Most advisors recommend that a family business have and use a board of directors. In fact, the majority of closely-held corporations are formed with boards of directors, but those boards frequently consist of only a single individual. Moreover, there are very few actions that technically require board approval. So there is always a temptation in a closely-held business to avoid the hassle and complications of appointing a group of individuals to govern the business, calling meetings, taking input from those not intimately involved in the business, etc. Nevertheless, it is common wisdom that a functional board of directors, including some independent voices, can be a valuable asset to a company. A board can offer an objective and higher-level perspective. It can be a decision-making body without blind loyalty to a particular family member or family branch. And because the directors on the board are each subject to the fiduciary duties that go along with such role, there is a real comfort that they take the position seriously.
What frequently goes unsaid, however, is that a company should not just rush out and pull together a board of directors based on this advice. The composition of the board is key. The selection of individual directors should be a careful and thorough process. In selecting a director, the owners of a company should consider each potential director’s skill set and sophistication, his or her familiarity with the business or the industry, his or her independence and any inherent conflicts of interest he or she might have with what would otherwise be in the best interests of the company. The owners should also be aware that a director cannot be “handled.” A director is entitled to effectively all company information she requests and cannot be removed or excluded from board meetings. This makes sense because a director has to comply with his or her fiduciary duties. Therefore, the law is very clear that he or she should be entitled to all the relevant information necessary to make tough, strategic decisions for the company.
In some family-owned businesses, owners will sometimes try to place individuals from the family on the board of directors to make them feel included in the business, even when they have limited involvement otherwise. Be warned that this puts an individual in a place of significant power and influence in a company. It is unlikely that such a single director could unilaterally direct policy or force certain actions on the company, but he or she could upset a productive decision-making dynamic in the board room. The whole value of a functional board of directors is its ability to operate collectively. And it only takes one person in the room to dramatically change the dynamic.
Closely held companies should consider the advantages of a functional board of directors, but they should also be very careful about selecting the individuals to participate. It is a grant of substantial authority and trust, and it is not hard to imagine how a dysfunctional board of directors could be worse than none at all.
Drew Steen is a business transactions attorney at Davis Wright Tremaine LLP. He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings. He also serves as regular corporate counsel for several closely held and family-owned companies. Drew can be reached via email at firstname.lastname@example.org or directly at 206.757.8081.