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Independent director in unlisted family owned business


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Family owned business in their quest to strengthen the corporate governance process are opening up their board for independent board directors. This article details the roles of independent directors and the challenges they face.

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Independent director in unlisted family owned business

  1. 1. Browne & Mohan Board & CEO Advisors, Management ConsultantsIndependent director in unlisted family owned business D Balasubramaniam and Dr TR Madan Mohan
  2. 2. Browne & Mohan Board & CEO Advisors, Management ConsultantsFamily ownership is the most prevalent form of What Qualities do Family businesses seek inownership structure in many countries. Family independent directors?owned business can be a single-owner firm tolarge industrial houses. In a family ownership Unlike the listed firms that hire independentthe family members don several roles, common directors to meet the regulatory requirements orethos, identity and principles transcend to appease minority shareholders concern,multiple- generations, and munificence is a private business companies hire for followingmajor driver of business. Each family owned has unique set of challenges. Many 1) Solid industry background. Independentsingle owner run business may lack clear directors with loads of year of experience arebusiness norms, and policies, processes. Many sought to help master the nuances of thefamily organizations may have limited use of industry and prepare companies to succeed incapital budgeting, risk management and working the industry. Family businesses seek ourcapital management techniques and long term directors who not only stimulate goodplanning may be completely missing. Some discussions on industry, but offer deep insightsfamily business, however large they may be, may and share experiences on what not to do.have no clear plan to sustain the profitability oftheir business across markets and customer 2) Deep knowledge of the market. Familysegments, improve predictability of revenue businesses prefer independent directors whengrowth so that mutli-generational growth can be they are expanding to newer markets wheresustained. Wealth management may also be their prior experience may not stand muchnascent in many of these businesses. Proper water. Family businesses that are enteringplanning of shirt term and long term newer customer segments or distributioninvestments, and protection of corpus may be models prefer directors with a goodmissing. Most family business also don’t invest understanding of the industry nuances, thesufficient energies into succession planning and competition, government laws and markets, continuity.There is no shortage of advice for family 3) Broad governance experience. Experiencedbusiness. From personalized guru’s and Chapels, family businesses at the crossroads of transitionpeer groups, friends and family many snippets of or inter-generational transfer prefer to bring inadvice flows. However, the advice is ad hoc and independent directors for prior boardgeneric in nature, not applicable to their experience. Family businesses planning to raiseorganization. Moreover, their applicability to the capital from markets and professionalizing theircompany requires lots of rehashing, reshaping management also prefer directors with broadthe data. Family business owners need advice governance experience.that is professional, unbiased, consistent andappealing to their way of doing business. They 4) Well networked. Most first generational familyalso realize a need to adopt appropriate business or single-man operations with no majorgovernance practices to propel them to next brand capital, seek out independent directorslevel of organizational growth. In recent years, for their social connections. In industries withcorporate governance in family business has high outsourcing opportunities or OEMgained significant research interest (). Role of dominant industries, independent directors whoindependent directors in listed family business, could open the doors for business through theirthe corporate governance practices and networks are preferred.challenges are sufficiently explored (). However,unlisted family businesses which form the large 5) Easy going and available to roll up sleeves whenbase of growth drivers in any economy has not required. First generational family business andreceived sufficient focus. In this article we single-owner businesses are conservative andpresent our experience as independent directors hesitant to bring in outsiders who are too directin couple of Indian organizations. and transactional. They prefer independent directors are easy going, and compassionate. With limited bandwidth for monitoring and
  3. 3. Browne & Mohan Board & CEO Advisors, Management Consultantscontrol, they also expect the director to own and business, and act as a go between people to reducedrive some of these activities. ego frictions. They are not afraid in asking the right questions and asking them all in a fair andRoles of Independent director in a family professional manner. They also do not mind diggingbusiness deeper if some answers are not satisfactory or do not ring the right tone. They attempt to delineateIndependent director can be broadly of active or the CEO and Chairman roles and hence bring morepassive type. Active types involve in strategy clarity in day-to-day operations and strategic views.making and guide implementation processwithout actually interfering with the CEO andthe senior managers. Passive directors limit Based on our experience and our readings of thethemselves to their advisory role. In our industry, independent directors are broadlyunderstanding the most valuable independent involved in following roles:director brings the following. 1) Provide guidance. Family owned business1) Focus on profitability: constantly reminds the like independent directors to offer guidance andpurpose and means of establishing the company, assistance in finding opportunities for the firm tothe stakeholder value created by the company, grow, align with new partners, explore new marketsnumber of revenue streams, etc. They raise and change the status quo. In some companies, thequestions and offer constructive ideas to better family ownership may be seeking specific guidancethe company’s revenue, how to do better than to reduce CEO stress and bringing inindustry, help in arriving at cost comparison professionalism.against the best in the industry, etc. They help indefining and honing the business mix. The 2) Improve visibility and network valuecomponents of business model you choose to Independent directors participate in firm sponsoredplay determine how fast you grow. events as experts and consultants to showcase talent and provide key networks.2) Focus on De-risk: focus on broadeningbusiness mix, segmentation, market 3) Act as a sounding board and a confidantegeographies, reduce dependence on some key In many a first generation family businesspeople, skill sets that are likely to mature or new independent directors are seen as sounding boardsskill sets that would be in demand and finally, where partially defined or tentative plans can bereputation of the firm. They help in identifying bounced off to obtain feelers. Moreover, they mayinnovations (either radical or incremental), help also be involved to act as a neutral party tobuild portfolio of products/services targeting minimize “self-seeking behaviour” of the familydifferent consumer groups, thus reducing members and to arrest “private gains over companydependence on a products or a market. losses”.3) Focus on Sustainability: by constantly asking 4) Ensure fiduciary requirements are metfor extending the reach of their company into Independent directors act as audit committeethe economy, find newer opportunities and members, validate whether the taxes are paid inincrease the richness of marketing engagement time and regulatory requirements are complied.with its partner. They also continuously focus onsustaining creative friction within the company 5) Provide consistency, longevity andby approving creation of cross-functional groups, knowledge for the companynewer R&D teams, and novel commercializationmodels. They also focus on extending the Independent board members play a unique role ofmanagement in the company, prodding for self- checking for continuity of ideas and assumptions,organization and responsibility at multiple levels, longevity of plans and efforts and learn fromso that continuous streams of leaders emerge. historical perspective.4) Focus on professionalism: by constantlyencouraging multiple perspective at the boardlevel, transparent and creative discussions about
  4. 4. Browne & Mohan Board & CEO Advisors, Management ConsultantsChallenges faced and strategies adopted by continuity risk , but also preserve the familyIndependent Directors harmony.Independent directors in family owned unlistedfirms face following unique challenges: Conclusion: Independent directors in family owned firms have key role in expanding business growth and1) Ensuring independent neutral advice continuity. Not only there are various types of independent director roles emerge, they are capableIndependent directors realize the family’s of performing multiple roles. While there could bechoices and decisions may not be in the best several ties between the family and independentinterest of the firm and must exhibit their directors, adhering to principles of independence andindependent views and advise. Major areas of mediation may be more useful for the familydisagreements would be in placing loyalty over enterprise. With increasing market complexity andperformance, leadership changes, ownership need for independent recommendations, demand forand responsibilities, investments and exits. independent directors is likely to increase. FamilyDocumenting disagreements and revisiting the businesses will serve their interest better if theyplans is one best strategy that works best. invest in right independent director, offer the right environment to review and direct the advice to bring2) Prioritizing the change process growth and sustainability.Many family owned businesses, especially theSMB, lack formal planning process and thechange management process is often ad hoc. BibliographyIndependent directors add value to the companyby bringing in a method to manage the priority Adam, R.B. and Ferriera,D. (2007)“A theory ofof changes and ensuring the governance of friendly Boards”, Journal of Finance, Vol.62, Iss 1,change is managed well. 217-250.3) Managing “guidance” fatigue Anderson, R and Reeb. D (2004), Board Composition: Balancing family influence in S&P 500 firms”,One of the biggest challenge independent Administrative Science Quarterly, 49, 209-237.directors must be prepared is the pace of changemay be limited by resources and in many Bammens, Y, Voordeckers W, and Gils, A.V. (2008) “Board of Directors in Family Firms: a generationalquarters the governance guidance may not be perspective”, Small Business Economics, Vol. 31,varying much. Sticking to a rolling plan with 163-180.same objectives and keeping the motivation andguidance at highest becomes a challenge formost independent directors. Benjamin, H.E and Weisbach, M.S. (2003) “Board of Directors as an Endogenously Determined4) Familial role & conflicts Institutions: A Survey of the economic literature”, Economic Policy Review, Vol. 9, 2003, 7-26.Unlike a corporation, family members and theirextended relations may have different rights, Clark, C.D. (2006) “The Independent Director inexpectations and responsibilities in the business. Chinese Corporate Governance”, Delaware Journal ofThis sometime can lead to conflict and Corporate Law, Vol 31, 125-228.jeopardize the sustainability of the business.Unique privileges, access to privy information Clark, C.D. (2007). “Three Concepts of Independentand independent management are issues Director”, Delaware Journal of Corporate Law, Vol 32,independent board members have to grapple 73-111.with. Other key areas of conflict are successionand distribution of wealth. Independent Huse, M (2000) “ Board of Directors in SME: a reviewdirectors must stick to their professional role, and research agenda”, Entrepreneurship & Regionaland offer solutions that mitigate the business Development, 12, 270-290.
  5. 5. Browne & Mohan Board & CEO Advisors, Management ConsultantsJohannisson, B and Huse, M (2000) “Recruitingoutside board members in small family Browne & Mohan insight are general in nature and does notbusinesses: an idealoogical challenge”, represent any specific individuals or entities. While all efforts areEntrepreneurship & Regional Development, 12, made to ensure the information and status of entities in the353-378. insights is accurate, there can be no guarantee for freshness of information. Browne & Mohan insights are for information and Kevin, H.P, Kiel. G.C and Nicholson, G. (2010) knowledge update purpose only. Information contained in the“How Boards Strategise: A Strategy as Practice report has been obtained from sources deemed reliable and noView”, Long Range Planning, Vol. 43, 33-56 representation is made as to the accuracy thereof. Neither Browne & Mohan nor its affiliates, officers, directors, employees, owners,Neubauer, F and Lank, G.A (1998) “The Family representatives nor any of its data or content providers shall beBusiness: its Governance for Sustainability”, liable for any errors or for any actions taken in reliance thereon.Routledge, New York.Varottil,U. (2010) Evolution and Effectiveness of © Browne & Mohan, 2013. All rights reservedIndependent Directors in Indian CorporateGovernance, Hastings Business Law Journal, Vol. Printed in India6, No. 2, 281-286.