How to Choose a Family Business NED
Non-Executive Directors (NEDs) can add value to a family enterprise in several ways. They bring outside experience and independent judgement to bear in major matters requiring board decisions. They can act as a link between the board and the shareholders, provide the benefit of their personal contacts and help to ensure that the overall governance of the family enterprise operates effectively.
The role of NEDs has increased in prominence in response to investors’ concerns about the following issues:
excessive executive remuneration;
control over board appointments;
evaluation of board performance; and
the relationship between the board and the company’s auditors.
To address these concerns in UK plc, the governance functions of audit, executive pay and the nomination of directors are referred to permanent board committees in which the majority, and sometimes all, of the members are NEDs.
In order to strengthen the autonomy of these NED’s, corporate governance codes and guidelines advocate that NED’s should be independent, which means that they are meant to be free of any commercial or personal ties that could impair their ability to probe and challenge the board.
In privately owned family enterprises, these requirements on independence can be difficult to apply. In reality, the choice of NED is often influenced by a prior relationship that helps to increase the trust and respect between the controlling family and the NED. This does not mean that NED’s in a family enterprise should not be independent; it just emphasises the importance of NED’s having an independent mindset and the courage to base decision-making on the merits of the decision rather than extraneous influences or considerations such as relationships with family members.
Family enterprise owners might want to ask the following questions of their NED candidates:
What is your experience of working with family enterprises?
What type of family enterprise have you worked with; first generation or multi-generational; single business or diversified enterprise?
By way of example, what type of non-financial performance measurements could be included for the NED of a family business (and do these fit with the controlling family’s values)?
What are some of the advantages and disadvantages of a family owned enterprises compared to other types of business?
Why would you recommend working for a family enterprise?
In what areas would you expect the governance of a family enterprise to differ from other types of business?
The family should also reflect on the following matters:
Will this NED be a safe custodian of our values and our wealth?
Will we get on with them? How adaptable are they to our ways?
Will they seek too much independence from the family?
Will they be approachable?
Are they comfortable communicating with family members (including different generations)?