Leaving Your Comfort Zone:
Adding Independent Directors to your Board
The Board of Directors is where the will of owners turns into action. It is also one of the most challenging steps to take for a business owner as they may be advised to do things differently. To be more specific, in almost all family business governance assignments that I have been involved globally, the top of actionable items list has been to add independent directors to the board. Yet only a small portion of business owners easily adopt this idea to change the board composition.
In general terms, an independent director is someone who has no other roles, which might potentially pose a conflict of interest with their duties towards your company. In my experience, inviting independent directors to join the board has always been the number one subject that stands clearly outside the comfort zone of the owner.
Why to take this difficult step
We often tell our clients that adding independent directors to the board is the best way to bring objectivity to their business. In the words of our senior partner Joe Paul, “if we could recommend one action to all our clients regardless of the presented problem, it would be for them to engage three strong independent directors. They would bring the wisdom and knowledge required to manage the necessary changes in the family and/or business.” In fact, our theoretical knowledge and practical expertise confirm that sharing the decision-making authority with qualified people around the table is in the best interest of the owner. Then what is it that keeps the owner from developing a strong independent board? How can a business owner prepare to leave his/her comfort zone?
A business owner who is reluctant to change the board composition:
- is not convinced that it is in their best interest; or
- even if they are convinced to the benefit, they suspect that they cannot manage the process successfully; or
- even if they have no issue with a) and b) above, the outcome is not important to them, i.e., they are not motivated by the benefit offered.
Is it in Your Best Interest?
You may start thinking about what exactly the ultimate duty of a board of directors is. The board exists to increase shareholder value, in other words, to make your company worth more. This is where you think about the future of your business and this strategic thinking allows you to move your focus from daily operations to the roadmap that will lead your business to its full potential.
Independent directors will help you define what you want your business to become in the future and the path that will take you there from where you are today. The best independent directors bring the ability to think about your business as an enterprise in the business environment in which you operate, rather than diving into the day-to-day operations. They can bring a context of how other businesses develop and what are best practices.
A strong board will also contribute to your succession plan by creating a platform for your successors to learn how to lead a business. It constitutes an invaluable resource as part of a transition plan for the development of the next generation, which usually takes a minimum of 10 years until you would comfortably delegate and finally handover the authority to your heir. Many times, independent directors can provide advice and coaching to potential successors and help to make the difficult decision of what leadership is needed by the company and who has the potential to provide that type of leadership.
Can You Plan an Effective Selection and Induction?
As the first step, think about the profile of people that would complement your skills. You can develop a Board Skills Matrix and list the qualities, qualifications, and talents which are needed to implement your strategic roadmap. People that you know and trust within your business community are a great resource. You can first look there to identify ideal candidates. You can also work with an executive search firm to propose people who will add value to your business.
While working on identifying candidates, it is also wise to consider what information they need to know about your business to be able to add real value in your board process. The position of your business as of today, competition, and future trends in the market are key information to help them understand your company and where you are heading. Creating a Board Prospectus is a useful tool to collect the information, which you can share with prospective board members or those who may share candidates with you.
Is it Important for You?
A strong board of directors can help guide the direction your business should go and what actions should be taken to get there. This is indispensable regardless if you would like to sell your business or transfer it to the next generation. If the mechanism that knows how to keep your business profitable is “you” instead of a board of directors, then you are also limiting the value proposition of your business — anyone who is interested in buying your business, should actually buy “you” and not the business. However, your board of directors will help your business incorporate your valuable competitive knowledge, which is the key to sustainability of the distinguishing performance that you have achieved.
In summary, many family business owners hesitate to build a board of directors with independent members because of their fear of outside control or advice that conflicts with their way of operating. We have found, however, that the voices of independent directors supplement those close to the business and provide an objectivity that typically no one in the family or in the business can provide. In addition, the presence of a board increases the value of the business both of current owners and for potential buyers should that be the ultimate goal.