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Investing in growth through smarter boards in family firms
In Asia, where most publicly listed firms are controlled by families, family businesses are a significant driver of economic growth.
Owners of family firms are often concerned about maintaining control and keeping a firm grip on decision-making. After all, they have spent much sweat building up a successful business, with the family fortune and reputation at stake.
Hence, boards of family firms tend to be dominated by insiders. It is often the case that the founder is both CEO and chairman. A few family members may join him or her on the board, whilst the rest of the seats are taken by trusted professionals or long-time family friends.
The advantage of having such a cohesive group is quick decision-making with minimal conflict. It can give the necessary discretion to family entrepreneurs to grow the company. The formula works well when the business is relatively simple. Combined with a long-term view, deep industry knowledge, and a hands-on approach, family firms can outperform other firms when they are nimble.
But a control mindset can hold back growth. The boards of Asian family firms often resemble the rubber stamp variety where most decisions are made by the family and the board generally approves proposals without much discussion. Is this smart thinking or a missed opportunity?
External: Blind spots
Trusted insider directors often have similar backgrounds as the firm’s owners, and similar exposure and networks. This lack of diversity can hamper the firm when it goes beyond its comfort zone – for instance, when an industry is disrupted or the company moves into a new product or service.
Entering a new market requires an adaptable mindset. Take a commodity company that decides to move into downstream industries. The new business is often more capital intensive, requires more advanced technology, has new global customers, and is usually done in collaboration with foreign partners. Insider board members may not have the skills or know-how to move the business forward.
In short, as family firms grow, having appropriate independent directors can lower the cost of learning, provide access to relevant new networks, and can generate confidence in the eyes of capital providers, partners and regulators.
Internal: Weak control systems
Even large and publicly listed Asian family firms can be micro-managed by family leaders, particularly if they are also founders of the firm. While having a personal stake in the company has its advantages, it becomes a problem when the owner can no longer oversee the entire business operation.
Micro-managing family leaders may dismiss the need for good management information systems when they intuitively add up small decisions in their head. A developing business will however reach a stage when the leader can no longer make every decision.
An important warning signal is when no work gets done whilst the chairman is overseas – a surprisingly common occurrence. While this inertia obviously slows down progress, it exposes an even bigger danger: lack of control.
Large family firms often rely on “intuition” for major decisions, and lack internal systems that provide crucial management information. The internal control function is weak and easily overruled. A corporate culture based on deference and hierarchy may not be equipped for comprehensive risk management.
Often, it is when the family leader is bogged down by minor daily decisions that executives or family members ignore proper due diligence. Insider boards that defer to family owners tend to operate on a “don’t ask, don’t tell” mode, and avoid confrontation, even if red flags are activated. Successors may have an even harder time controlling family firms lacking strong internal systems and processes.
Experienced independent directors know when additional control systems are needed and how to build them. As part of a strong and effective board, they will call for investments in corporate culture, control systems and appropriate leadership talent to put family firms on the right growth track – something that may not come naturally to hard-working founder-entrepreneurs who are just focused on getting the job done.
Investing in smarter family firm boards
How can family firms preserve the advantages of committed and entrepreneurial leadership and mitigate the weaknesses?
Bringing in strong, independent directors is a great way to invest in future growth, adding new competencies and networks beyond the firm’s comfort zone without radically altering the family business structure. Competent independent directors can also help strengthen the firm internally to position it for sustained growth and smoother succession to the next generation.
Taking a control mentality when selecting independent directors and expecting them to bless every decision without discussion is a missed opportunity.
The smarter solution is to view a strong board as an investment. Family owners should use independent directors as a resource to help the family firm reach the next level, both externally, in terms of new knowledge and networks; and internally, in terms of better systems and processes.
The writer is a member of the Brand and Communications Committee of the Singapore Institute of Directors