The cost of good governance

If a family business is on an upward trajectory, there will come a time when appointing a formal board of directors is a natural next step. But it can be a conundrum for a family operation that is used to keeping everything in-house. It can also be a cost impost. But if handled well, the return on investment can far outweigh the price paid.

One family business that knows this only too well is Beaumont Tiles. Managing director Bob Beaumont explains the business decided to operate as a corporation with a board almost 20 years ago.

“We asked ourselves whether we were in business to employ family members or because family were shareholders. All family businesses need to pose this question; then you have a clear direction. We decided having a formal board and meetings was a good way to ensure accountability,” he explains.

The board is made up of Beaumont and his three brothers, as well as the business’s former CFO, who acts as the external director. The company is considering adding another extra external director to the board.

“It’s important to have an external director, preferably more than one because the board needs to hold the family accountable,” says Beaumont, who expects that the composition of the board will change as the business grows.

Seek external advice

When it comes to choosing the right external directors, he says many companies map out the experience they would like their external director to have, such as legal or accounting. “But actually, boards should be getting proper external advice because it’s not wise to rely on internal advice alone.”

Boards do not always have to be large, formal or expensive.

He says it can be more important to look for directors who have strong ethics, who are strong enough to hold the business accountable, but who also operate harmoniously on the board. “We pride ourselves on how we get on with each other. The biggest thing I look for is not particular skills, but wisdom.”

Beaumont says when it comes to the cost of using external directors and running a board in general, the biggest expense is paying directors’ fees. “What you pay is up to each company and the level of the director; external directors get more than family members.”

In terms of bang for buck, Beaumont says you should expect directors to work about three days a month, studying the accounts and the market place and being onsite.

Lloyd Russell GAICD, principal of TCB Solutions, which provides consulting services to family businesses, says the right structure for a family business is situation-dependent.

He uses a client case study as an example. The family is a fifth-generation manufacturing and service business in the infrastructure industry, operating in two states, with an annual turnover of $90 million. Six family members work in the business and have clear position descriptions and performance criteria. It has developed a family charter and has separate, formal processes for making business decisions and engaging with the family members.

The business recently formed a board to respond to emerging trends such as digital disruption and automation, to enable it to compete and expand nationally.

Russell says the costs in establishing the board included $5,000 for a consultant to prepare a critical assessment of the required skills, knowledge, background, cultural fit and purpose of the board and its composition. It paid $15,000 in solicitor, accounting and consultant fees to prepare preliminary due diligence documents, including confidentiality agreements, financials and a strategic summary. It then made three $5,000 director agreements.

As to the cost, Russell says a family business should expect to pay in the vicinity of $4,000 to $10,000 per month plus expenses for an external chair and between $2,500 and $7,500 per month plus expenses for a director.

“The fees paid to the independent directors in my client case study are $8,000 per month plus expenses for the chairman and $5,000 per month plus expenses for directors,” he explains.

Understand the figures

Holly Isdale, founder of financial management business Wealthhaven, says legal costs for the board depend on the scope and complexity of the board. But, unless something major is going on, these costs should be routine or minimal.

Starting with an advisory board provides an element of mentorship and an ability to seek the opinions of independent and trusted advisers.

“Board fees depend on activity. You are asking directors to spend time and attention on your business and you should pay them at an appropriate rate for services. For some families it’s $25,000 a year [for each director], for others it’s $50,000 to $150,000-plus a year. If the board meets four times a year, consideration would include the time required, and possibly time outside of meetings to prepare, and any committee work.

“So, if a day is $5,000 – say $500 an hour for 10-hour days – then four days of meetings and one day to cover other calls and attention required in the interim might get you to the $25,000 range,” she says.

In return, the company would expect directors to be focused and prepared for the meetings. Although, Isdale says it is incumbent on the family business to properly prepare clear agendas and briefing materials and distribute them a week or more in advance in time for review. “Likewise, the board should be involved in identifying issues for meetings and able to share their expertise as needed.”

Expanding networks

In terms of the benefits of family and private companies forming boards, Isdale says it delivers bigger networks and access to expertise that is not core to business. This might include insight into the skills needed to successfully market to a different consumer group, experience to make acquisitions, mentoring and leadership coaching for the rising generation of family business leaders.

Andrea Michaels MAICD, managing director of NDA Law, agrees a family board delivers substantial business advantages to private entities.

“Boards do not always have to be large, formal or expensive. A common concern with small private companies, particularly family businesses, is that a board will be an impediment to decision-making and control, and will be financially non-viable. But boards come in many shapes and sizes and many businesses can start with a casual board or an advisory board, even where remuneration is not always offered,” says Michaels.

“Board members bring with them different skills and different perspectives. Those who are not closely involved with the day-to-day operations of the business have the ability to assist with bigger picture issues such as strategy and direction. Starting with an advisory board provides an element of mentorship and an ability to seek the opinions of independent and trusted advisers,” she adds.

It can also be a step towards making business owners feel comfortable that they won’t lose control of their business by appointing a board.

Says Michaels: “Boards are not designed to review each and every decision of the business owner. They are there for strategic and independent thinking, covering skills that the business owner themselves may not have a strength in.

“The key is finding the right type of board and the right people to be included. Board members are expected to deliver free-thinking and sound advice. They are not expected to slow down the decision-making process or take over control of the business. But they are also not expected to be the solution for each and every issue the business encounters. Rather, they provide assistance in high-level decision making,” she adds.

Businesses that are considering appointing a board should take their time to find the right people at the right price, start small and then develop the board as the business grows. It’s likely that the calibre of director the business is able to attract will rise with its fortunes.