Let’s first get clear about the difference between advisory and fiduciary (aka, statutory) boards.  Advisory boards work for the CEO and fiduciary boards work for the owners.  When majority ownership is concentrated into the hands of one person, a fiduciary board is, in effect, an advisory board, since the owner can vote at any time to disband the board.  Fiduciary boards represent the interests of all owners and are especially valuable when some of the owners don’t understand the business, as is often the case in family-owned businesses.

Advisory Boards.  It is useful to differentiate early-stage and late-stage advisory boards.  Many owner-operators will start their first boards as occasional dinners, bringing together the accountant, lawyer, banker, and a couple of trusted business friends.  The after-dinner discussion is a safe place for candid discussions and can be extremely valuable.  Over time, these dinners become regularly scheduled, follow a structured agenda, and may involve presentations or reports.

Late-stage advisory boards are commonly started to help with forming a strategic plan, making M&A decisions, or to address other strategic issues.   These can evolve into having the “look and feel” of a fiduciary board, but still operate as an advice-giving group in support of the President or CEO.

As the business grows in scale and complexity, owner-operators often create late-stage advisory boards as an ongoing resource to provide input on complex decisions and to make introductions to potential partners, candidate executive hires, or other specialized resources.  Also, a formal board of accomplished business leaders adds greatly to the gravitas of the business, as perceived by current and prospective suppliers, customers, partners and sources of capital.

Fiduciary Boards. Incorporation requires that the company have a board of directors.  For start-ups and early-stage companies, these boards are typically paperwork exercises to meet state regulations.  They provide little value to the business and are relatively inexpensive to create and operate.

(NOTE:  Information up to this point is applicable to all businesses owned and operated by a single person, regardless of whether family members work in the business.)

Fiduciary boards often start meeting as “family boards.” They are a means for the owner-operator to brief the spouse and children on business performance and upcoming plans.  With 100% of the ownership present at board meetings, most of the fiduciary obligation is satisfied by the owners’ presence.  As the children take management roles in the business, and the business grows in scale and complexity, outside directors are often added.  However, ownership issues and family dynamics are also likely to interfere with the board’s responsibility to oversee the business.  Thus, for a fiduciary board to operate at full potential, the family needs to form a family council.

Family Councils. As the founder’s control recedes, sibling rivalries emerge, and third-generation owners increase in numbers, family members need to learn how to work together as an effective ownership group outside of board meetings.  When the owners’ power is fully vested in a family council, family members more freely leave the board room and the board can better focus on business oversight.  The family council sets the business’ long-term direction, empowers the board with a charter of its responsibilities, elects the directors, and sets policy to balance the needs of the family and its business.The family council keeps the family engaged as owners, mitigates the risks over excessive control by a dominant individual, and is the deciding factor on whether the business thrives and the family retains ownership.

About the authors:

Jack Moore is a 4th-generation family member and former board director of Benjamin Moore & Company, a major paint manufacturer, sold to Warren Buffet in 2001. He now specializes in family business governance and serves as a manager and trustee in his family’s investment company.

Terry Phinney, principal in Blackstone Management, has advised family businesses on strategic operational issues for 25 years.  From 1995 to 2002, he advised Benjamin Moore & Co. in a highly successful renewal project that more than doubled the company’s bottom line.

“This post is part of a series of posts that the upcoming speakers of the 2013 XPX (Exit Planning Exchange) Summit are contributing. The theme of this year’s summit is The Art and Science of Collaborative Innovation.  The event will be widely attended by business owners and trusted advisors to privately-held companies which are preparing for a successful exit.

Originally posted by Terry Phinney on April 2, 2013 at 11:47am