Keeping it in the Family? The Value of Independent Directors in Family Businesses

Family businesses are the cornerstone of economic activity, accounting for more than 70% of global GDP and approximately 60% of employment globally. In the UK, they make up 90% of all private firms, equating to 4.8 million businesses. Studies show that family-owned companies often outperform their non-family counterparts. Their distinct strength is being able to take the long-term view.

Family businesses that survive beyond the third generation are adaptable, resilient and committed to fostering a sustainable organisation. With a focus on stewardship and decisions made for future generations, family businesses look beyond profits, taking the longstanding view and emphasise reinvestment in the business.

Where owners and executives have little outside experience, there is a risk that family businesses become an ‘echo-chamber’. A constructive solution is to appoint independent non-executive directors (iNEDs).

Grant Gordon & Nigel Nicholson, the authors of ‘Family Wars: Classic conflicts in family businesses and how to deal with them’, wrote: “Many of the strongest and most admirable firms in the world…have implemented governance systems that make provision for solving problems before they occur. They embody independent voices to counsel against poor or biased decisions.”

iNEDs can provide balance, help develop strategic direction and give oversight reassurance, whilst ensuring the business retains its essence. They increase accountability and help create stronger and better managed businesses.

Why appoint an independent director?

iNEDs help balance family expectations with business requirements. They bring business experience, adding critical new insights on strategic options, extending the range of experiences on which families can draw. They offer unbiased advice on delicate issues such as board appointments, succession planning and remuneration.

At a recent Family Business Dinner hosted by Odgers, guests agreed that “we provide an independent view and facilitate a discussion which they [the family members] cannot have amongst themselves. Someone has to explain to each side why, somehow, something isn’t working. Families avoid conflict, because they have to live together. We can hold a mirror up to them”.

As trust develops, iNEDs can ensure that the next generation of family executives are successful. iNEDs often get more deeply involved, as a trusted advisor than is common on a listed board. One iNED observed: “The iNEDs are singularly focused on ensuring the family successor gets the breadth of experience he needs to be successful; that he is not exposed too quickly and that the organisation is prepared for him. Simply put, failing is not an option”.

Another agreed that “you can never waste too much time or money educating the next generation”.

Attracting independent directors to a family business

Introducing external individuals who are committed to understanding the family business is increasingly attractive. The family needs to be convinced that the iNED really understands who they are, their culture and values, and how they operate. 

Families welcome challenge, if they can trust the individuals providing it. For their part, the iNEDs will want to be satisfied that the family is willing to listen because, “to be successful, family owners need to want the iNED”.

Mindful that family members may have different priorities, successful iNEDs have the ability to relate to the different interests and priorities across the family.

One guest summarised it as follows: “There are three kinds of family owners – Prisoners; Past; and Perfectionists. All are equally valid but their interests and how you engage with them vary. Prisoners focus on the money so ‘benchmarking’ may be your language of choice. Others focus on the family’s history and provenance, so you would emphasise culture and values. With the Perfectionists, who seek to save the world, the narrative is about the strides the business takes in supporting communities, education, net zero achievements and so forth”.

Who should serve as an Independent Director?

A non-family Chair commented: “Simply put, families are interested in individuals who add real value to their business. They want to listen to people with points to make that genuinely interests them”.

Thinking through the business challenges in the medium and long-term provides the context and guide to pertinent skills and experience. Younger family-owned businesses tend to target aggressive growth, at first, with a change towards value preservation as the business matures.

Thus, a ‘first’ generation entrepreneur may seek specific commercial experience or networks that enhance the business, whereas a mature, multi-generational family business typically has well-developed governance structures in place and may welcome challenge from a more diverse group of independent non-executive directors.

Chemistry with the board and trust with the family are essential. One non-family, senior independent director said: “You add value by spending time in the business and building relationships. You must ‘get’ the business and the senior people, and understand what the family wants from you. Engaging beyond the boardroom enables you to pick up the ‘mood music’ in the business. Fundamentally, you have to like the family. If they annoy you, then you are in the wrong place”.

iNEDs are not family, and must avoid the temptation to become involved in family dynamics. No external party can fully grasp the nuanced drivers and undercurrents of a family discussion. Family members have additional responsibility to formulate and communicate their owner strategy, articulating the value for the future, over and above financial benefits.

The indispensable contribution of iNEDs is their ability to focus on the business strategy, bringing commercial experience, objectivity and impartiality to bear. As an experienced, non-family board member said: “If you don’t want to sell that business unit, that’s fine. I respect that, but don’t expect me to stop advising you to sell it every time it is discussed”.

Considerations for a successful iNED appointment

Family businesses need to consider the appointment process to get to the optimum answer. Care needs to be taken by the family in how they appoint and induct iNEDs, articulating their role and responsibilities, to ensure they deliver lasting value. The board environment created must be one in which iNEDs can participate and contribute fully.

Family business owners face numerous challenges, including board composition, family discord, and succession planning. iNEDs can significantly enhance long-term success by bringing skills, experience, objectivity, and valuable networks to the business.

At Odgers Berndtson we recognise the value-creating mindset, the positive effect of trust and loyalty, and the central importance of stewardship that sustain family businesses through generations. Appointing independent directors is a valuable but delicate undertaking. Securing the interest of the right individuals, handled professionally, helps secure success across generations.

Odgers Berndtson's Chair & Board Practice is responsible for significant Chairman and non-executive director appointments, covering all major sectors, size of businesses and ownership structures.

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