How Useless Boards of Directors Develop

The composition of the typical family business board-a body required by law-

tends to depend more on history than on contribution.

adapted from Beyond Survival by Léon A. Danco

Every family corporation has a board of directors. But having a board of directors is not the same thing as having a board that actually directs. Most family business boards don't meet, much less direct.

Initially, the board often begins with Mom, Dad and an old Advisor. As time goes by, the board is infil­trated by increasingly inappropriate “hangers on.” Over time, these directors often become more and more hardened and set in their prejudices.

Once these people are “in,” they're hard to get “out.”

If Dad took on investors in the early days (“…with your money and my brains…”), they usually became “silent” partners. They were on the Board so they could be fooled into thinking they had some control over their investment.

Later, Dad also discovers this was a good way to reward faithful, old-time employees for their loyalty. They stuck with him through all the disasters, and knuckle-whiteners of the early days. Dad wants them to know he hasn't forgotten.

A board seat is also an excellent way to “promote” a restless key man­ager, giving him a new title, little (if any) increase in pay, and often no authority.

Then there are sons or daughters who are working out of town in one of the branch offices. Making them directors is a good way to give them prestige with­out the power to mess things up.

Sometimes, the passage of time tends to increase the frequency of meetings for these “expanded” boards. After all, how are all these people going to be fooled about their importance if they never meet?

But meeting doesn't necessarily mean they do anything. Woe to him or her who steps out of bounds and questions The Boss's decisions. That's the surest way for a grateful director to become an ungrateful ex-director.

With this “accommodating silence” in mind, meetings are often held at resorts or in conjunction with vacation travel. Potentially questioning mouths can be kept shut when full of a steady stream of deductible treats at poolside.

Afterwards, the well-fed and well watered scribe heads back to the office, pulls some canned boilerplate out of his word-processing files, and composes the minutes of what was essentially an extended cocktail/dinner/beach party.

Actually, this fictional opera­tion is preferable to the usual inside board alternative-running family fights over dividend policy, jobs, fringe benefits, and power.

The Successor's Problem

Eventually, Dad moves on to his heavenly reward. He leaves to his widow and successors this gothic collection of relatives, friends, co-conspirators, self servers, employees, and minority share­holders-all posing as directors.

If ownership (and, therefore, con­trol) has been maintained in the hands of a single successor, not much changes on the surface. The board remains composed of The (new) Boss and his retinue of non-performing courtiers.

But even for only sons of only sons, problems intrinsic to an inherited board are bound to show up. Eventually, if the successor is serious about business growth, he faces a whole range of very tough problems.

How can he go about cleaning house? How can he persuade Mom that she's really not needed as a director of the company she and Dad built together?

How can he move the grateful employees off the board without destroying their continuing gratitude, loyalty, and usefulness, now that the major guarantor of their continued tenure-the founder-has left the boardroom?

And that's not all. If this unfortunate heir happens to face the additional discomfort of having to deal with other successors, other own­ers (active and inactive), and maybe even a minority partner or two left over from Dad's regime, we begin to see the need for a lot of change in the board and the way it meets.

At least in the past this pseudo-board didn't really absorb any manage­ment time or attention. Now, it not only doesn't “direct,” but it becomes a dead weight, diverting the already over­burdened energy and the attentions of the successor from vital business matters to what, essentially, are family matters.

All this can be avoided, but it is best avoided when inappropriate directors are recognized before they get in the boardroom door. Once in, they tend to stay.

As Confucius once complained:

Flea never come

For short visit

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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