The Board of Directors in a Family Business

Almost every incorporated company has a board of directors. Far fewer have a board that governs. In many family businesses the board meets once a year, signs the accounts, approves the dividend and adjourns. The same three or four relatives who run the company, own it and sit on the board are all in the room, so the meeting changes nothing about how decisions get made.

That's the gap this article covers. It looks at what a family company board is actually for, how it differs from the board of a listed company, how boards typically evolve from a legal formality into a working body, and who should sit on one. It also covers the line between a board, an advisory board and a family council, since confusing those three is behind a lot of governance trouble.

What a Family Company Board Is For

The IFC Family Business Governance Handbook describes the core roles of a well-performing board as setting the overall strategy of the firm, overseeing management performance, and making sure an appropriate corporate governance structure is in place. It adds that the board of a family-owned company should add value and not replicate work already handled elsewhere. It should guide the business, but it shouldn't run the day-to-day, which belongs to management.

Beyond strategy and oversight, the same handbook lists several standing tasks:

• Securing senior management succession.
• Making sure financial resources are available.
• Checking that internal controls and risk management are adequate.
• Reporting to owners and other interested parties.

In a family firm each of those has a family dimension. Succession isn't only about finding a capable executive. It's also about which branch of the family feels passed over. Risk isn't only about market shocks. It includes the risk that one relative's lifestyle spending leaks into the company. A board that can see both layers is doing real work.

How It Differs From a Listed-Company Board

A listed company's board answers to a broad, changing, mostly anonymous shareholder base. A family company's board answers to a small group of owners who know each other, share a surname and often share a dinner table. That changes several things.

The practical difference is that a listed board has outside rules pushing it toward independence, while a family board has to choose independence for itself. Nobody forces a founder to invite an outsider who might disagree with him. That's why so many family boards stay small, closed and ceremonial for decades.

The three-circle model explains the pressure. A single person can be a family member, an owner and an executive at once, and a family-only board concentrates all three hats in one room. Nobody in that room is placed to ask the uncomfortable question.

From Paper Board to Independent Board

The IFC Handbook describes a progression that most family firms follow, in some form, as they grow. The details differ by country and company, but the shape is consistent.

Stage 1: the paper board. According to the handbook, most family businesses create a board in their early years to comply with legal requirements. It calls this a "paper board": its purpose is usually limited to approving the financials, dividends and other items the law requires the board to approve. Such boards typically meet once or twice a year, for a short time, and consist only of family members and sometimes a few trusted non-family managers. The same individuals often serve as managers, directors and owners. The handbook's verdict is blunt: this structure adds little value, because roles are mixed and that can lead to conflicts and inefficiency in overseeing the company.

Stage 2: the advisory board. Before moving to a fully professional board, many families set up an advisory board to fill gaps in skills. The handbook calls it a "compromise solution" between a family-dominated board and a more independent one. The family gets outside expertise without handing outsiders legal authority or sensitive information. For a fuller treatment, see the article on the private company advisory board.

Stage 3: the working family board. As the business becomes more complex, the board has to take on strategy and review of management. The handbook notes this requires the board to meet more often and to have the expertise and independence to challenge management. At this stage the board becomes more organized and more focused.

Stage 4: a board with independent directors. Once the board is open to outsiders, directors are chosen for what they can contribute rather than their surname. The handbook describes this as the point where the board becomes open to outside independent directors.

These stages loosely track the family business lifecycle. A founder-controlled firm can survive on a paper board. A sibling partnership starts to need a forum where partners disagree productively. A cousin consortium, with dozens of owners and branches, usually can't function without directors who answer to the company and not to any one branch.

Key Facts: Family Business Boards

• The IFC Handbook describes a typical early-stage "paper board" as meeting once or twice a year and made up of family members and a few trusted managers (IFC Family Business Governance Handbook).
• The same handbook gives 5 to 9 members as a manageable board size, and 3 to 7 members as a practical size for an advisory board.
• It cites John Ward's 1991 study of more than 80 US family companies run by the third or later generation, which found an active outside board was the most critical element in their survival and success.
• Anderson and Reeb's study of S&P 500 firms found the most valuable family firms were those where independent directors balanced family board representation (Administrative Science Quarterly, 2004).
• An advisory board's members carry no legal responsibilities, and its advice isn't binding (IFC Handbook).

Board, Advisory Board and Family Council: Who Does What

Confusion between these bodies is common, and each failure mode is familiar. A family council that starts voting on capital expenditure. A board that spends its meetings on who gets invited to the holiday party. An advisory board that everyone assumes has authority.

The IFC Handbook is explicit about the advisory board's limits. Its members have no legal responsibilities, which lowers cost and makes recruiting easier. But it can't compel information from management, so its recommendations rest on whatever management chooses to share, and its advice isn't systematically followed.

The handbook describes the family council as a working body elected by the family assembly, typically set up once the family passes about 30 members, and says one of its duties is suggesting candidates for board membership. That is the clean division of labor. The family decides who it wants to propose, and the shareholders elect directors. The council isn't the board. The family council article covers how that body is built, and the family constitution is where these role boundaries usually get written down.

Who Should Sit on the Board

Size and skills

The IFC Handbook recommends a manageable size of 5 to 9 directors, noting that a smaller board communicates better, stays on topic and finds quorum more easily. It says directors should be chosen for their potential contribution rather than whether they belong to the family, and it lists the personal traits it wants: integrity, teamwork, communication, analytical skill, and the courage to challenge other directors, family members and senior managers.

Typical skill areas it names include strategy, marketing, law, finance and accounting, risk management and internal control, human resources and corporate governance.

The case for independent directors

The handbook lists advantages of independent directors: an outside perspective, new skills, an objective view, hiring and promotion decisions free of family ties, and a balancing role between family members. It also says that independent directors can discourage family members from spending meeting time on family issues and can act as a "buffer" when relatives disagree about business matters.

It also gives an indicative definition of independence. Among the criteria, an independent director has not been employed by the company or its related parties in the past five years, is not affiliated with the company's advisors, significant customers or suppliers, and is not a controlling person of the company or a close relative of one. The principle is that the person should be free of links to management and controlling shareholders that could shape their judgment.

What the research says

Two pieces of evidence come up repeatedly.

The first is John Ward's work. The IFC Handbook cites his 1991 book, Creating Effective Boards for Private Enterprises, for a US study of more than 80 family-owned companies run by the third or later generation. It found that the existence of an active, outside (not family-controlled) board was the most critical element in the survival and success of those companies. That's a study of a specific population, not a universal law, but it is frequently cited because the sample was long-lived firms.

The second is public-company evidence. Ronald Anderson and David Reeb examined S&P 500 firms with founding-family ownership. Their 2004 paper in Administrative Science Quarterly reports that the most valuable firms were those where independent directors balanced family board representation. In firms with continued founding-family ownership and relatively few independent directors, performance was significantly worse than in non-family firms. The same abstract says a moderate family board presence provides substantial benefits, and that families often seek to minimize independent directors while outside shareholders seek more of them.

Read carefully, the finding isn't "families should leave the board." It's that family presence and independent oversight work best together. Note too that this sample is large listed US companies, so it doesn't prove the same effect for a small private firm, though the logic transfers: someone has to be positioned to say no.

Chair, CEO and Family Roles

A common structure problem is that the founder is chair, CEO and majority owner. The IFC Handbook lists "separate chairman and CEO roles" among its examples of best-practice governance attributes for a board, in its section on family companies preparing to go public. The reasoning applies to private firms too. If the person who runs the company also chairs the body meant to oversee it, oversight is hard to take seriously.

Families handle this in several ways. A non-executive family member can chair. An independent director can chair, which works well when the family has strong rival branches. Or the CEO can chair for a transition period with a lead independent director appointed to balance. The right answer depends on trust and on how much outside capability the board has attracted.

What matters is that the question gets asked deliberately and not inherited. The same goes for family members on the board who also work in the business. That's a particular case of the role overlap described in the family and non-family employees article, where non-family managers can find themselves reporting to a board that contains their boss's relatives.

What a Working Board Does in a Year

A board that earns its place usually follows a rhythm, not a pile of ad hoc meetings. The IFC Handbook's list of best practices includes a regular schedule and agenda of meetings, committees for audit, governance and nomination, and remuneration, initial and continuing director education, and periodic evaluation of directors. For a smaller private company, that translates to something lighter.

A plausible annual cycle looks like this:

1. Strategy session. Review the long-term plan, capital allocation, and any major bets or exits.
2. Performance reviews. Quarterly review of results against plan, and an annual review of the CEO against agreed goals.
3. Risk and control review. Financial controls, key-person risk, insurance, concentration of customers or suppliers.
4. Succession. Review of the CEO succession plan and the pipeline below the CEO. See succession planning for the broader process.
5. Owner reporting. A clear annual report to shareholders, including those who don't work in the business.
6. Board self-assessment. Is the composition still right? Are the right skills missing?

On succession, the IFC Handbook advises that a CEO narrowing the list of potential successors should get advice from the external independent directors on the board, and from trusted senior non-family managers if there are none.

Common Pitfalls

• The board as a rubber stamp. If every proposal passes without discussion, the board isn't governing. Minutes that never record dissent are a warning sign.
• Family drama in the boardroom. Business meetings become the venue for family grievances. The family business conflict article covers how to route those disputes elsewhere.
• Board seats as inheritance. Seats treated as entitlements for each branch produce a board sized for fairness, not for capability. The IFC Handbook's guidance is to choose on contribution.
• Independent in name only. A longtime friend, the family lawyer or the company's banker may be convenient, but they fail the independence tests in the handbook's definition. The handbook's own advisory board guidance also excludes suppliers, existing service providers and friends with no relevant expertise.
• Blurred authority. The board, council and management each assume the other will decide. Writing down who decides what, in a family constitution or a board charter, closes that gap.
• Information starvation. Outside directors can't challenge what they can't see. If management or the family controls the flow of information, an independent board is cosmetic.
• Too big or too thin. Fifteen directors can't deliberate. Two directors can't challenge each other.

Related Reading

• Three-circle model of family business
• Family business lifecycle
• Family council
• Family constitution
• Family business conflict
• Family and non-family employees
• Private company advisory board
• Succession planning