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 in the governance of public companies has increased in prominence in response to investors’ concerns about 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, the corporate governance codes and guidelines advocate that NED’s should be “independent”, free of any commercial or personal ties that could impair their ability to probe and challenge the board.

In privately owned family enterprises, the requirements on independence can be difficult to apply since the choice of NED is often influenced by a prior relationship that helps to increase the levels of trust and respect (always important ingredients in family enterprise governance) 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.

In addition to reviewing the criteria on independence found in the conventional corporate governance codes, family business 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 business compared to other businesses?
  • 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?
  • Will they 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)?
  • Will you be willing to stand up to the different interests in our family enterprise and act with uncompromising independence when that’s needed in a way that helps us to balances the best interests of everyone with a stake in our enterprise?

Maybe that sounds a difficult job, but if you find a NED candidate who impresses with their answers to these questions, they’re probably worth hiring.

Want to learn more? Cranfield School of Management in association with Withers Consulting Group will run a specialist 2 day programme for NED’s in family business. If you are pursuing a NED position or you want to bring more to your current role you will gain expert knowledge and practical skills. Click here to visit the Cranfield School of Management website for further information and to apply

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