With the boomer generation transitioning into retirement, 40 percent of leaders currently at the helm of family-owned companies will retire in the next five years, according to a statistic cited by the National Association of Corporate Directors as part of its Director’s Handbook Series. With four in 10 heads of such firms set to step down, it is all the more important to strengthen corporate boards.
The leaders of family-owned companies who are considering restructuring their existing boards or creating new ones need to understand their options. The NACD broke down the different types:
- The all-family board, composed solely of members of the family.
- The family-dominated board, chiefly made up of members of the family, plus managers and advisors who represent the family, also known as inside directors.
- The partially independent board, staffed predominantly by family members and their representatives but with a few independent directors as well.
- The independent board, which contains a majority of individuals with no ties to the family, the firm’s employees or the company in general.
“One of the hallmarks of a successful family-owned business is a strong board.”
According to McKinsey & Company, one of the hallmarks of a successful family-owned business is a strong board. As McKinsey associate principal Ana Karina Dias and directors Christian Caspar and Heinz-Peter Elstrodt noted, an analysis of the S&P 500 revealed that 39 percent of family business board members are inside directors, compared to just 23 percent of board members at non-family companies. Clearly, having a family presence on the board can be beneficial in terms of corporate success, but taking the “all-family” approach outlined above may not be the best option.
“It’s important to complement the family’s knowledge with the fresh strategic perspectives of qualified outsiders,” the trio wrote. “Even when a family holds all of the equity in a company, its board will most likely include a significant proportion of outside directors.”
So, what is it about family-run firms and the boards that oversee them that often place them ahead of their competitors? In a piece for the Harvard Business Review, George Stalk and Nicholas Kachaner of the Boston Consulting Group and Alain Bloch, a professor at French research and education institution CNAM, identified several differences in these enterprises:
- Frugality, regardless of economic conditions
“Family firms seem imbued with the sense that the company’s money is the family’s money, and as a result they simply do a better job of keeping their expenses under control,” noted the trio. This serves them well during downturns such as the Great Recession, as these firms enjoy greater stability than much of their competition.
- Stringent and risk-averse capital expenditure strategies
Rather than spending more than they earn, family-owned businesses tend to do the reverse, saving the balance in rainy-day funds. Moreover, they only invest in the most promising projects. This means “they miss some opportunities … during periods of expansion, but in times of crisis their exposure will be limited because they’ve avoided borderline projects that may turn into cash black holes,” explained Bloch, Kachaner and Stalk.
- Low debt
“Debt means having less room to maneuver if a setback occurs – and it means being beholden to a non-family investor,” the experts explained. Due to this mentality, family-run firms had to make fewer sacrifices during times of economic instability than their non-family counterparts.
- Fewer and smaller acquisitions
“Family businesses prefer organic growth and will often pursue partnerships or joint ventures instead of acquisitions,” the trio noted. This echoes the risk-averse nature mentioned earlier. Instead, family-owned enterprises make expansion decisions based on factors such as geographic location and cultural compatibility.
The authors conducted a study that found nearly half (46 percent) of family businesses were highly diversified, compared to just one in five of their non-family counterparts. “Diversification has become a key way to protect the family wealth,” observed Bloch, Kachaner and Stalk. “If one sector suffers a downturn, businesses in other sectors can generate funds that allow a company to invest for the future while its competitors are pulling back.”
- A global presence
Family-controlled companies work to achieve foreign growth organically or via small, local acquisitions, ultimately generating a slightly higher percentage of sales than non-family equivalents, according to the experts’ research.
- Low turnover
According to Bloch, Kachaner and Stalk, family businesses “focus on creating a culture of commitment and purpose, avoiding layoffs during downturns, promoting from within and investing in people,” which leads to longer employee tenures and lower turnover rates.
With the leadership of many family-owned enterprises currently in flux, it’s critical for these firms’ corporate boards to be at the top of their game, whether they’re solely composed of members of the family or completely independent.