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
-- Forth generation
wwner 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
12
2.5. Networks as a valuable asset
12
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.
1.
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.
Boardsize
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 membersintheBoard
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.
MenandWomen intheBoard
MenandWomenintheBoard
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
FamilyMemberCEOorChairman
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
CEODuality
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.
8
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.
2.
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.
4. Conculsions
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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