Outside expertise

When the phrase “board of directors” is uttered within a family-owned or closely-held business, the most common question that arises is: “Do we have to have one?”

According to Barry Graff, a consultant with RSM McGladrey Inc., it’s a topic worth considering, especially if you’ll be transitioning the business to the next generation in the near future. Graff spoke at ANLA Management Clinic earlier this year about the crucial role a board can play in creating trust among all parties.

“You need to build confidence in the succession process and in what will come next for your family, your employees, your customers, your bankers/suppliers and for you,” Graff noted.
 

Advisors or Directors?
Creating a board that brings outside expertise into your business is almost always a good idea. The question is: Should you opt for a board of directors or advisors?

A board of advisors, Graff said, has no legal authority over your business. In this incarnation, board members essentially “speak when spoken to.” The owner and management team can accept or reject the advice given.

A board of directors, however, can sometimes be held legally liable for decisions made about the company. They also have more power. A board of directors could elect to fire a CEO, for example. If this prospect gives you the jitters, it’s worth noting that board members serve at your discretion. They can’t take control of your business.

“You voted them in, you can always vote them out again,” Graff said.

That brings us to a big question business owners face: “Who should serve on the board?” Graff recommends seeking out peers in somewhat similar, but noncompeting, businesses. Also consider principals in local companies you do business with. Be prepared to compensate board members for the time they spend working on your behalf. Graff said these fees vary greatly, depending on the company, the scope of duties, etc. A very rough “ballpark fee” would be $1,000 per meeting.

Step by Step
If creating a board is in your future, Graff recommends following these steps:

1. Form a family council and use that forum to educate your family on the role shareholders play.
2. Decide on the compensation and the type of board you want.
3. Recruit outside directors and determine who in the family shareholder group should be directors.
4. Make it clear to your board members how you intend to use the board (strategic planning, financial expertise, management evaluation, operations insight, etc.).
5. Prepare for and begin to have regular board meetings.

If the process seems a bit too daunting, or you’re having trouble getting “buy-in” from family-member shareholders, consider contacting a consultant to help with the transition.

Shareholders

• General function: Shareholders are the owners of the corporation. They become owners by acquisition of one or more shares of stock.
• Election: Shareholders elect the board of directors at the annual shareholders meeting in accordance with the bylaws.
• Meetings: Shareholders must hold at least one annual meeting to elect the board and conduct other business that comes before them. In addition, they will meet at certain times per year to receive reports from the board and management.

Chairman of the board

• General function: Acts as the senior governing officer of the company. Responsible for seeing that the board carries out its defined functions and oversees the operation of the company.
• Reports to: The board of directors
• Gives updates to: The president and CEO

Board of directors

• General function: Serve as the responsibility link between the shareholders and the management of the company.
• Election: The board is elected at the annual meeting of the shareholders and serves for terms in accordance with the bylaws.
• Officers: The board elects officers in accordance with the bylaws.
• Meetings: Occur quarterly, with one meeting designated the annual meeting. Additional meetings can occur at the call of the chairman or at the request of three board members.

President and CEO

• General function: Responsible for the overall operations and management of the company within the policy framework established by the board of directors. To fulfill this responsibility, the president has complete authority to make day-to-day decisions.
• Reports to: Chairman of the board
• Gives updates to: Other officers, directors and managers

Management team

• General function: Serves as a communication and information sharing forum for the senior managers of the company. On some issues, the president may wish to use this group as a decision-making body. But most of the time it will be advisory to him/her.
• Chairman: The president, unless he/she delegates this role to another.
• Membership: All senior managers
• Meetings: Typically weekly. Special meetings can be called as necessary.

Why?
You need to build confidence in the succession process and in what
will come next for your family, your employees, your customers, your bankers/suppliers and for you.
 

For more: Barry Graff, RSM McGladrey Inc., (619) 743-1110; bdgraff@gmail.com