersshould ask themselves when hiring nonexecutivedirectors.Equally, independent directors must ensurethey have a full picture of the businessbefore deciding whether to join the board.One independent director told us: “As aprospective family business non-executive,you must do your due-diligence. Speak tothe auditors and the current non-executivesof the family business to make sure it is aboard you want to join.”To make it successful, both the family andthe independent director must be confidentthat the relationship can work, and thateach has a fully informed view about theother.info@odgersberndtson.com | www.odgersberndtson.co.uk 5

n Attracting IndependentDirectors To A FamilyBusinessFor some independent directors, joining afamily business poses inherent risks – whyenter an environment in which your abilityto fulfill your director’s duties could becompromised?Family-firms, however, offer distinctadvantages that non-family firms cannot.They often provide a level of collegiality andinformality rarely found in other corporateenvironments. Board members in familyownedfirms may also exhibit higher levelsof long-term stewardship, which helpsto align the interests of the family withindependent directors.Equally, while non-family firms can beconcerned with the quarterly reportingtreadmill, family businesses tend to take along-term view and emphasise trust, loyaltyand a sense of pride in the family tradition.“I was delighted when the family chairproposed the establishment of a boardcommittee to dispense £250,000 incharitable donations unrelated to the profileof the business. That would never happenin a public company,” says one independentdirector.Family businesses can also be more flexibleand less bureaucratic than non-family firms.One independent director comments: “Theability to make quick decisions is perhapsthe greatest strength of family businesses.You can talk through a topic in ten minutesand there is no need to put it to a committeeor board.”The sense of mission and purpose found infamily businesses can not only give thema competitive advantage over non-familyfirms, but also make them an attractiveprospect for independent directorsconsidering their next career move.Recruiting Independent DirectorsFamily owners can be so close to theirbusiness, and emotionally involved,that they overlook the need to ‘sell’ theopportunity to potential outside directors.Although the commitment, culture andpride of the family are each unique sellingpoints, the recruitment process itself isfrequently the most significant factor whenattracting independent directors to familybusinesses.Many independent directors use therecruiting phase to gauge the family’slevel of openness and whether they trulyembrace the concept of independence onthe board. As one independent directortold us: “The key question facing anyindependent non-executive in a familybusiness is whether the family is willing tolisten.”Independent directors will have manyquestions about the firm’s financialposition, long-term strategy and businessoperations. As one independent directorpoints out: “Prospective non-executivedirectors will want to explore whether they‘fit’ the generational profile of the familybusiness and the shareholders’ growthaspirations.”They will also take time to explore thewider family stakeholder relationships andhow the family communicates its views tothe business. It is essential that family boardmembers are open and transparent withinterested candidates.Similarly, when it comes to attractingindependent directors, it makes a differencewhether they are one or one of several.Many independent directors we spoketo expressed caution at joining a familyIndependentdirectors whomake thesuccessfultransition fromnon-family tofamily ownedbusinessesappreciate andunderstandthe familyownershipstructure and theidiosyncrasiesthat canaccompany it6info@odgersberndtson.com | www.odgersberndtson.co.uk

The senseof missionand purposefound in familybusinessescan not onlygive them acompetitiveadvantage overnon-familyfirms, but alsomake theman attractiveprospect forindependentdirectorsconsidering theirnext career movebusiness where they would be the soleindependent director, or where there wasonly one other independent non-executive.One director says: “I would be reluctant tojoin a family business if it only has one nonexecutivedirector. Decisions are likely to bemade over Sunday dinner and you may getrolled over.”Another adds: “They are not going to winthe argument with the first appointment.They must be seen to be making severalindependent appointments.”No non-executive director wants to beemployed as a token independent. To attracttop talent, family businesses must build atrack-record of genuinely independent nonexecutiveappointments.n Retaining IndependentDirectors On The BoardOnce an independent director has joinedthe board, it is the chair’s job to ensure thatfamily board members handle the transitionwell and create the right environmentfor the non-executives to participate andcontribute fully.He or she is responsible for ensuring thatindependent directors have sufficientinformation to discharge their duties. Thechair must also help create an environmentwhere independent directors are able toexpress their views candidly to the family.To retain independent directors on theboard, they must have the same degreeof influence as family members. Equally,because it can be difficult to separate familyrelationships from business relationships,clarity of role is essential.Board appointments should also bemade in a fair and meritocratic way.Many independent directors we spoke tohighlighted nepotism as one of the maindrawbacks of working in a family business.One independent director told us: “If youare running a world-class company, youneed world-class directors. No familymember should feel they have the right tobe there. It must be a meritocracy and theymust add value.”While it is a human failing that familymembers often act in favour of those whoare part of the kinship, the perception ofnepotism may result in disillusionmentamong independent directors and maylead them to conclude that their position isuntenable.Family businesses should ensure that onlyfamily members with the requisite skills,knowledge and experience are appointed tothe board.Making independent directors feel as mucha part of the business as family members,and giving them genuine accountability andtangible input into board decisions, is a keyway of ensuring loyalty, commitment andlong-term stability.info@odgersberndtson.com | www.odgersberndtson.co.uk 7

n ConclusionIn these turbulent times, family businessowners face many challenges.Is the composition of the board fit-forpurposein the light of market changes? Isfamily discord affecting the performance ofthe business? Is there a qualified and willingfamily successor who can take the businessforward?In confronting these challenges, anincreasing number of family businessowners are recognising that the longtermsuccess of their company will begreatly enhanced by the appointment ofoutstanding independent directors.In addition to giving the family businessaccess to skills and experience that itmay not otherwise have, an independentdirector can bring objectivity and outsideexperience to bear in board decisions.They can also open up important networksfor the business and help to ensure thatthe overall governance of the family firmoperates effectively, fostering open andconstructive debate and assisting withstrategy and succession planning.While the value of independent directors infamily businesses is increasingly recognised,appointing them to the board is a delicateprocess. Reaching family consensus on nonexecutiveappointments can be difficult.A delicate balance must be struck in findingindividuals who are respectful of theunique DNA of family ownership but arealso prepared sensitively to challenge theexecutive team and prevent groupthink.Done right, the appointment of independentnon-executive directors to the board offamily-owned companies can help ensurecommercial success across the generations.A delicatebalance must bestruck in findingindividuals whoare respectfulof the uniqueDNA of familyownershipbut are alsopreparedsensitively tochallenge theexecutive teamand preventgroupthink8info@odgersberndtson.com | www.odgersberndtson.co.uk

n About Odgers BerndtsonOdgers Berndtson is one of the leadinginternational executive search firms andthe largest in the UK. Our reputationfor excellence and integrity has beenestablished over 40 years. We act as trustedadvisors to clients who need help recruitingfor important positions.Odgers Berndtson’s Board Practice isresponsible for some of the most importantrecent Chairman and Non-ExecutiveDirector appointments as well as forexecutive board roles.As part of a truly global firm, the BoardPractice spans all major markets. We workwith a wide range of FTSE and AIM-listedcompanies, international groups, privateequity-backed businesses, family-ownedorganisations, and small and medium sizedenterprises.We have a thorough understanding ofboard and committee structures, and boarddynamics. Our team includes experienceddirectors of publicly quoted and privatelyheld companies. In short, we know howboards work.Odgers Berndtson has been an influentialvoice in the corporate governance debate.We understand how the principles of goodgovernance, applied practically and not byrote, can help create strong, effective boardsthat add real value to an organisation.Our wide experience and deep knowledgeis brought to bear on every boardappointment we undertake.info@odgersberndtson.com | www.odgersberndtson.co.uk 9

n Our Peoplen Susanne Thorning-LundSusanne is a Principal in the Chair and Non-Executive Director Practice. She has over tenyears experience of advising on senior boardappointments in family-owned businesses andpan-European engagements, working with ourinternational partnership.susanne.thorning-lund@odgersberndtson.comn Contact Details20 Cannon StreetLondon EC4M 6XDDirect + 44 20 7529 1077Mobile +44 7768 992 10610info@odgersberndtson.com | www.odgersberndtson.co.uk

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