We the Family: The Benefits of Creating a Family Constitution

 

Definition and Purpose of a Family Business Advisory Board

What is a family business advisory board?
It has been well documented that the biggest challenges a family business faces are the sustainability of family harmony and business success through economic cycles and generations. While there are many uncontrollable reasons why a family business thrives or fails, there are controllable safeguards a family can institute to remain unified. One safeguard that is growing in popularity is the formation of a family business advisory board. At its core, a family business advisory board is a body (external to the family and the business) that is intended to provide objective industry and functional expertise to the board of directors and management of the family business. Family businesses often have extensive industry knowledge, which a family advisory board can complement with objective, independent insight. The advisory board’s role is to offer guidance to the owners of the business, working in conjunction with the board of directors, which in turn provides governance at the company level. Well-functioning advisory boards act as an independent sounding board for strategic considerations for the business.

What is the purpose of a family business advisory board?
A family business advisory board provides structure for business owners to reach outside their area of expertise or industry in an effort to broaden their knowledge, experience and network. It adds value across three dimensions:

  • Knowledge and expertise: Advisory board members typically come from diverse backgrounds or industries. The knowledge and experience each board member brings into the conversation adds value, as they provide insight into areas the company may lack.
  • Strategic idea generation: Advisory board members are not focused on the day-to-day operations of the business, allowing them to provide perspective and creative solutions to the company. Further, board members are not legally liable for the company’s operations, which provides the freedom to think outside the box.
  • Network effect: In addition to the experience, expertise and idea generation gained from an advisory board, their members typically provide deep networks that can be leveraged to support additional guidance or business needs. The network effect has the ability to add significant value to the business and its owners, which is especially meaningful when a company is considering entering a new market or launching a new product.

What issues does a family business advisory board address?
A family business may elect to establish an advisory board for a number of strategic, familial, emotional and psychological reasons. The most common issues and reasons that lead companies to set up an advisory board include:1

  • Solving complicated financial issues for the business
  • Providing counsel for difficult decisions when family members disagree
  • Helping move stubborn projects forward
  • Gaining experience of outside advisors to supplement the family’s skillset
  • Generating new ideas with out-of-the-box thinking
  • Establishing a sounding board to validate emerging business opportunities
  • Providing an objective voice to help put opportunities into perspective


Composition of a Family Business Advisory Board

Once a family decides to form a family business advisory board, the process and criteria for selecting its members should be thoughtfully considered. According to Brett Sovine, co-head of the Brown Brothers Harriman (BBH) Center for Family Business:

Advisory board members should have experience in a family setting or in an aspect of business that is applicable to near- and mid-term issues facing the family business. For a family business whose board comprises primarily or exclusively family members, consideration should be given to compensating advisory board members for their services. Compensation equates to engagement, expands the pool of potential advisory board candidates and will likely enhance the consideration management and the directors give to the counsel rendered by the advisory board.

When creating a list of potential board members, the following attributes should be considered:2

  • Integrity
  • Sense of duty and commitment
  • Competence
  • Demonstrated track record
  • Objectivity
  • Willingness to speak the brutal truth
  • Lack of ego

In addition to the selection of board members, the family should consider the optimal size of the board and meeting frequency. The optimal size may depend upon the size of the family and business but should be between five and 10 members who should plan to meet three to four times a year. Critical to the success of a family advisory board is the ability to openly communicate with the business owners; thus, the board should have a strong relationship with the owners.

Intersection of a Family Business Advisory Board and the Company’s Board of Directors

A family business advisory board is a separate and distinct body from the company’s board of directors. A few key differences are described in the table below.

  We the Family: The Benefits of Creating a Family Constitution

High-functioning advisory boards tend to focus their time and energy thinking about the future of the business and little to no time focused on governance of the business. This distinction allows each group to focus on their goals and objectives. That said, both boards work together in order to accomplish the goals and objectives of the overall family business.

  We the Family: The Benefits of Creating a Family Constitution

 

Steps to Begin Establishing a Family Business Advisory Board

The process of establishing a functional family business advisory board is iterative. In order to begin, it is imperative to memorialize the advisory board’s guiding principles, which include creating a mission/purpose statement, outlining the characteristics and attributes of each board member and delineating the policies and procedures necessary to create a board tailored to the family business. Once the principles are in place, the family business is ready to build a list of potential board members, ultimately selecting five to 10 to serve.

If you would like assistance in creating an advisory board for your family business, please contact BBH’s Center for Family Business. Learn more at www.bbh.com/familybusiness.

 

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1 “3 Habits of Highly Successful Family Businesses – #1 Advisory Boards.” Fambiz. September 24, 2015.
2 Randall, Richard. “Advisory Boards for Family Business.” New Level Advisors.