Ten reasons not to create an advisory board.By Ellen Frankenberg
One of the most significant factors determining the survival and success of family firms, according to a 1997 MassMutual survey of U.S. family businesses, is a board of advisers. Yet the 2002 American Family Business Survey found that nearly half of the respondents’ boards meet only once or twice a year, 61% of the businesses surveyed don’t compensate directors, and one-fourth of participating family business owners say their boards make “no contribution” at all.
During tough economic times, it’s particularly puzzling that so many family firms resist an effective tool used by most U.S. corporations. Why do very smart entrepreneurs continue to ignore a strategy that promises great long-term payoffs for them and their successors? They must know something that we experts have missed.
I think it’s time to borrow a page from David Letterman. And so... here are the top ten reasons not to develop a board of advisers:
10. No one “good enough” will want to serve on my board. When Jay Schindler took over as president of ESKCO, a Dayton, Ohio, firm that provides promotional marketing and corporate packaging solutions, he and his father, Jim Schindler, re-thought their requirements for a board. Jim contacted Clay Mathile, who built the Iams pet food company into an international brand and had recently sold it to Procter & Gamble. Clay agreed to serve on the ESKCO board and to help the Schindlers re-structure it to meet the needs of their growing business. “We have incredible talent helping us,” Jay reports today. “It was the best thing we could have done for the business.”
9. I don’t want to upstage my current advisers. When you’re making decisions about what’s best for the business, the focus needs to be on what is best for the business—not your advisers. An advisory board offers the opportunity to expand your circle of experts beyond your lawyer and your accountant. Strong outside board members can look at your business with fresh, practical eyes (especially if they have already managed companies one step ahead of yours) and improve the bench strength of your management team without expanding your payroll.
8. I have no idea whom to choose as board members. Your current network of advisers—bankers, accountants, lawyers, friends, trade associations, Chambers of Commerce—can help you build a short list of potential candidates. You and other family members can then interview the top two or three candidates until you reach a consensus about whom you would trust to serve your business best.
7. I don’t have time to work on one more project. Board development may not be urgent, but it will save you time and money in the long run. Especially if you’re considering passing the business on to the next generation, board development becomes an essential part of that process. As you begin to enjoy the golf links or the warmth of southern Spain, a strong board will help you savor your time away more completely. You can chair regularly scheduled meetings four or six times a year, where others besides yourself will challenge the next generation with non-parental, business-like voices, and you won’t be the only one worrying about the balance sheet. Your bankers and other investors will become more confident, knowing that the company’s future doesn’t depend on your heartbeat alone.
6. I don’t want outsiders to know about our problems. Families cherish their privacy, for many good reasons. But sometimes the risk is worth taking. Outsiders can take the heat about thorny issues like realistic salaries for relatives and perhaps point out problems you didn’t even know you had.
5. I don’t think we have enough issues to discuss. A typical board agenda might include (1) reviewing management’s implementation of the strategic plan, (2) comparing last year’s financials with this year’s, (3) helping determine the feasibility of expanding into a new region or product line, (4) discussing reports from department heads and (5) developing criteria for selecting the next CEO. Imagine—if you had the best business brains in your region providing you with a “think tank” as you tackle tough issues like these, would you really rather face all this alone?
4. A board will slow down our decision-making. Developing a board may well slow down your decision-making, but as your company becomes more professionalized, that may be precisely what works best. Rushing to put out one fire after another may suit a start-up with little at risk, but not a 26-year-old company with 31 employees.
3. Directors will be too concerned about liability. Many family business owners develop “boards of advisers” who meet together with the legal “directors” to share information and expertise, even though the family stockholders alone take the final vote. This may diminish the exposure of outside “advisers” and reduce the risk of their liability. Of course, the laws of your state and your own legal counsel will need to be consulted about specific board requirements. Liability insurance may be purchased to secure the commitment of the best candidates.
2. If I pick the wrong people, how will I get rid of them? Terms of office make sense, and some simple written expectations in an introductory letter can clarify goals until more formal by-laws are developed. A first term may be one year, so that there is an exit opportunity for all parties. After that, terms may be staggered for two or three years, to maintain continuity and to provide outside advisers with enough knowledge of the business over time, so they can provide well-informed counsel.
And the Number One reason not to establish a board of advisers:
1. I don’t want to give up control. Ironically, developing a board of advisers may actually be one of the best means to maintain control, especially if your company grows and prospers. If you ever actually retire, the role of chairman of this board may suit you very well. As chairman, you can convene the board four or six days a year, review the financials of the business in a systematic way, tap the brains of those who can best help your business prosper, retain authority to hire top management and develop a sounding board to test the fresh ideas of the next generation. Sounds like a good plan to maintain control, without camping out in the office every day.
And maybe you too will some day say, along with Jay Schindler, “It was the best thing we could have done for the business.”
Ellen Frankenberg, Ph.D. (www.frankenberggroup.com), heads the Frankenberg Group, which provides consulting services to business management and entrepreneurial families in transition. Her book, Your Family, Inc., now in its second printing, is also available in Spanish.