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October 2007 — Vol. 85, No. 8
COVER STORY
Family business
Advisory boards fill in the gaps
with expertise, counsel
By Debra Susca
Freelance writer in Portland, Conn.
Related article:
A business advisory council or a decision-making board of directors that includes nonfamily members can play critical roles in helping a company face challenges, weather transitions and grow. For many family owned and run businesses, however, having people other than family weigh in on business matters may be uncomfortable or even unthinkable.But those who have taken the leap encourage others to follow, citing the many benefits of a board or advisory council. Advisors can help the business maneuver through potentially sticky and complicated family issues during times of ownership transition, allow the business owner to brainstorm with peers, and push family members to become more accountable and professional in their approach to the business.
Which is right for your business: a governing board of directors that makes decisions for the company, or a council of advisors that provides informal advice to the business?
According to Richard Narva, partner in Roseview Group, a Boston-based family business consulting firm, it depends on your comfort level, your company’s size and how much you want the business to grow.
Whichever type of group you choose, it should comprise individuals with unique outlooks and expertise who have specifically been selected by you to offer guidance in business areas with which you have little familiarity or that you would like to improve.
Narva recommends you start with a council of advisors if your company is:
- A larger, family-controlled enterprise — for instance, one with multiple locations or high-tech components — that must hire others from outside the family to help run the business and make decisions, or
- A small, owner-managed family firm in which a few family members currently make all the decisions and that is growing and transitioning to a larger enterprise.
These are cases that call for a more sophisticated model of governance than family members alone can provide, says Narva. “Since most owner-managed firms are run by entrepreneurs — and these are people for whom oxygen is nice, but control is what sustains life — they’ll be most comfortable with an advisory council. It looks and smells like a board of directors. But they only advise; they don’t decide.”
After three to five years of working with an advisory council, says Narva, some entrepreneurs develop enough comfort and appreciation for this governance model that they transform their advisory council into a fiduciary board of directors. He admits, though, that that is rare among family-owned businesses.
Board eases ownership transition
However, that’s exactly what happened at Santa Energy, a Bridgeport-based residential and commercial heating oil company. In the early 1990s, the growing company formed a council of advisors to help it deal with various issues, including preparing for the retirement of three of the four owner brothers. Within two years they converted the advisory council to a board of directors that had full fiduciary responsibilities and the authority to make business decisions. It was instrumental in ensuring a smooth transition of ownership.
“If we hadn’t established the board of directors, we probably would have sold out 15 years ago,” says Thomas Santa, current CEO of the 67-year-old firm. “We wouldn’t have agreed how to transition the business nor been able to agree on major decisions. The board brought an objective measurement to the process and helped with some of the business planning, ownership planning and goal setting needed for the transition.”
The board helped again in 2003 when Tom Santa purchased the company from his uncle and became president, and again in 2005 when he became CEO and two of his cousins and a business partner bought into the firm. “It helped us to balance the success of the business with the health of the family,” says Santa. “What I’ve seen in the oil business is that when you bring in the next generation and have to talk about succession and whose children will do what, it adds a dimension beyond business decisions. We found then, as now, that a board of directors brings clarity and keeps everyone focused on the guiding objective, which is the success of the business.”
Advisors increase firm’s accountability, credibility
Acme Wire Products Co. Inc. in Mystic, on the other hand, in 1999 chose to set up a council of advisors. “We’re a privately held company, but we felt that we needed people to advise us on different goals and ideas,” says Mary Fitzgerald, president. She and her two younger brothers purchased the 37-year-old manufacturing company from their father in 2001. “One of the goals we set for the council when we put it in place was to help with the transition in leadership and ownership.”
The council, which continues to operate, also forces them to be more professional and accountable, says Fitzgerald, since she and her team must thoughtfully prepare for meetings with their advisors. “In a privately held business, you’re really not answerable to anyone,” she says. “However, our council meetings are like mid-term exams for us. There’s a lot of preparation that goes into it, and you know that if something is out of whack, you’re going to have to explain why.”
Fitzgerald meets with her advisors for half a day three times a year.
Dirk Dreux, a former banker and the founder of Dreux Consulting LLC, a family business consulting firm located in Greenwich, points out another benefit of setting up an advisory council or board of directors: Companies that do this have more credibility with financial institutions. “It gives an investment banker a lot of confidence and tells him or her that this company is smart: They know how to get information, how to get help, how to assimilate facts and how to get things done,” says Dreux, who has sat on several boards of directors and advisory councils. “An advisory council is indicative of a company that is adaptive and wants to create a learning environment.”
Getting the right mix
Before you begin inviting individuals to serve as your advisors, you need to do a bit of homework. “You can’t just rush out and get any three golf buddies,” says Dreux. “You want to get a complement of skills and experience so that you have a group of robust minds ready to have discussions and help you with the business.”
How many minds? For the best results, an advisory council should have at least three but no more than eight or nine members — five advisors plus four owner/managers, says Dreux. “Anything above that is too big. Discussion becomes difficult and ineffective.” The group, he stresses, must consist of people who can work together.
According to Narva, who has published an article, “How to Create Effective Governance in a Family Controlled Enterprise,” boards of directors are typically made up of family members, key management of the business and advisors to the company who are paid for their work. Advisory councils, he says, comprise people whose sole purpose is to enhance the business’s success. Its makeup should reflect the mix of skills and experience the company needs. Members need not be from the family firm’s industry. Most important, however, they must be willing to provide objective perceptions and expertise to guide the business.
Determining the “who”
Priscilla Cale, director of the University of Connecticut Family Business Program, says the first step in finding advisors or directors is to do a thorough assessment of your, your people’s and your company’s strengths and weaknesses. Take a look at your company’s structure, finances, mission, vision and culture; then determine the opportunities and threats to your business.
“The assessment will help you uncover gaps and enable you to select advisors who can provide the missing experience,” says Cale.
Next, select potential members. Do that, says Cale, by visiting industry associations and peer groups, asking other business owners who have councils where they found their advisers, networking, and even checking with the National Association of Corporate Directors to see if its registry includes someone who would like to serve on either a board of directors or an advisory council. (You must be a member of the association to access the registry.)
“Look for people to serve as advisors who are successful in areas you’d like to improve,” Cale says. “Also, look for people in companies that have already dealt successfully with issues you’re currently facing, and those who are where you hope your company will be in five or 10 years.”
Acme Wire’s advisory council, for instance, consists of Fitzgerald, her brothers, her father and four outside advisors, all of whom work for manufacturing companies, three of them in family businesses that are all larger than Acme Wire. One has gone through a generational transition and is in its third generation of owners. Another family business has a multitude of cousins, uncles and brothers involved in the business. Another is a nonfamily executive in a family business, and the last advisor is a high-level manufacturing executive in another industry.
“They each have a certain technical or business aptitude that was applicable to the issues at Acme Wire,” says Fitzgerald, who pays her advisors based on a formula she worked out with them to compensate them for their time.
Though her family dragged its feet a bit before taking the plunge in setting up an advisory council, they’ve been very pleased with the results. She strongly encourages other businesses to do the same.
“The hardest thing is to get started,” she says, chuckling that people often worry about what they’ll do if the person they pick doesn’t work out. “You’re not marrying them,” she says. “You can change.”
Dreux recommends that advisory councils meet three to four times a year to be effective. He also stresses that council members be required to sign confidentiality, noncompetition and non-solicitation agreements. Some companies require one-year term limits, or in the case of Acme Wire, review the makeup of the council each year and rotate members on and off as needed.
“I highly recommend an advisory council for family businesses,” says Dreux. “An advisory council offers so much, including providing a safe-harbor environment in which to learn new skills.”
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