Why establish a board of directors?

Why establish a board of directors?

Not all family enterprises have, or even need, a board of directors. Where a business-owning family has the choice, it has to decide whether a board will help to deal with their challenges and professionalize the business.

Senior Manager

KPMG AG Wirtschaftsprüfungsgesellschaft


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Business people meeting in conference room

Extract from the book “Governance in Family Enterprises – Maximizing Economic and Emotional Success”, 2014 , reproduced with autorisation, Palgrave Macmillan ©

CEOs or family owners have objections against introducing a board of directors. Those can be countered:

  • “I see no benefit in a board of directors for the enterprise.” A board can be particularly helpful in the succession process, because nonfamily nonexecutives are often better able to approach the decision about the next CEO in a professional and objective manner. A board can motivate and inspire the executive, and can create space for deeper discussion and reflection. It increases the accountability among customers, suppliers, and banks.
  • “I do not want external people to know about our problems.” Nonfamily members as nonexecutives can act as mediators in conflict situations. Those board members who are not employed in the business, independent of whether they are family members or not, may identify problems that managers have missed.
  • “A board slows down our decision-making process.” If a CEO has to present a proposal in front of nonexecutive board members, he or she is forced to think clearly about the consequences of the decision. This slows down the decision-making process but can also allow for deeper reflection, better identification of risk, and prevent a poor decision.
  • “My fear is that I cannot get rid of the board of directors anymore.” The contractual term that a board member serves can be as low as three years. And, if all owners agree, they can be voted out any time. Setting up a board is a reversible process: the owners collectively could choose to abolish the board.
  • “I don’t want to lose control.” A board functions primarily as an advisory body and a forum for discussion, testing and challenging ideas, including those put forwar by executives. It can also assist in an emergency when the next CEO or managing director needs to be selected.

Despite those objections and fears, most family enterprises have a board of directors. However, there are many who have not the right members on the board. This is due to the fact, that the owners forgot to discuss the benefits they expect from a board of directors. Therefore, before a board is implemented, or if the board does not work effectively anymore, the owners should discuss among themselves or with the board members the benefits that the board should generate for the firm and the family. The answers differ tremendously, depending on the type of family enterprise. Some benefits are:

  • Support the management with comprehensive expertise
  • Increase the quality of decisions
  • Intensify the self-discipline, accountability and responsibility of managing directors
  • Assure the realization of goals and compliance with rules
  • Ensure communication to owners
  • Mediate in conflict situations
  • Assist in the succession process

In addition, it helps if the business-owning family defines those aspects that the board should not do. This will depend on legal considerations. It is important that the limits of the board’s remit are clearly communicated by the owners’ family to the nonexecutive member, the managing directors. The limits also differ according to the type of family enterprise, but some examples of what the board should not do are:

  • Intervene in daily business
  • Intensify groupthink dominated by one person
  • Produce extensive reports
  • Generate complexity
  • Avoid a critical and controversial debate
  • Speak out for the interests of individual owners.

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