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Introduction to Board of Directors in a Family Business

Provided by IFC Corporate Governance

The board of directors is a central institution in the governance of most companies, including family-owned ones. The role, structure, and composition of the board of directors vary from one family business to another. These are usually determined by the size and complexity of the business and the maturity of the owning family.

During the first years of their existence, most family businesses create a board of directors in order to comply with legal requirements. Known as a “paper board”, its purpose is usually limited to approving the company’s financials, dividends, and other procedures that require board approval by law. These boards usually meet about once or twice a year (depending on the local regulation) and their sessions last for a very short period of time. The board in this case is generally composed exclusively of family members and –in some cases- a few well trusted non-family senior managers. It is also very common to see the same individuals serve as managers and board directors, while being the company’s owners. Such a governance structure adds little value to the family business as each element of this structure (board, management, and family) could play a more active and constructive role within the governance of the company. As a consequence, roles are mixed, possibly leading to conflicts and inefficiencies in overseeing the company and its strategic decision.

As the family business gets more complex, it becomes necessary to rely on the board to play an active role in more important matters such as setting the company’s strategy and reviewing its management performance. These tasks require the board to meet more often and to have the necessary expertise and independence to challenge the company’s management. This is when the family business board becomes more organized, well focused, and open to outside independent directors.

Before moving to a fully professional board that has the ability to act in the best interest of the business, independently from the management and controlling shareholders, many family businesses set up an advisory board that complements the skills and qualifications of their current directors. In this case, the advisory board closely works with the company’s board of directors and senior management to address any key strategic issues that the business is facing.

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