Family Firms

FAMILY FIRMS - Board Composition and Non-Family Board Members

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Board composition is an important determinant of ensuring successful discussion and effective decision-making in the board of directors. It is a widely discussed topic and the suggestions are plentiful in corporate governance codes and literature on how to form the ideal board. In family firms the question of board composition naturally brings up the matter of whether or not to include non-family board members on the board and what added value these non-family board members can bring to the company.

PREFACE

The aim of this paper is to provide a better understanding of the board composition of Finnish family firms. It is also discussed for when the time is right to recruit non-family board members and how non-family board members can add value to the board’s work in family-owned companies.

This paper is based on the survey carried out in autumn 2015 and made by Mercuri Urval, the Finnish Family Firms Association (FFFA) and Directors’ Institute of Finland (DIF). Almost 50 family business owners and chairmen/women of board of the FFFA’s member firms answered the survey.

To get viewpoints of non-family board members, Isabella Wrede and Erik Wikström interviewed four board members who all have vast experience of working with family firms and as non-family board members. I am grateful that they shared their wisdom. Isabella and Erik also wrote this paper and collected data on the composition of the boards of the 444 family firms, which are members of FFFA. I will thank you them for their contributions.

I hope you as a family firm owner will find this paper useful, when you are recruiting non-family board members and working with them.

May 2016

Krista Elo-Pärssinen Managing Director, PL Family Business Services

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Contributors ISABELLA WREDE

-- Fourth generation owner of MetroAuto Group.

-- Board Member since 2010.

-- Graduating, at the end of 2016, in the Corporate Governance Master Programme of Hanken.

-- Currently studying law at Helsinki University.

ERIK WIKSTRÖM

- Fourth generation owner of Sarlin Group.

-- Ms. C. HANKEN Economics major.

-- Currently working with business startups as an advisor and researcher.

Non-family board member interviewees HEIKKI ALA-ILKKA

-- Fifteen years as CFO of the family business Onninen Oy. -- Fourteen years as Board member, out of which 12.5 years as Chairman, at listed family business Martela. Currently Chairman of the Board of the family business Masino Group.

-- Several Board memberships over the years.

TOM PALMBERG

-- Founding member of the Directors’ Institute of Finland.

-- Active board professional since the 1980’s.

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JUHANI MÄKINEN

-- Senior Partner at Hannes Snellman Attorneys Ltd. for the past.

-- Twenty-five years Full-time board professional.

-- Board member of Lemminkäinen and Karl Fazer as well as six other corporate boards.

PEKKA SUOMINEN

-- Family business owner and board member of Raute.

-- Board member of Hakaniemen Metalli as well as those of several small family businesses.

SISÄLTÖ 1. BOARD COMPOSITION

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2. BENEFITS OF HAVING NON-FAMILY BOARD MEMBERS

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2.1. Increasing the interaction within the board’s membership

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2.2 Improving the decision-making process

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2.3 Bringing new knowledge and competence to the board

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2.4. The driving force of succession planning

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2.5. Networks as a valuable asset

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3. RECRUITING NON-FAMILY BOARD MEMBERS

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4. CONCULSIONS

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There is no universal rule either for what the ideal board size should be in family firms. On average, Finnish family firms have four board members (including the Chairman of the Board but not including substitute members).

With a large board there is the risk of the group’s decision making becoming ineffective as varied viewpoints and/or personalities may disrupt its effectiveness.

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Board Composition

On the other hand, a small board may overlook valuable economic opportunities due to the size limitation of imaginative input that additional members could overcome.

Board size

6 5 4 3 2 1 0

Small

Medium

Large

Men

Women

The data shows that 9,5% of the companies have but one member of the board and one substitute member, which are the minimum requirements legally for a board in Finland. These boards are not required to appoint a Chairman.

It should be noted that non-family board members are an essential part of a fully functioning board as they, being outside of the family, can offer an “outsider’s” view to the owners and the company as a whole.

It should be further noted that including non-family members in the board of directors is something the Finnish Corporate governance code for listed companies recommends.

Non-family members in the Board 120 %

100 %

80 % 60 %

40 %

20 %

0%

Small

Medium

Large

No

Yes

In spite of that recommendation, the data collected regarding member firms of the FFFA conclude that only 55 % of the 444 family firms have a non-family member or members on their board of directors.

In 33 % of family firms there are two or more non-family board members. It is the working hypothesis that if a board consists of more than one non-family member, they provide mutual support, and the resulting dynamic may be better for the board as a whole.

A board should strive for including at least two non-family board members in their board of directors.

Juhani Mäkinen

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Continuing: 27% of board members are women. The number is higher when compared to the number of women in listed companies, which is at 24% according to research conducted by The Finnish Chambers of Commerce.

Yet another risk of CEO duality is that the person wearing both hats may not feel the need to explain or justify his of her actions to anyone, which, in turn, can lead to faulty decision-making through the lack of perspective of the person making the decisions.

Men and Women in the Board Men and Women in the Board 100 % 100% 90 % 90% 80 % 80% 70 % 70% 60 % 60% 50 % 50%

The greatest threat fostered by this situation is when companies find themselves growing and yet fail to adjust the board membership and dynamics to the reality.

Pekka Suominen

40 % 40% 30 % 30% 20 % 20% 10 % 10% 0% 0 %

Small Small

Medium Medium

Large

Men

Women

13,5% of family businesses have a woman as CEO and 14% as chairman of the board. According to The Finnish Chambers of Commerce, 5% of the women act as chairperson of the board in listed companies.

The consensus of opinion on this matter was that a person from the family can be CEO and Chairman of the Board, as long as he/she can identify situations to act as CEO and in others to act as Chairman.

It therefor stands that the CEO/chairperson must be capable of performing the necessary self assessment and/or external assessment regarding his or her roles within the company.

It may be argued that family companies naturally have more women on the board which depends upon the gender diversity in the ruling generation of the family business.

CEO duality means Family Member CEO or Chairman that the same person 100 % operates as CEO and 90 % 80 % Chairman of the Board.

70 % 6 0 % Family businesses are 50 % complex entities in 40 % 30 % which the roles within 20 % 10 % the family, management 0 % and ownership are often CEO chairman CEO Chairman CEO chairman Small Medium Large confused. Thus, it is important to insure that No Yes the company’s operational management and board members have clearly defined roles and responsibilities.

One of the most important benefits of having two different individuals holding the positions of CEO and Chairman of the Board are the interaction and mentoring opportunities which, of course, cannot be done if the same person holds both positions.

Heikki Ala-Ilkka

 

57,7 % of family firms have individuals from the owning family in the position of CEO and Chairman of the Board. This is expected as family businesses tend to choose people from the family to hold these positions in order to ensure that family values and principles are carried on into the future of the CEO Duality company.

120 % In 19,4 % of the family firms depicts CEO duality, which may foster a situation wherein the roles of the person can be misperceived.

100 % 80 % 60 % 40 % 20 % 0 %

Small

Medium

Large

Another risk of CEO No duality may well be that the potential added value a board can bring to the firm is not made use of properly.

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Yes

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2.1. INCREASING THE INTERACTION WITHIN THE BOARD’S MEMBERSHIP As the governance of firms has become increasingly more time-consuming and demanding, the board’s work needs to be, in many cases, restructured, providing a more effective process.

There should be a set of clear ground rules within a mutually agreed upon framework for the board’s work.

It is also important that each member has a clearly defined set of roles and knows exactly what is expected of them.

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Benefits of having non-family board members

It is also important to have a prudent allocation of time during board meetings. Such time should be concentrated on thinking about, and planning for, the future development of the company, rather than spending excessive time looking in the rear-view mirror and/or discussing family matters.

I myself have taken on the role of organizer of the board’s work by structuring it more effectively and clearly.

Heikki Ala-Ilkka Through my experience as a board member in one of the larger listed companies, I have had success in promoting proven interactive practices to the new board, thereby adding such structural benefits to the board’s way of working.

Pekka Suominen

2.2 IMPROVING THE DECISION-MAKING PROCESS There is always the danger that a board’s work will begin to resemble the practices of management in small family firms. A non-family board member can offer a solution to this particular problem.

Non-family board members may be able to facilitate an entire restructuring of the decision-making process enabling the board to make clear decisions and thus ensure that such decisions are properly implemented with the necessary followed up.

Tom Palmberg

2.3 BRINGING NEW KNOWLEDGE AND COMPETENCE TO THE BOARD Knowledge and competence are the most important resources that boards have at their disposal. Non-family board members often have a different and untraditional set of solutions to the issues at hand and therefor bring a new “idea mix” as well as the crucial insights that past experiences develop.

Non-family members obviously can, therefor, be of great value to a family firm.

Conversely, strong family traditions can lead to stagnation through the lack of forward thinking.

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Thus bringing new ideas and perspectives to the board room is of particular importance in the type of family companies where there are strong inhibiting traditions present.

Tom Palmberg When one has emotional distance from the company, one can often provide innovative viewpoints to share.

Pekka Suominen

2.4. THE DRIVING FORCE OF SUCCESSION PLANNING One of the most difficult issues for family firms is succession planning. It could therefor be part of the non-family board member’s task to assist in the succession planning and in the transition. This is an issue many family firms usually initiate too late in time and it then often times becomes an emotionally difficult matter.

Non-family board members are able to bring a neutrality to this succession planning-process and can often be a driving force in beginning the succession process at a more optimal time.

Juhani Mäkinen

2.5. NETWORKS AS A VALUABLE ASSET The non-family board member may be able to provide the company with a new “network” which could, in turn, foster the development of new business opportunities and thereby allowing the company to evolve in a positive direction.

The value of the non-family board member addition: The owner’s perspective

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Before initiating the recruitment process of a non-family board member, it is essential that the board has an accurate overview of the needs of the firm and the board. As well as a proper understanding of the owners’ vision.

Most family firms recruit non-family board members in order to gain new knowledge or perspectives regarding specific issues (acquisitions, succession, and and the like) which the company is going to be confronting in the future.

Some companies are seeking a new strategic approach as well.

3.

Recruiting non-family board members

The board may have such questions as: Is the company venturing into new international markets?; Is there enough financial knowledge within the board?; Is there someone on the board who has a adequate understanding of customer needs, service, and marketing?

I was elected to a board at a time when the family firm was going through such strategic changes and expanding their business abroad. My experience of the internationalization process proved to be invaluable.

Tom Palmberg Members ought to bring diverse skills and competence to the table so that the knowledge inside the board is maximized.

Pekka Suominen This particular board needed balance in order to enhance communication. It needed an outside voice as a challenge to the wishes of family members in order to start fruitful discussions.

At times non-family board members are often included within the structure much too late. It may be more usefully proper for a company, in its early stages, to think through corporate governance and the role that the board plays within the firm. In this way the board can evolve along with the firm.

An established company without an effective board may loose valuable opportunities. Such a company, being late in setting up a fully functioning board, will face difficulties as there are no “corner stones” for the building of an economically effective board.

Once the company and the board have established an accurate overview of its needs, the recruitment process can be initiated.

It is important to first proceed by going through the so called “hard facts” (background, experience, skill sets and personality) of the possible board members. These, of course, have to match the company’s and the board’s needs.

Effective communication is the most important thing when recruiting non-family board members. It is essential to familiarize the chosen board member with the firm and its working methods.

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Boards of directors must consists of people who are willing to cooperate and work well within the group while also being willing and able to constructively challenge other people’s viewpoints and opinions. In that way the new member contributes and adds value to the board’s work.

Again, a sound foundation for successful board work is clear communication, and therefore it is vital that the chemistry is right between the board members.

Heikki Ala-Ilkka

Evaluating and reviewing the boards and CEOs are vital parts in today’s analysis in order to ensure the stable continuity of family businesses and such analysis should be done on a yearly basis in order to be effective.

Through this evaluation and review owners can be confidant that the right individuals are leading their family firm.

Is there a “dream-team” composition for the board of directors? Of course not.

Every board should be formed according to the company’s individual needs.

Family firms must be encouraged to see beyond the simplicity of age when choosing board members and look at each individual as a whole and how this person’s competence, experience, skill set, and attitude could benefit the company.

In family firms, there is always the risk that ownership takes trumps competence.

There should be the proper balance of experience and innovative thinking on each and every board.

Tom Palmberg When being asked what specific types of knowledge and what specific skills our interviewees feel important in the board room, Palmberg specifies that in today’s society, it is becoming increasingly important that within the board there is an understanding of the customer and that customer’s decision-making process regarding his or her future needs.

The challenges of the recruitment of non-family board member (owners’ perspective).

Palmberg also believes that boards should become significantly more customer-oriented and more sensitive to economic changes in the market.

Surprisingly, none of our interviewees considered It a necessity for an non-family board member to have had experience within the specific industry the company operates in, but they stated it is important that there is industry-specific knowledge in the board as a whole.

Diversity on the board is very important and is one of the key factors in ensuring a properly functioning board. Family firms are encouraged to think “outside the box” when recruiting board members.

People with a completely different educational background, e.g. a psychologist or philosopher can be a surprisingly effective addition to a board.

Juhani Mäkinen

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4. Conclusions

This study has explored the board composition of family firms and the benefits of having non-family board members incorporated within family businesses.

It can be concluded that non-family board members have a vital part to play in ensuring a dynamic and well-working family business board.

This study also concluded that the added value of the non-family board members is maximized when they number at least two, otherwise the single non-family member may be dominated by the family members of the board.

The most important first step that should be taken when recruiting non-family board members is to ensure that the persons have the right set of skills for the board rather than because they happen to be part of one’s social circle.

Familiarizing new board members with the company’s history and values is the natural second step in order to establish a solid platform for the board to work effectively.

Other valuable additions non-family board members can bring to the table, other than those noted above, potentially, are differing and/or nontraditional solutions to problems, new and insightful ideas, the sharing of past experiences of pertinence to the needs of the company, and, of course, a representative of a new network of people who can bring valuable economic opportunities to the company in the future.

And there is yet another importance that a non-family member of the board can bring to the fore (and what the owners may not think of ): Assistance in the decision making process through support of management.

In summary, non-family board members should be chosen through a careful selection process, taking into account the fact that the board as a whole possess a unique knowledge and share valuable competencies that are crucially important with respect to the company’s current strategy, the market, and their clientele.

A majority of the members of the FFFA are involved in board work and operational management, which is a distinct positive when considering the importance of continuity within businesses.

Family firms value the involvement of their family members in the business and their contributions within the company as well as their efforts within the various types of business orientated organizations, such as owners councils as well as family councils.

Lastly, it is important to note that results with regard to the involvement of family members in organizations outside of the firm can be affected by family size as well as if the family has the opportunity to have family members of the in these organizations.

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