How Important is an Operating Board of Directors for Your Family Business?

I am just back from an Operating Board of Directors meeting with a long standing client that brings to light several important business succession theorems. As a refresher, an Operating Board of Directors is a Board of Directors that actually operates. In contrast, ninety-nine percent of the Board of Directors of closely held companies are perfunctory. The directors never actually meet or provide oversight accountability. The attorney or Secretary prepares boiler-plate minutes for directors to endorse and satisfy annual regulatory requirement.  I had convinced this Board consisting of a 77 year old widow and her two sons that it was prudent to come out of their offices and endeavor to work together to provide oversight to a recently hired new CEO.

According to the Mom’s design, the boys had had titles and filled chairs at community or industry meetings. About twenty-five years earlier, on the brink of bankruptcy she and her deceased husband had hired a non family CEO. This was the right move because they recognized they were ineffective leaders. As the business began to recover she also assumed the boys could not run the business, told them to get out of the CEO’s way and did not require the CEO to hold them accountable for contributing.  Naturally the boys became “entitled” and even contentious regarding who would ultimately assume control of the business.  The boys spent their time on hobbies and taking issue with the CEO who had seized the opportunity to ignore them and effectively do as he pleased as long as he paid the bills and did not offend the “Queen”.  As the years progressed without the boys being trained or held accountable I warned Mom of the growing resentment towards the CEO and that “critical mass” would occur immediately upon her death. In lieu of confronting either “his arrogance” or her sons she devised a plan to sell the business when she could no longer keep the peace or leave instructions in her estate plan for her trustees to sell it. 

Unfortunately circumstances changed. First Mom grew weary of the CEO’s arrogance and began respecting the opinions of her sons who showed how he was taking advantage of them. So Mom booted her “Succession Bridge”. Second they encountered a recession that deemed the business worth not much more than the debt the old CEO approved during the glory years of 2004 through 2007. Mom and her sons recognized that if they sold the business the good life was over for their respective families. Consequently, Mom who had become frail and the sons who were now middle aged men without real business supervision experience recognized that they are stuck with a new CEO and a business that would need close supervision for at least five to ten years. Results; we have an Operating Board of Directors supervising a new CEO and a fresh reaffirmation of fundamental business succession theorem:  expect the unexpected and have a contingency plan!

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