Aspen current thinking column


Spring 2013

September Current Thinking Column

Sunday, September 27, 2015

Steps to Setting up a Fiduciary Board

 by Leslie Dashew

Once again, I have seen the tremendous opportunities and benefits that accrue to a family business when a truly professional fiduciary board is put into place:  access to intellectual capital;  wisdom and objectivity; networks of business contacts;  and institutionalized leadership.   I have found repeatedly that through the implementation of a fiduciary board, we can access incredible talent that surprises most family leaders.  

An example: 

“Legacy Family Business” is a 70-year-old company that has been led by two second-generation brothers  in their late 70s. The non-family CEO is in his mid-60s and has been recently thinking of retirement. In one branch of the family business, two third-generation family members work, but neither are an appropriate candidate for succession. Moreover, the family has remained largely uninvolved in the business, always perceiving it as "dad's business." 

Their advisors had been encouraging the family leaders to complete succession planning, which included all three roles and estate planning.  The fiduciary board was one of the recommendations I made when I began working with the family. This was to ensure that the leadership talent would be in place during the time in which the three leaders were transitioning and the family was becoming educated about stewardship.  As the process began, the three leaders scratched their heads and wondered how they would attract anyone to serve on the board. 

The leaders were astounded by the results we had!  The brothers, who were the majority owners of the business, decided to have a majority of five independent directors and three family members along with the CEO.  From among a large pool of candidates who responded to our outreach, we selected:

  • a very bright CPA with amazing experience in mergers and acquisitions and oversight of public and private companies;
  • a wise elder in the industry who had vast experience using the company’s products;
  • an extraordinary marketing and strategic background who had worked in the industry and in other industries;
  • and a business leader who had formed a board for his own third-generation family business, served on several other family business boards and had become very knowledgeable about governance. 

One member of the former advisory board was selected to continue on the fiduciary board because of his extensive experience in banking, business and financial matters. They all shared the values of the family and were excited to serve the family and with each other.

Oftentimes, I have found that families and their business leaders are intimidated by what seems to be insurmountable obstacles to organizing and operating a board with independent directors.  The cost is well worth the outcomes.  As with finding other talent, it is important to be clear about your goals for these resources, the roles they will play and to effectively communicate the compelling reasons they would want to be part of your team.

Here is the process.

1.Clarify the purpose and goals for having a board.

For example:  Legacy Family Business is seeking to establish a Fiduciary Board of Directors to provide oversight and guidance to a  growing company during the transition from one generation of leaders to the next.  The family members who own this business are committed to see it led and governed by the most qualified business people available. This commitment is driving the family’s goal of developing a Board of Directors with a majority of independent outsiders who will bring a variety of talents, experience and perspective to help assure that the business continues to thrive in its third and fourth generation of ownership. The family shareholders will look to the board for guidance, education and objective perspectives. 

In some family businesses, one of the objectives of the board is to provide mentorship to up and coming younger generation leaders.  This can be specified in the board statement of purpose as well.  Board members often bring a wealth of experience in helping young people in their business lives (and personal lives) with objective perspective on what is needed to be effective leaders. 

2. Create a board matrix that identifies the competencies and perspectives desired for the board. Click here for an example.

3. Discuss the investment needed (fees, insurance, time)

Typical board fees are at a rate of $1-8,000/meeting (a formula often used is to divide the compensation of the CEO by 200 for the meeting fee for each director) plus travel expenses. It is important to look at what other closely-held businesses in the area are paying board members as well. D&O insurance may need to be increased depending on the nature of the business and the requirements of board members.  Much time is required to set up the board, go through these steps, and prepare for each meeting. 

4. Clarify indemnification and assure sufficient Directors & Officers insurance

The bylaws and/or articles of incorporation often specify how the company indemnifies its officers and directors.  This refers to willingness of the company to “hold harmless” those guiding the business if they act in the best interest of the company, and to cover the costs of defending themselves should the company, its officers and/or directors be sued.   Board members who are experienced will have specific expectations about the language of indemnification and the amount of D&O insurance required to protect them in the event of litigation.

5. Create a board prospectus that gives background about the board, the company and the owners, while specifying expectations of board members.

The prospectus typically includes the following topics:

Purpose of the board Background/history of the company

Current business (products, services, volume, customers)   

Ownership and leadership

Structure of board (independents, insiders, committees, responsibilities)

Specific goals and plans for the board (challenges or transitions to address, frequency of meetings)

Board member qualifications (competencies, experience or perspectives sought)

Compensation and D&O/indemnification provisions

Process of recruitment and selection (timeframe, where to send letter of interest and resume)

6. Develop a board manual that guides the operations of the board and committees, while providing ongoing information needed by directors

Company background

Company basic data                                                                                    

Company philosophy                                                                      

Purpose of board of directors                                                                   

    role of the board

    role of owners

Guidelines for board member                                                                   

      Operations of the board

      Board meeting location and scheduling                                                  

      Board member compensation, expense reports

      Appendices, e.g.

          Contact information


          Shareholder agreement                                 

          Financials of last three years and some data             

          Types and amounts of insurance                       

          Types of compliance/agencies/frequencies  

           Conflict of interest form                                              

          Organization chart                                                  


7. Board Recruitment:  send out a letter with prospectus to everyone you know, advisors, industry associations, etc. about the board you are forming.  Create a time frame for review/interviews and selection

8. Board Selection:  use the matrix to evaluate candidates and compare them; interview the finalists; select those whom you feel have the competencies, values and chemistry to work with owners, families and each other

9. Orientation of new Board Members: develop a program of orientation to the business and the family

10. Setting the Schedule and Agenda:  set the schedule for a year of meetings and the areas you want to be covered in the first year

The process, if done systematically, will take time and attention, but will yield a highly functioning organization from the beginning.  Some of the benefits we saw right away with the client above:

A higher level sense of accountability than had existed in the officers before, and attention to detail and communication that had been missing; Education of all stakeholders about what is possible in the world outside of this industry and this business for best business practices; Opportunities to connect with publications that would create new marketing opportunities that had not existed; Beginning of a process of strategic analysis and planning that helped all leaders to begin to develop realistic and sound plans to continue growth and sustainability in an expected downturn in industry; Confidence within shareholders that there was a talented team of business people who would help them make the best decisions about the business now and in the future.

Aspen Family Business Partner, Joe Paul comments:  One of the valuable traits that a director can bring to the table is experience in their own or another family business.  That might extend into the willingness to address family issues that are complicating the governance process. It might be called the “Dutch Uncle” role where in this, the director would have the emotional license to speak to the issues of disruptive family dynamics, and  be willing to take a family member to "the wood shed" when necessary.

It would also be helpful to shine a light on the leaders’ personal sources of resistance to more rigorous governance such as:
Fear of becoming obsolete.
Fear of unintended consequences in the family relationships
Fear of not having stamina required
Fear of failure
Fear of loss of control
Fear of discovery of "skeletons in the closet"

I find that folks often cover up fear with another emotion, like anger, since the latter is a safer emotion to be in.  Helping them become more conscious of their camouflaged emotions helps, such as helping them identify certain emotions by the physical sensation they create like a tremble in their chest, or gritting their teeth.

A couple of quotes occur to me concerning fear: "A problem identified is a problem half solved." --Charles F. Kettering 

And regarding governance is: "It is not a question of whether you are governed or not:  It is a question of what are you governed by."--Joe Paul


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