Louis XIV, the king of France, has been credited (albeit, not everyone agrees to this) with coining the phrase L'Etat, c'est moi, or, I am the State. Things have changed since then and not many rulers are still around who can claim the same thing. But each of us probably has come across business owners who fully identify themselves with their companies.

The management board is probably not the first thing that comes to mind when thinking about a family business. A report (a full text of which is available here) by PwC, a consultancy, has been looking at the role, if any, the board might have in a family business. Admittedly, their research is covering the US market and one needs to consider some differences in the board structure and role. Nevertheless, many of the findings are applicable in countries with slightly different governance models as well.

The report talks about four models of family business company boards, in the order from a formal one to more sophisticated:

• Compliance board where the founder serves as the sole board member just to meet the legal requirement of having a board;
• Insider board which includes other family members and members of the senior management of the company;
• Inner circle board which includes other professionals who usually are personal friends of the founder, or have assisted and guided the company (accountants, lawyers etc.);
• Quasi-independent board which includes independent outside directors who have no employment or any other relationship with the company, except for their role of director.

What are the advantages from migrating towards a more sophisticated model of governance? The report lists quite a number of them, which are primarily achievable through the inner circle and quasi-independent boards. But there are still some benefits that can be reaped from setting up an insider board.

First and foremost, it is the separation of the company’s needs from the family needs. When you alone are in control of the company the line separating its assets (primarily, the cash) from your personal becomes somewhat blurred. Removing assets from the company, either temporarily or permanently, is a habit easy to acquire but difficult to ditch.

Another important role of a board relates to the succession planning. It is a safeguard against the unplanned vacuum that might be created by the disability of the founder. In many cases such unexpected developments might put the very survival of the company in danger. Also, the board can serve as a useful grooming forum for the family members expected to take over running the business from the original founder.

And, finally, a board may have a role in deciding on whether it is in the best interests of the shareholder from the wealth maximisation point of view that the company is to be passed over to the next generation. Sometimes this is not the best path, compared to other options, like selling, merging, going public or, as the case might be, winding the business down.

Indeed, having a board might have a monetary cost attached, requires some investment of time and effort, calls for disclosure of sometimes sensitive information and might require giving up at least some of the control the founder had enjoyed before. None of this is easy for the founder to accept. But the long term benefits are quite substantial.

Sincerely,

Aivars Jurcans
editor@mergers.lv