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A Board of Directors in Family Businesses Serve Vital Role


A Board of Directors in Family Businesses Serve Vital RoleBoard Members Bring Greater Accountability for Owners

Increasingly more family businesses are choosing to incorporate a board of directors in their operation. Why form a board? A board of directors can serve a vital role in helping a family company navigate its future. In addition to having access to individuals with expertise in strategy and other high-level business issues, a board can provide greater accountability to the family owners and executives running the business. This is an important step for a private company, as the family owners are agreeing to allow others to hold them accountable, for their own good and for the good of the family business.

What’s more, a board is a critical independent party when facing difficult issues that could lead to disputes among family members. Issues such as pay, performance and position are very hard for family members to discuss with each other. Board members can assess these situations more objectively, providing structure and an independent voice to make the best decisions for the business and reduce family conflicts.

However, even with these key benefits, many companies wrestle with the prospect of creating a board, including whether to include a non-family member. When deciding to establish a board, it’s recommended to address some of the critical issues with all those involved, including the composition of the board in order to get the most from it; who should serve on the board; where to find qualified members; how much work will be involved by the members; and member compensation.

Family & Non-Family Board Members: The Right Mix

When looking at board composition, it’s wise to have both family and non-family board members. Family members are important because they provide the context of the company’s history and legacy, and can fill key roles in the business and are owners. It’s also best to have more outside board members than family board members, as family issues are not an influence. The number of board members can vary depending on the size of the business.

When looking for a board member, seek out these key attributes in an individual: integrity, commitment to making an impact and a passion to serve, impartiality when providing advice, and a willingness to speak the truth to management. Once you have the right profile in place for candidates, consult your most trusted business advisers (accounting firm, law firm, insurance agent, banker) first for recommendations. These are individuals who know your business and your needs well.

Board Member Compensation

In most family businesses the level of board member risk is not as great as in a public company, therefore private company board members usually receive lower retainers than public company directors do. However, bear in mind that there is still some level of risk and an expected time commitment for which your board members must be compensated.  Board member compensation should take into account roles, responsibilities, time commitment, seniority/ experience level, geographic location and committee involvement.
When it comes to compensation for family board members, this can be tricky. As a general rule, it’s advised that companies treat each board member the same. If you’re on the board, it means you are qualified and you are being asked for your candid and strategic advice, whether you are a family member or not.

Of course, Directors & Officers (D&O) Liability insurance is critical for your business and directors and officers to protect against the potential consequences of alleged wrongdoings, such as financial mismanagement, misappropriation of funds, and negligence. At Axis Insurance Services, our experienced D&O insurance specialists will help protect your assets and those of your directors and officers long before threats occur. Give us a call (877) 787-5258 to find out how we can help protect you and your business.

Source: Family Business Magazine

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Blogged on: April 22, 2013 by Mike Smith
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