Mary K. Duke is an independent advisor to families, founder of High Road Advisors and a member of several family office boards, both fiduciary and advisory. She and Joshua Nacht, Ph.D., principal consultant with The Family Business Consulting Group, offer perspectives on family office boards — why they’re important, who should be on them and how to set them up:
Why should family offices have a board?
Duke: Wealth creators are invariably bad role models for joint decision making — they’re used to making the decisions. And for families who are downstream from that powerful decision maker, learning how to make shared decisions is a muscle they need to build. That’s often done in the forum of a board room, whether it’s advisory or fiduciary.
Having a board forces a level of professionalized reporting that is healthy — and isn’t always there in a family office if they don’t have a reason to get numbers in front of everyone at the same time, in the same format. This means everyone sees the numbers together, and everyone knows what everything costs.
Nacht: When a family has a board set up, they have the structure and the forum to ask questions. The family will have different needs as it grows, and family members don’t always know what those needs are. Having a board can be really helpful to focus in on these questions. In addition, the benefit of having a board during a CEO transition can be significant.
Does every family office need a board?
Nacht: There is a huge range of how families utilize boards. In some cases, where the family is really small, a board can feel like too much governance and structure. But even then, I would say the family still needs some type of organization to be able to guide the family office.
Why do some families choose an advisory board rather than a fiduciary board?
Duke: Advisory boards are sounding boards for families, where the family retains control over decisions. They are often an evolutionary step before bringing non-family members into the actual decision making. To share their financial information and talk about the dynamics and things that they’re navigating with others in the room — it’s a big step. Many choose to do it in an advisory capacity first. As they get more comfortable with that, and they build some patterns and process around it, they can move to a fiduciary board.
What are the benefits of including independent members on the board?
Duke: The independents have a unique role, as do the family members. They’re different, and you need them both.
Bringing in non-family members changes the nature of the room in some pretty profound ways. One is that people behave differently. For example, family members tend to use shorthand. They can be a little informal. Also, families are by nature hierarchical — but board members are supposed to be peers. One of the ways you can break out of the family hierarchy is by bringing in independents, because when independents are sitting in the room and they’re acting like directors, everyone else is more inclined to behave like directors and not like parent and child. It creates a tone of professionalism in the room.
What is the role of family members on the board?
Duke: Families need to be aware of the different role family members play when they sit on a board versus the independents or executives. They bring very different things to the table, and you aren’t looking for the same things from your family directors as you are from independents.
Family members — while they have to have a baseline competency in business acumen and reading financials and corporate governance — really serve to represent the voice of the family. Families need to work to master this notion, and practice being a representative of others who are not in the room, speaking on their behalf, speaking with one voice, representing the values of the family.
But families can lose track of their values, and especially as they move down generations, values may be less vocalized. Family members start to diverge over time. So, getting and maintaining clarity on the family’s values — ensuring they are transmitted into the family’s enterprises — is best done in the boardroom by the family board members.
Being able to sit in that room and represent all those voices outside of the room is very important and requires work. It requires communications and accountability by the board member out to those family members. These are new skills, usually, in a family.
How can families prepare NextGen members for board service?
Duke: I do a lot of work with families on how to grow the next cohort of family directors. What does it take to make a generational shift in the boardroom? It’s a long journey. There’s a lot of learning. One of the most important things is these young people need to grow as individuals. That usually means going out in the world and finding and pursuing their passion, getting bruised a little in the process and building some credibility and credentials to bring back into the family boardroom. So not rushing them into the boardroom is an important consideration.
But while they’re out building their experience, the family can also be growing them in their capacity to be great future directors. One aspect is to ensure they understand the complex structures of the family enterprise. Very often there are shareholder agreements, voting agreements, trusts and trustees, sophisticated bylaws. Understanding the interplay of all these is important for family directors.
And although some family offices are smaller and easier to understand, the family will still want the same competencies in their family directors. The really important task is representing the voice of the family — the whole family.
What are some obstacles to finding family members to serve on a board?
Nacht: Board service is a time commitment. Are people willing to sacrifice some other things they’re doing for this board role? And a lot of people feel they don’t know enough to be on the board. Part of recruiting board members is helping them develop and getting the education and resources they need. Once they get in there, they get up to speed, and they learn from other family members and independents.
Sometimes, it can be kind of a heavy lift to get people to engage and commit to board work. I have also seen situations where there’s a sense of competition for the board seats. Each scenario presents its own challenges, but I would rather see more enthusiasm than apathy.
When there are more interested family members than board seats, we can create structure and processes for selecting the best candidates and come up with a good system that feels fair to everybody.
Forming a board — including searching for family members and independent members to be on it — is a significant piece of work. But once it’s up and running, it is hugely helpful to bring in different perspectives.
