When is the best time to appoint an external chair? Alexandra Cain considers this all-important family business conundrum.
When a successful family business reaches a certain size and level of complexity there comes a time when it must consider putting in place more formal governance structures and, in many instances, appointing an external chair.
This is often a tricky period for a business, which might entail the founders giving up power and the younger generation taking on more responsibility. But family businesses that do manage this transition successfully put themselves in a sound position for the future. Company Director spoke to the chairs of a number of family businesses to find out what it takes to steer a family-owned ship.
The main advantage of having an independent chair, says Rod Walker FAICD, a former managing director of the Freedom Group who has chaired a number of family businesses over the past decade, is the ability to bring a different perspective into the business.
“People who run a family business sometimes don’t have a broad range of experience, which can make it difficult to grow the business. An independent chair can bring in experience, expertise and ideas the family may not have,” he says.
It can also be an antidote to what Walker calls “founderitis” – where the business owner is too close to what’s going on in his or her company. “If you’re the founder it can be tricky to step back and see what’s going on outside the company. You can have a situation where the founder is a great entrepreneur, but not be so great at running the business.”
Duncan Schultz FAICD is the group managing director of AMPLIFi Governance, which specialises in helping family boards develop good governance principles. He sits on a number of family boards and says running them is very different to running a public company. He says a good family chair must understand that family enterprises usually have more complex objectives than shareholder return. “There are considerations ranging from ego, empire, legacy, community, wealth, lifestyle, and of course profit. Many times these objects are in tension with each other.”
Schultz says it can take considerable skill to manage the family dynamic. “In a mature family enterprise, where the family board members and wider stakeholders are operating professionally and within bounds, it’s much like any other board.
“But when family tensions, conflict and ‘kitchen-table’ behaviours enter the boardroom it tests your skills as a chair. I have chaired a board meeting where, in front of the executive, a son leapt over the table to punch his father. This was a $250 million company. So there is a broad range of differences.”
Martin Tobin MAICD from OutLore Consulting is also a chair of a number of family businesses. He says the trick to running a great family business is finding equilibrium between the private and business aspects of the enterprise.
“Some businesses have a family-first mentality, but they usually don’t perform that well because they compromise on commercial things, or a dominant person gets control. At the other end of the scale you get a business-first approach, and family members have concerns that are not heard, or remuneration isn’t at market levels,” he says.
Tobin says to balance these aspects it’s essential to take advantage of the benefits of ownership, such as the passion for the brand and a commitment to the success of the company and the legacy of the business. He says an independent chair can be invaluable in striking the right balance. “If family businesses are dealing with emotional issues they can take their eye off the market. An independent chair is able to challenge the thinking in the family and can address issues without destroying the family dynamic. An independent chair isn’t in anyone’s camp and is only interested in the greater good of the business.”
Another key to the success of running a family board is having the right processes surrounding the board, such as family charter or shareholder agreement. Nick Guest, a partner of professional services firm HLB Mann Judd, who specialises in family business and enterprise, says these documents should set out the role of the chair and board.
“This allows the chair and the board to operate at an optimum level from the start.” But he says that if a family is going to pay for external governance support in the form of a chair and board, it’s important to understand what the return on this investment is. The value is usually in the expertise the external people bring, so it’s important to properly assess this to ensure the skills will add real value to the business.
Timing is everything
One of the main questions family businesses must answer is when is the right time to bring external counsel into the business. Guest says the trigger is sometimes the elevation of younger family members to positions of seniority in the firm. “Another point can be when the business is of a size that it has to file financial reports with ASIC,” he explains.
Max Scales MAICD, principal of Scales Consulting, who is the independent chair of the board of Reid Stockfeed, says the tipping point can be the scale and complexity of the business. Banks can also make an independent chair a loan covenant.
“In most cases it happens when governance issues become critical or when the business has reached a size at which it requires external auditors,” he says.
Another catalyst can be when the owners are reluctant to take decisions that might have a damaging effect on relationships with long-term staff.
“An independent chair can provide a smoother path when the business is faced with decisions about structural change and new opportunities. An independent chair is in a strong position to make this happen; it’s about delegating authority to someone who is outside the business,” he explains.
Inside or out?
Of course, not every family board has an external chair. Many very successful family businesses are run by the patriarch – think Rupert Murdoch and News Limited, and the late Richard Pratt and the packaging company Visy.
There’s also a middle ground, argues Craig West, another external chair who runs the governance business Succession Plus Australia. “It’s possible to have a separate family board to the business board. You might have two meetings – the family group and the business group and have two separate conversations.”
He says this can work when the business is facing decisions that are not compatible – such as a desire by some family members to receive a dividend, and a commercial decision, such as whether it’s strategically important to invest in a new factory. “You need a mechanism to work this out.”
So how does having separate structures help to resolve these seemingly irreconcilable desires? West says the only way is to go back to business principles. But ultimately in a private business, it’s up to the shareholders.
“It’s always important to separate the personal side from the commercial side and ensure everyone understands each other’s viewpoint. You won’t ever be able to completely remove conflict, but the right chair will be able to address the personal interests of individuals,” says West.
“At the end of the day, having an external chair is invaluable. Family businesses that try to manage their affairs without external facilitation can get into a lot of trouble because it’s impossible to completely get rid of all emotional baggage, even in the best of family businesses,” he says.
The benefits of having a non-family chair
• Accountability at board level cascades through the business.
• Proper governance process and knowledge.
• A well-networked and respected outsider can add value to the business.
• Perspective and the opportunity to be a sounding board to family members.
• The ability to take the “family” out of the agenda and conversation when necessary.
• An outsider can act as a “relief valve” when family politics affects the business.
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