The Companies Office lists over 200,000 SME or family firms in New Zealand. A proportion will be early stage and still vulnerable. The more established will generally be led by a strong, skilled and confident business operator who both governs and manages the company, effectively alone. Board meetings are probably infrequent. While many may consider appointing an independent director in 2019, few will actually do it. Accustomed to watching every cent, the controlling shareholder / managing director struggles to see sufficient value in what an independent director brings. To him/her it is all too hypothetical, unnecessary, uncertain and uncomfortable.
Difficulties that an active business owner may find in the concept of an independent board appointment include: –
- Loss of sole (unbridled) power
- Scrutiny of fundamental thinking – in culture, risk, opportunity, safety, reputation and compliance
- Being challenged over strategy, succession, nepotism, fairness
- Having to divulge innermost family issues
- Being monitored as to ethical behaviour / tax / Code of Conduct obligations
- Direct cost of fees
- Indirect cost of board meetings and stronger accountancy, compliance, processes
- Time taken in keeping the independent director in the loop
- Irritation that the independent director does not contribute “work” nor participate in bonding or guarantees
All pointing to an easy decision!
BUT
The controlling owner may have dreams, plans and challenges that will take them and the firm into unfamiliar territory. These might entail: –
- The firm becoming unmanageable FOR ME – too big, too complex, too exhausting
- Rapid growth, perhaps in new markets, that brings management and financing complexity
- Acquisitions
- Introduction of minority shareholders who depend on good governance
- Succession planning within demanding family dynamics
- Market environment changing and risk increasing
- Growing the enterprise value
- Reducing dependencies; preparing for a business sale
Addressing any of these strategies will likely require a longer view, complementary skillsets and relevant experience. Here an independent director can add real value, supporting a lowered-risk implementation of shareholder policy. An independent director brings: –
- Fresh thinking / objectivity / different experience / comparable scar tissue
- Balancing of opportunity and risk
- Practical pathways that guide and derisk difficult decisions
- Wide networks
- Encouragement, enthusiasm – a “shoulder” and confidant for the owner(s)
- Clear acknowledgement that power resides with the shareholders; the board is their agent
- Principled separation of family and company; neutrality in disagreements
- Wisdom and calmness in hard times, sharing and dissipating stress
- Loyalty to the company
Clearly pros and cons. However, on the evidence most family firms remain unconvinced of the merits of a professional independent director. By choosing DIY, they will never know whether they are making the better call.
