On Serving as an Independent Director for a Different Family's Business

If you own a successful family business, you can help pass that success on to your family's future generations by serving as an independent director of another family's business, especially one in a disadvantaged population.  Serving as an independent director of a family business that has unique challenges can help you better understand how to use independent directors in your own family business.  Obviously, your knowledge, experience, and network also will help the family business on whose board you serve, and that will help the community in which the business operates.

Why are independent directors important to a family business?

I often have asserted that independent directors can provide many benefits to family-owned businesses.  I'll briefly make the case again, but one good way to determine how independent directors can help your family business is to serve as an independent director for someone else's family business.

Here are some of the benefits of having independent directors on the governing board of your family business:

●    Knowledge and Experience. You can select independent directors based on particular experience, knowledge, and expertise that you do not otherwise have within your family.  For example, your board may benefit from the presence of an independent director who has franchising experience, knowledge of international markets, or ecommerce expertise.

●    Networks and Credibility. Independent directors can give your business access to their networks and can augment or broaden the credibility of your business in your community, your industry, and your markets.  This can be especially helpful when ownership passes to the next generation of family members.

●    Best Practices and Reality Check.  Experienced independent directors can help your business adopt better systems for decision making, business planning and budgeting, financial reporting, and accountability of executive officers.

●    Approval of Insider Transactions.  Independent directors can review and approve transactions involving an owner-director that might otherwise be challenged as a conflict of interest.  For example, if owner-employees on the board vote to give themselves a year-end bonus, other family members may view this as a conflict of interest, but if it is approved by independent directors, then it has much less exposure to legal challenge.

●    Mediation.  If owners are at odds about matters of family business governance, such as family member employment, compensation, or advancement, or payment of dividends versus reinvestment of earnings, the independent board members can serve as informal, objective mediators, to try to resolve the owners' differences before they become formally adversarial.

Why should a family business owner serve as an independent director?

By serving as an independent director on the board of another family's business, you can gain insights into the benefits of appointing independent directors to your own family business's board.  You also can learn how best to engage and utilize the independent directors on your own family business's board.

Obviously, your board service also can help the business that you are serving and the family that owns that business.  Imagine how rewarding it would be to help improve another family's business operations and future prospects, or to help another family resolve an owner dispute in a way that avoids litigation and helps preserve family relationships.

Further, if you specifically seek to serve as a director of a business in a disadvantaged population, you can provide a benefit to the community by helping family business ownership grow in places where it can do much good.  In turn, you may meet talented individuals who can help you diversify the stakeholders of your own family business.

How can lawyers and accountants help?

The relationship that family business owners have with their lawyers and accountants should be secure and based on mutual trust.  Due to the personal nature of the family element of a family business, the advisors who serve the family business must be more than simply an expert service provider.  They also must know and understand the family and feel a personal commitment to the family's well-being and success.

Therefore, if you serve as an independent director of another family's business, you should not seek to disturb the relationship that family has with its lawyers and accountants, if the relationship is sound. Rather, if you think that your lawyers or accountants have greater experience or technical skill, you might arrange for your advisors to collaborate with and support the other family's chosen advisors. This is especially true in the case of advisors in a disadvantaged population.

What else can a family business do to help other family businesses?

Many family businesses have suffered much in 2020, including illness or loss of loved ones, lockdowns and other economic disruptions, and physical damage to facilities during social unrest.  If your family owns a business that continues to thrive, notwithstanding the present challenges, perhaps you should consider developing a relationship with another family business that goes beyond board service.

Perhaps your business should form a special alliance with a family business in your community whose owners are very different from your family, especially a family business that faces unique challenges because of inexperience, lack of history, or inadequate networks in the business community.

Imagine the benefits to both businesses and both families, if a longstanding, successful family business were to form a special alliance and friendship with a newer family business in a different population.  The newer business, its owners, and its advisors could benefit from the experience and knowledge of the more established business's owners and advisors.  In turn, through exposure to the newer business, the next generation of owners in the more established business could gain a useful education in business challenges and problem solving long before they ever need to deal with a crisis in their own business.  Both families also could enjoy the social and cultural benefits of learning about, and caring about, a family that experiences daily life in a very different way.

Gregory Monday