Sha is the third-generation director of a mid-sized and progressive medical company. His grandfather started the organisation on a very small scale in a small town in UP. The Board of the organisation consists of his uncle (father’s younger brother, cousins (father’s elder brothers’ son and himself) – all family members. Most of the key positions in the organisation are also managed by themselves. Over the years, they have grown to be a known brand with large presence in Central and North India. During Covid and post covid period, this organisation has achieved notable business growth, especially in nutraceutical products and in modern marketing outlets. While discussing about engaging consulting organisations to support this growth Sha has brought in the idea of appointing a non-family expert to the Board as an independent member, which was rejected immediately. Rest of the family members did not find any reason to bring in a non-family member to the Board.
What’s preventing the vast majority of non-listed family businesses to appoint an independent and non-family member to their Board?
While reasons vary, the last few years of working with Family and Family Managed business of various size and industry has provided us with few insights into the how, why, and what – to enable you to appoint an independent board member.
ESTABLISH A MEANINGFUL PURPOSE
For a traditional family business sharing their space and secrets is a big move.
Whoever is proposing this idea to the Board (family member / family business facilitator), must establish and communicate the purpose of the proposal. For example, in the above case, to bring in strategic input on nutraceutical.
Creating consensus among the board members on the requirement of an independent director is paramount. All board members should be able to accept the idea of having a non-family member sitting on the Board. They should also understand that this person will be a neutral person who will take decisions based on his/her experience or subject-matter expertise and data. For him/her organization is the objective not the individual.
The objective of appointment should not be to side-line or silence another member of the board.
REMOVE THE FEAR OF INSIGNIFICANCE
Most of the time, family members object to the appointment of a non-family member to the Board due to the fear of being seen (sometimes being felt) as insignificant on the Board. Fear of being marginalised and side-lined by rest of the directors along with the external person will lead to future issues in family and business.
Family Board members should collectively discuss about it. In some cases, we have advised, in the initial days, that the family board members meet separately to discuss topics before they discuss the same in full board meetings to avoid conflict in the presence of an external person.
OBJECTIVE ASSESSMENT LEADING TO FAIR / NEUTRAL DECISIONS
An independent BOD applies an objective angle while making decisions; they have nothing to lose, and their main role is being responsible for stakeholders and shareholders equally. Therefore, they are unbiased and will make decisions that are beneficial to the ultimate users /clientele. This is also a great advantage when succession planning needs to be put in place, as conflict of interests is a key issue in appointing a successor. Many a times promising candidates are overlooked during succession planning because of bias / prejudice / lack of perspective etc.
AN ORGANIC CHANGE IS ESSENTIAL
As the business grows along with time, people, technology and demands, so too a board needs new eyes that help keep pace with this dynamic turn. Challenges and complexities have to be met with and in order to sustain and develop the business even further, a change in the BOD is also essential. Independent directors are an asset during such times.
AREAS BEYOND CURRENT CAPABILITY
Once the consensus is created, members need to identify the area of appointing independent director. BOD should look for areas beyond the capabilities of the current directors; in some cases, they look for futuristic areas. However, the Board must ensure all members have a similar thought process.
Identifying an expert who has exposure in the family owned and managed business, especially for the first time, is crucial. An independent director with similar industry knowledge will help and find it easy to align with the thoughts of family directors faster. In many cases, totally radical or different ideas are not accepted well and then the director will feels out of place and becomes non-value adding.
An independent board member with exposure to family owned and family managed business environment will bring in lot of value and acceptance from rest of the BOD.
SET RIGHT EXPECTATIONS
An appointment with clarity will lead to clear expectations.
Board members should have clear expectation from the external member. It is imperative that this is shared during the initial process. Most of the initial dialogs should be about the role of the independent director. All family board members must participate in these meetings.
Design and communicate the job description, period, and frequency of meeting, point of contact etc. The chairman of the board should intimate the appointment of the independent board member to rest of the family members / family board/ family council etc.
Key executive leadership of organisation also should be briefed about the appointment
Appointing an independent nonfamily member on board is the sign of progressive family owned and managed business. They will bring in fresh perspective to the board and help them to take well informed decisions. An independent board member also brings in an effective governance system to the family board thus can make the entire organization to be professional and progressive. So, move out of the fear zone and embrace progression.
M R Rajesh Kumar
Lead Partner and Family Business Coach