Family businesses are the foundation of the Canadian economy, with families owning or controlling 80% of all companies. Yet research suggests that only a third of family-run businesses last into the second generation, and a meagre 12% survive into the third generation or beyond. Family businesses have unique advantages which come in part from a dedicated focus on the long-term, but they are also prone to crippling problems such as succession planning and family conflicts, and as with other companies, disputes over business goals and profits, and poor strategic planning, can often take a fatal toll.
Thus, it is arguably critical for family enterprises to engage in both succession and strategic planning. But are family businesses more likely to engage in strategic or succession planning if they have a dedicated structure in place such as an advisory or fiduciary board to deal with these processes? A study in the Family Business Review takes up this question by conducting a survey with the CEOs and top managers of 133 family businesses in Wisconsin and Illinois.
The results of the survey suggest that companies that had an advisory board were far more likely than companies that did not have a board, to engage in strategic and succession planning, i.e. they were more likely to have identified a successor, and to either conduct strategic reviews on a regular basis, have a formal process around creating a strategic plan, or have a written strategic plan in place. However, as the researcher points out, it is unclear whether this finding is a result of family business owners consulting experts when they feel their companies need to plan or whether business owners engage in more planning as a result of creating an advisory board.
Surprisingly, the same results were not observed for companies with a formal board of directors even after controlling for the size of the company and tenure of the CEO.
Though there are limitations to the study, the author suggests that the key finding that companies with advisory boards are more likely to engage in planning may be less surprising if we consider the two primary roles of the board, namely, governance oversight and resource provision.
A formal board of directors has a legal standing and voting rights as it formally represents the company’s shareholders. It plays an important governance role by providing oversight on behalf of shareholders and ensuring management acts in the interests of the firm’s owner, controlling for the so-called agency problem. However, this role may be less relevant in family firms, where the conflict between managers and dispersed shareholders does not apply.
On the other hand, an advisory board is a less formalized group, which usually consists of managers, owners and trusted advisors, appointed by the CEO or owner to provide independent advice and business insights. For owners hesitant to relinquish control, advisory boards often entail less paperwork and have the advantage that decisions made by them are non-binding. Moreover, an advisory board can still perform the second primary role of the board – resource provision. In other words, the board can provide important resources in terms of the expertise, skills, contacts and experiences that board members bring to the decision-making table.
Key Takeaways:
- Family businesses with advisory boards may be more likely to engage in strategic and succession planning, i.e. they are more likely to review their strategic plans on a regular basis, have formal processes around creating a strategic plan, or have a written strategic plan in place
- An advisory board could provide an important resource for family businesses, enabling firm owners to gain an outside perspective and business insights from leaders they hold in high regard
Conclusion
Further research could benefit from investigating the unique value that advisory boards offer to family businesses in their decision-making processes. A forthcoming paper by the Johnston Centre and KPMG LLP, will consider the creative approaches private companies have adopted in meeting their governance challenges, the relative merits of advisory and fiduciary boards, and the critical importance of injecting an outside perspective into the decision-making process.