How to involve non-family members in the business, as employees, managers, or within executive or non-executive board roles.
This is one of an ongoing series of 10 legal alerts on this topic. This article is the third in the series, and follows on from Understanding Business Structures for Succession & Asset Protection and How to Create a Succession Plan.
Within the vast majority of family businesses, managerial and strategic decisions are made by the current owners as needed and there is no operating board of directors.
If there is an operating board, managers within the business may, or may not, be directors. Directors are elected by the shareholders, usually by majority vote, to govern the business, and may be executive directors, (“inside directors”) who also discharge certain functions as an employee in a managerial role within the business, such as marketing director or finance director, or non-executive directors (“outside directors”) who have no involvement in the day to day management of the company.
As directors may be personally liable in certain circumstances for the debts of a business, non-family members in particular may be reluctant to accept a directorship role due to personal asset-protection considerations (although this risk can be mitigated to some extent through the company taking out directors and officers insurance) and may require remuneration. Privacy, and allowing access to the detailed workings and finances of a family business to a non-family member, may also be a consideration.
The board of directors set the strategy of the business, to be implemented by management, and monitors management in the best interests of the owners. The board ideally should be a composition of both executive directors, with key senior roles within the business, such as the current owner (who may be the managing director or CEO), the finance director and the marketing director, along with independent non-executive directors, with relevant industry experience (perhaps on other boards) and specialist skills and experience in corporate governance to keep the focus of the board meetings on the strategy of the company, as opposed to day to day management. The board may also comprise the next generation, particularly any successors who may have been identified.
Clearly the appointment of non-family members to employee/management roles within a family business is commonplace for the running and growth of the business.
Depending on the scale and needs of the business, and whether family members have the requisite qualifications and experience, non-family members may be employed as employees/managers. Using a wine related business as an example these positions could be, viticulture, winemaking, finance, sales, marketing or distribution. The Code of Family Business Principles, Family Charter, or Family Constitution (whatever the family want to call it) will set the parameters for the employment of a family member as opposed to a non-family member within the business, usually with the approval of the board. Certain qualifications and periods of employment outside of the business are often required.
The appointment of non-family members to the board of directors is not uncommon. If the right individuals can be identified, and the issues of remuneration and risk can be overcome, the benefits can be significant.
The decision to constitute an operating board is often driven by business growth, growing sophistication of the business, the desire of the next generation to become more involved in business strategy and the need to ensure the succession and continuity of the business when the current owners, who currently make strategic decisions, are no longer involved, through dissemination of ideas and experience.
The first step is to ascertain the number of board directors required. The majority of operating boards of family businesses have between four and eight directors. Secondly, the business must identify the competencies required to implement the business strategy going forward. A business looking to grow and raise capital, or to export or expand operations into another market, may need to look for independent, non-executive directors with particular skills and experience in these areas to implement these particular aspects of the strategy, to the extent that such skills and experience do not already exist within the business and cannot be better outsourced from external advisers.
As the business grows, there are valid business reasons to consider the appointment of non-family members to key positions:
- to fill a skill or experience gap required by the business
- to give an independent perspective into an insular business, highlight areas which may not be performing optimally and introduce successful strategies from personal experience, similar businesses or industries
- to introduce, and help the current owners identify, new business and network opportunities
- to bring objectivity to difficult decisions, which may otherwise be driven by subjective personal considerations of family members, and which may be difficult for the current owners in light of family relationships; for example, when a family member can be brought into or removed from the business, qualification and performance parameter-setting and assessment, remuneration and successor identification, mentoring and training
- in a board role, to ensure good governance, to challenge, question and test strategy and also mentor and assist the managing director or CEO
- in a board role, to act as facilitator or mediator to assist the next generation in identifying their future strategy goals for the business (sale, increase long term business value, short term dividends, philanthropy) and try to reconcile these goals
- in a board role, to give the business continuity and stability in case of family disagreements or the retirement, incapacity or death of a current owner.
The introduction of an operating board with non-family executive or non-executive directors should not be seen as an interference with family decision-making, or an added level of bureaucracy, limiting agility. When the business grows to the point where day to day tasks, management and strategy cannot be optimally dealt with by the current owners, and the current owners are looking at succession to the next generation, it can be a very useful tool for the future stability and continuity of the business.
This was originally published in Australian & New Zealand Grapegrower & Winemaker.
This Alert is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.