For the continued success of many family businesses, a professional board, staffed with qualified, experienced directors, is becoming more essential each year. A diverse board, once installed, is an asset to any organization: strengthening the decision-making process, adding independence, and fostering board effectiveness. However, for many family businesses, the step from the past to the future is fraught with challenges and barriers that can be hard to surmount. Nevertheless, it is important to break down the barriers and overcome the challenges to cultivate diverse boards.
A diverse board encompasses many elements. Racial diversity is a priority for many boards today, as recognition of the significant underrepresentation of racial minorities on corporate boards spreads. In addition to race, director qualifications, experience, age, ethnicity, gender, and independence can all contribute to a board’s diversity, improve its productivity, and strengthen its governance.
In order to fully reap the benefits of board diversity, it is important that boards go beyond hiring token “diverse” board members, and actively seek out candidates who possess a wide range of perspectives, industry and market knowledge, financial acumen, and business expertise. Similarly, diverse boards are strongest in an open, collaborative atmosphere, in which directors can comfortably share their perspectives, voice their concerns, and openly challenge assumptions or reject recommendations from management.
However, for many privately held family businesses, achieving diversity can be problematic. Family company bylaws often include limitations or barriers to adding qualified, independent directors. Outdated bylaws restrict, rather than encourage, family companies from broadening the scope of talent on their board. Working within a restricted governance structure weakens an enterprise, depriving it of essential talent.
Simply put, archaic bylaws limit the independent participation that is so essential in decision-making related to strategic direction, management recruitment, company performance, and operating processes. Many families are not racially diverse, nor do they have a pool of qualified family members with relevant board skills and experience. “Members only” boards preclude family businesses from taking advantage of the powerful insights, knowledge, and skills often found only in independent board members.
Often, the biggest hurdle for change is the historic family culture. It can be challenging to garner support among family owners averse to structural changes. Having been through this process, I can attest that it requires a great deal of communication, education, and consensus building. In 2001, after almost 150 years of family leadership, we made the difficult and emotional decision to hire our first non-family CEO and, a short time later, we added two independent directors. To help us implement an enterprise-wide governance structure, our first independent director was an expert in family business governance. We knew we needed someone on the board with this expertise to guide our governance planning and decision-making. Our second recruit was a retired executive with expertise in operational oversight and investment management. With diversification also a priority, we wanted someone to help guide the due-diligence process related to our business investment and divestment activities. The contributions of our initial independent directors proved so valuable that the family approved the addition of two more in 2008.
So, if you are wondering if it is worth the time and effort required to tackle this issue with your family, hear this: it is well worth it. A diverse board that collectively has the requisite skills, expertise, and experience needed to strategically guide the business is truly valuable, and there is lots of data showing that such boards perform better.
This is where all of us currently involved in board service can play a leadership role. As independent directors, it is our duty to guide a company’s efforts to better understand diversity, and encourage a courageously different approach to director recruitment. In doing so, we will embolden family companies to step into the present and face the uncertainty and volatility of the years ahead with a renewed confidence.
Debbie Brown serves as Board Chair for Seattle-based Laird Norton Company (LNC), a seventh-generation business-owning family with investments in real estate, wealth management, and consumer products. With its 163-year history, LNC is one of the longest-standing family enterprises in the country. Debbie also serves as a director for two private holding companies and is a member of their governance and family council committees. In 1990, she founded and served as CEO of Pacific Preschools, Inc., a network of high quality, worksite childcare programs. In 1997, she led the sale of the company to the premier provider of employer-sponsored childcare and, later that same year, participated in their IPO. Debbie has also been an invited guest and speaker at numerous family business events and conferences. She especially enjoys sharing her family’s best practices and “lessons-learned” related to family governance, shareholder communications, and family engagement.