This post makes the case for educating next generation family business owners about the responsibilities and duties of board service long before they receive a substantial ownership interest in the business.
Why does this blog discuss boards so often?
I believe that a well-composed board is one of the most important tools for effective family business succession planning and long term success.
A governing board in a family business can ease the transition of ownership and management to the next generation by preserving institutional memory, providing a sense of stability and continuity (even when the transition is caused by a crisis), and supporting new management, while also protecting the interests of the owners (old and new).
Family members on the family business's governing board can help management pursue and honor the family's values and legacy. Independent directors on the board can help with their experience, networks, and objectivity.
Many family business advisors emphasize the importance of transparency, accountability, and participation in family business governance. A well-composed board is an effective way to achieve those objectives.
Unfortunately, the role of a governing board is sometimes ignored in family business succession planning, either because the planning is focused primarily on managing wealth transfer taxes, rather than future business operations, or because senior generation managers worry that a governing board will impair their authority to manage. A well-composed board, however, can support the managers' best efforts while helping them avoid miscalculations or mistakes.
What does "King Lear" have to do with this?
Shakespeare's "King Lear" is famously about the tragic consequences of believing in mere professions of affection instead of placing trust in silent devotion. For business purposes, however, it also illustrates the mistake of conveying ownership of a family enterprise to next generation members without first teaching them how to govern.
In the play, King Lear waits too long to begin succession planning. By the time he is ready to transition out of active management of the kingdom, he is already suffering from dementia. Then, to decide on a successor, Lear asks his daughters how much they love him. Two of his daughters ostentatiously proclaim boundless affection for him. The third daughter, who is truly loyal to him, declines to participate in the contest.
In a fit of anger, Lear disinherits the third daughter and divides his kingdom between the other two, both of whom promise to love and care for him for the rest of his life. One of Lear's independent advisors attempts to intercede on behalf of the silent daughter, so Lear terminates his employment. Inexplicably, however, Lear continues to employ a professional fool as his constant companion.
Soon, the daughters who have succeeded Lear evict him from their castles because his knights keep getting drunk and carousing with the staff. After that, things go from bad to worse. The daughters and their husbands (and lovers) betray one another, wage war, and kill apparently everyone in the play except perhaps a waiter from the first act.
Many times in the play, Lear or another character declares that Lear's mistake was that he gave away his kingdom before he died, but that can't be right. Lear was no longer competent to govern, and he was surrounded by mostly drunkards, yes-men, and his certified fool. Lear had to implement a succession plan or his family surely would lose the kingdom.
Lear's true mistake was that he did not teach his daughters how to rule by allowing them to participate in governance before he relinquished control. If he had done so, he could have seen that his silent daughter was wise and loyal, and he could have taught his other daughters to be conscientious or realize that they were unfit to govern.
How do next generation family members learn about board service?
Next generation family members can learn to be good directors of the family business through a combination of education and experience.
Many family business advisors have educational materials about the procedures and duties relevant to board participation. For example, the ABA Business Law Section publishes an excellent resource titled, "Corporate Director's Guidebook." It is written for lay people, so the material is very accessible. Although some sections of the book apply only to public companies, the chapters on directors' duties, board structure and process, and the relationship between the board and the shareholders contain valuable information for directors of closely-held businesses as well. (At only 120 pages, these Guidebooks make excellent stocking stuffers.)
Next generation family members, regardless of age or prior training, can get board experience by serving on the governing or advisory boards of nonprofit organizations in the community. Next generation family members also can get board experience by attending the family business's board meetings as observers (no talking, no voting). Some family business owners give their next generation family members a form of board experience by creating a family council that serves the family business in an advisory capacity.
Even for next generation family members who will not eventually participate in family business governance, board skills will serve them well throughout their lives. They can use those skills again and again to serve the community on boards of nonprofits, they can gain stature and valuable contacts by serving on boards of other businesses, and they can be better prepared to assemble and lead a board for their own ventures if they choose to become an entrepreneur.
What does Thanksgiving have to do with this?
Although many family business owners wisely choose not to speak about business at family holiday gatherings, Thanksgiving is a natural opportunity to speak more generally about family legacy and shared family values. Those values can unite the family, and usually they are consistent with duties, like care, good faith, and loyalty, that next generation family members will need to honor and fulfill when they join the board of the family business.
Have a happy, safe, and peaceful Thanksgiving.
Gregory Monday
11/23/2020