Produced by Julie Garland-McLellan, Consultant at AltoPartners Australia and non-executive director and board consultant based in Sydney, Australia.

Contribution by Albert Froom, is a Partner at Leaders Trust Netherlands / AltoPartners Netherlands. Albert is a founding member of AltoPartners and he was the Chairman of AltoPartners from 2006 to 2009. He is currently Global Practice Leader of Family Owned businesses and a member of the Board Practice. Additional insights from Gerard Lentz, a board member the Netherlands Guild of Family Business specialists (NGFB). He is based in Houten, Utrecht, Netherlands.

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The Director’s Dilemma - April 2024

This month we consider succession in a family business.

Lewis is Managing Director and Chair of his family’s business. He has undertaken some governance training and, before he retires and leaves the business to his children, he wants to create a stable board that will guide the children and business into the future.

As a first step, Lewis discussed the idea with his board, who are all family members. He was pleasantly surprised that they were supportive of bringing on the company’s first ‘non-family’ director. The discussion progressed to the desired attributes, skills, experiences and networks that should be sought and, again, the family were agreed. Lewis then took the matter into a taskforce of himself and his son to look at the constitution and talk with their lawyer about the changes needed to create a non-family director, appointed by the family shareholder, alongside the existing directors who are all shareholders and collectively own more than 90% of the company’s stock.

The lawyer asked if the new director would be given a vote or would be purely advisory. Lewis hadn’t considered the idea of a board where some directors had votes and others didn’t. He is keen to have a board of equals, especially as the family retains voting control.

On discussing with his family, he found that they preferred the advisory option.

What are the pros and cons of going forward with either model, and which would you suggest is best for Lewis’ company ?

Albert and Gerard’s Answer

Lewis faces a dilemma common in parts of the world where the 1–tier board model is the custom. The problem would not have occurred in the Rheinland model in Europe, where they operate a 2–tier model in the majority of the countries.

In the end, the outcome will be about playing with the majority of votes as owners.

The pros: the new non-family member might accept the role easier, when he or she is taken seriously because they have a vote. The board might also have more respect for his or her advice.

The cons: lack of voting rights might give him or her more the flavour of an independent advisor rather than accountable board member. This might start discussion around difficult subjects earlier but struggle to see that carried through into action.

The family wants to keep the majority of votes on the board. The entrance of one non-family member vote in this board will probably not change that majority of votes held by the family members. Lewis should check his constitution: Does the Chair – being a non-executive director - have two votes? Being a Chair and a family shareholder?

In addition, governance guidelines suggest non-executive board members should have a majority vote. If the non-family member having a vote changes that vote ratio, it can be corrected by, for example, introducing multiple votes for non-executives. Research reveals that the trend in boards is to have more independent non-executive board members. It has a strengthening effect on companies, better governance, and better results.

Julie’s Answer

Lewis needs to think carefully about the purpose of his company. He founded it for a reason and, even if he has not been conscious of it, that purpose has been guiding his decisions. Was the company created to provide a shared focus and employment for the family, or to generate wealth and provide an income to the shareholders?

He then needs to consider the skills of his family board members. Do they have skills in managing a company of this size and stage of development that will help them to guide the management team? Do they have experience in operating the processes the company runs? Have they previously achieved something the company is working towards? Can they create or enhance supplier, staff and customer relationships? Do they understand governance and the role of the board, or do they act as managers and/or shareholders? If the result of this questioning is likely to be contentious Lewis should bring in outside expertise to create an independent assessment and help him draft a board development plan.

Then, and only then, is Lewis ready to create a skills matrix and bring in an outside (non-family) director to help strengthen the board.

My personal preference would be to bring in a director with voting rights as a deputy chair to Lewis with the aim of having that person step up to chair the board when Lewis retires. A good chair will ensure the board reaches consensus and all directors feel heard and valued; they won’t ‘control’ the board. But that is my preference and Lewis must develop his own. He has built a great company. Now he needs to build a great board.