The advantages of introducing a board of directors into the family business

Si bien el consejo de administración es decisivo en las empresas cotizadas, también las empresas familiares pueden aprovecharse particularmente de incorporar este órgano a su estructura organizativa.

Carlos Losada

The family business is an especially complex environment in which competitive demands are intertwined with economic interests, family loyalties and emotional ties. The interaction between business and family strengthens the organization when it is well channeled, but weakens it if this is not the case. In this environment, the board of directors plays a crucial role: it catalyzes the benefits of this relationship and neutralizes its possible disadvantages. 

Carlos Losada is co-director of Esade's Boards of Directors in Family Businesses Program and he has extensive knowledge and experience in organizational governance. In addition to his doctoral thesis on the role of the executive, he has served for many years on more than a dozen governing bodies of international companies, including Gas Natural Fenosa, SFL and InnoEnergy. In this interview, he outlines the advantages and difficulties of introducing a board of directors to the family business.  

What is the difference between an executive role and that of board member on the board of directors? 

This is a fundamental question, especially because most board members (between 70% and 90%) have been executives and they tend to repeat what went well for them in that managerial role once they are on the board. But these roles are not the same! Executives are expected to show leadership and strong empathy skills, with the ability to take quick decisions, attend to the many demands made of them, mobilize people and organizations inside and outside the company... On the other hand, board members are expected to show sound judgment and a strategic outlook in their approach to the matters they have to deal with. They must have the ability to listen, to reflect, to ask the right questions, and to influence a group of people over whom they have no authority (the other board members). They do not have to be specialists, but they must have a great capacity to learn and recognize what they do not know, which is not easy. Rather than thinking in terms of day-to-day issues and individual projects, they must focus at all times on the medium and long term and on the company as a whole, with a broad perspective of the various stakeholders involved. 

Not everything that works on the board of a listed company may work in the board of a family business

Over and above the formal aspects with which every board must comply, what does the board of directors bring to an organization? 

In many countries, the board of directors is set up as a counterweight to the management team that looks after the interests of the shareholders. This explains its role in monitoring, tracking, regulating, establishing incentive systems and evaluating the top executives. Other countries place emphasis on providing senior management with support and guidance (counsel). Both roles, and others besides, are entirely necessary.  

How does the board of a family business differ from that of a listed company?  

The difference lies in the family component, which may be highly positive or a burden for the business, even for the family themselves. Therefore, it is very important to put family conversations on one side (for example, on a family council) and business conversations on the other (on the board of directors), in order to turn the family factor into an asset. In contrast, this separation is irrelevant in a large company whose ownership is dispersed. Moreover, the family factor has an influence on many important aspects: the consideration itself of the term, that is to say, the time horizon for making decisions, separates these family businesses from those in which the majority of the shareholders remain in the organization for less time. And there are many other differences that set a board of directors in family businesses apart. This is why great care should be taken when transferring what works well in a listed company to a family business. 

The board of directors institutionalizes the presence of the family, transcending the figure of the founder

Why is the board of directors such an important body in the family business?  

First of all, it draws a line between family and business conversations. Furthermore, it paves the way for more ordered transitions in the successive stages of the family businesses. It also helps to institutionalize the presence of the family to a greater degree, transcending the figure of the founder or “captain and making it easier to incorporate the culture that the family as a whole wishes to see in the company.  

If the advantages are so clear, why are there not more family businesses with highly competent boards? What difficulties are there in creating and developing boards in family businesses?  

The introduction of a board into a family business constitutes a far-reaching change that challenges many perceptions and realities. Decisions are taken in a different way, other actors take the stage, and the distribution of authority can change significantly. Deciding on the moment to move from a model of a sole director as the "captain" of the ship to a more formalized board is not easy. Furthermore, when something is going well or very well... why change it? Families only embark on this voyage when they have a long-term vision of the family business project. 

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