Shareholders are responsible for the quality of results and should, therefore, decide on investments in continuous improvement initiatives on the board. As advisory boards become more of a rule than an exception, their continuous improvement becomes a key capability for competent family shareholders. Below are seven best practices every family office board should follow for operational excellence:
Re-evaluate board-design
The provision of advisory boards with directive and decision-making powers determines whether they are relatively weak advisory bodies or strong control bodies endowed with robust mandates. Smart boards have emergency mechanisms in place that enable a switch between both types with the associated rights and duties. With the transition between an advisory and a control body, alongside other role requirements, a different temporal perspective comes to the fore. In the control body, short-term survival is the focus.
Regardless of the purpose of the board and the time horizon, board members are always committed to the company and not individual shareholders. Otherwise, well-meaning but misunderstood loyalty commitments often lead to disputes, especially during share transfers. Without an effective structure, the best boards remain below their potential.
Question consensus culture
A good working atmosphere in family-office boards is the norm; respect and appreciation among the often honourable members are commonplace. However, upon closer examination, advisory board work is often harmony-oriented for the same reason. The frequently unchanged composition over many years can reinforce the impression of “false peace” and mutual confirmation through “yes saying.”
Controversial topics are inevitable, especially during ownership changes in the owning family. Therefore, the ability of the board to address hot-button issues proactively and openly is often lacking in practice. The ability of the board to constructively address conflicts in the interest of the family business’s future viability becomes increasingly important as the environment becomes more uncertain. Professionalising the practised culture of debate in the board, along with the corresponding competencies of its members, especially the chairman, and embedding it in the DNA of the board remains a key goal for competent owners.
Define the rules
Board regulations and operational business distribution plans, to the extent they exist in medium-sized family offices, are often outdated and of little practical relevance. Most often, board work is characterised by informal routines driven by individuals who are rarely, if ever, questioned. If enhancing the long-term viability of the family office is the mission of the board, then it is only logical to align its tasks, competencies, and responsibilities with the long-term goal system of the family at least every two years.
Existing board regulations and business distribution plans should also be reviewed and updated as necessary. The focus should always be on the function of the chairman and his deputy. If the priorities of strategic levers fundamentally change (e.g., less return but more security), this entails other tasks, competencies, and responsibilities for the board as a whole and the chairman in particular, which does not speak well for the continuation of the previous status quo in board composition.
Demand more contribution
While the demands on outside board members from family principals have recently increased significantly, most owner families remain faithful to the motto: “Blood is thicker than water, and lineage remains more important than competence.” Thus, family offices in reality not infrequently drive away the very candidates and members they urgently need. Top candidates will rightly stay away from boards where family representatives without expertise and relevant experience explain to them how the world works.
Likewise, non-family board members are not keen on stepping in as tutors for the basics of business management. In preparation for generational change, it is fundamentally unavoidable to question the working mode of the board and the necessary competencies of its members and to realign them with future requirements. Taking the opportunity to consciously cut old ties is usually not the worst idea here. The flip side of the coin, where family members are only sidelined as token representatives and familial “fig leaves” by external, professional board members, should also not become a permanent state. Rather, the question arises of the specific performance contributions to be expected from internal and external board members.
Drive strategic conversations
The handling of the COVID-19 crisis has forged many boards into a tight-knit group. Crisis work on the board was often characterised by very operational problem-solving. As difficult as it may be in the face of the current multiple-crises-environment of the post-COVID era, boards must again focus more on their “altitude,” meaning gaining altitude to broaden the field of vision ahead towards the long-term future.
This requires that balance sheets, reports, and other rear-view mirror control functions are being completed more efficiently at the same quality level as before; otherwise, the time burden on board members will explode. Different meeting-preparation and different procedural arrangements are inevitable to answer more strategic questions about the long-term viability of the family business. However, with the frequently home-grown infrastructure for the board and the resulting patchwork of digital collaboration systems in operating practice, this has little chance of success.
Develop diversity
“Birds of a feather flock together” describes the practice of boards in family offices in many cases quite accurately, starting with gender distribution, not least regarding the professional expertise of the members. Perhaps the search for urgently needed heads on the board for future topics such as AI, sustainability, and regulation takes so long.
A successful appointment would massively disrupt the practised predominance of classic business administration competencies in the board and call into question certainties. Competent family principals, therefore have to address the question of how many “blind spots” they can afford, want, and are allowed to have, especially in the areas that reinvent the world.
Assess performance
Systematic evaluation of board work is a prerequisite for any professional board work. Otherwise, on what basis does the shareholder committee annually decide on the overall discharge of the board or contract extensions for individual members? A reliable assessment of board work requires more than a mere self-assessment based on decades of practical experience. Still, it considers systematic feedback from both owners and members of the top management team. Those who subject board candidates to an assessment process in the selection process must proceed just as systematically and stringently in quality assurance in the current composition of the board.
To sum it up
Continuous improvement of board effectiveness as a practice starts in the owner room. Set a revolving annual date and define long-term goals, next year’s objectives, a concise action plan and a robust set of indicators for each of the seven elements. Once this development map is set, have an in-depth discussion with family members to create a shared understanding and a strong commitment. Thereafter, present the result to the board. To make it work in practice, it is essential to incorporate the respective measures in the compensation system of both the board members and the executive team.