Entrepreneurs and owners of family businesses traditionally resist bringing in outside directors because they do not want anyone telling them what to do or because they do not want to reveal company secrets. The owners of private companies, as stockholders, elect and fire directors. For that reason, they should not feel threatened by outside directors.
Boards are advisory in nature and do not challenge the owner’s authority. A board’s primary responsibilities are fiduciary, to protect the interests of the stockholders and to help ensure the success of the company itself.
Role of the BoardThe role of the active board is to assist in:
- setting the course of policy formation,
- developing long-range objectives, and
- monitoring the strategic plan as it is carried out.
In the privately held company, a key role of the board is to assist in establishing objectives and policies, to help the chairperson (president) to become more effective, to render advice and counsel as requested, and to assist in the strategic decision-making process.
It is important to note that directors do not immerse themselves in the day-to-day affairs of the business. To be purposefully repetitious, it is important to keep in mind that boards do not manage. It is also important to remember that no individual director or committee of the board has any power or authority. The authority lies with the full board.
A good board enhances a company’s credibility with customers and suppliers. A good board has salvaged many a family company by acting as arbitrator in conflicts among family members or in dealing with competing or hostile interests. In the event of an owner’s death, a board of directors can see that the owner’s wishes for the preservation of the family business are carried out with minimal turmoil. In the private company, the board’s biggest asset is advice based on access to special expertise that may be lacking in-house.
Legal Framework In the corporate legal framework, the board has the ultimate responsibility for directing the management of the corporation. The board discharges this responsibility by holding management accountable. In operational terms, the board reviews and approves or rejects the recommendations of management on major decisions for which the board has responsibility and power for action. The legally constituted board can be involved in:
- amending bylaws
- approving dividends
- monitoring pension plans
- questions involving annual plans
- long-term loans
- executive compensation
- sale of assets
- employee stock option plans
- new financing
- capital expenditures
- strategic plans
- corporate policies
- acquisitions or mergers.
Finally, the private company today that overlooks the many benefits to be had by using independent outside directors may be placing itself at a competitive disadvantage.This article has been partly extracted and modified from Nash, J.M. (1996). Board of Privately Held Companies: Their Responsibilities and Structure. The Best of Family Business Review: A Celebration. Brookline, MA: The Family Firm Institute.