56
A FAMILY AFFAIR
EMB
CASE STUDY:
THE EXPERT TAKE
RECRUIT NON-FAMILY
TO THE BOARD
SONNY IQBAL & RICHARD STARK ,
EGON ZEHNDER
While their attempts have been
unsuccessful, the González family has
acknowledged the importance of having
non-family members involved in the
company. This is crucial step. Non-family
executives bring additional knowledge of
best practices and a range of perspectives
EMERGING MARKETS BUSINESS
SUMMER 2017
and experience that allow family firms to
grow and stay competitive with non-family
companies. Yet, what Paraíso Verde has
overlooked, is the need to make similar
changes to its boards of directors.
Keeping a company board in the family
prevents the board from becoming the
true strategic resource it can be.
Independent directors who know what
“good” looks like can help the board chart
the company’s path to the next level,
expand its professional network and bring
ISSUE NO. 3
essential objectivity to board deliberations.
Where such influence is absent, trouble
often follows, as has been the case with
the González family.
Given the family’s experience so
far with non-family executives, it is
understandable that Paraíso Verde might
have been reluctant to introduce non-
family to their boards—and the company
is not alone in its reticence. Some families
worry that independent board members
could potentially undermine their control
of both the company board and company
management—a control that owner
families zealously safeguard. But their
fear is often misplaced, since the owner
family generally holds a majority of
shares and therefore can vote board
members in or out.
Secondly, many owner family board
members are uncomfortable with the
increased formality that comes with
having an independent director in the
room. But this is exactly the point.
Having independent directors on the
board professionalizes it like nothing
else can. In this particular cast, the
González family members would have
to put aside their personal issues and
histories as best they are able when in
the boardroom and instead focus on the
job of providing objective oversight.
It is also very important to remember
that professionalism flows in both
directions: Independent directors are
bound by the same rules of confidentiality
that they would be on the board of
a non-family company.
Third, when things are running
smoothly, family businesses such as
Paraíso Verde believe, incorrectly, that
a well-run board has less to offer them.
The basis for this view is rooted in history.
The institution of the company board first
arose to mitigate the problems that can
emerge when there is little or no overlap
between the people who manage the
company and the people who own it.
As long as family members are in the
CEO role as well as at several points
across the executive committee, which
is currently the case at Paraíso Verde,
this disconnect between shareholders
and management—known as “agency
cost”—isn’t much of a concern.
Independent board
members cannot
be effective unless
they have the
same access.
So, it’s easy for the owner family to see
the board as little more than a statutory
and compliance requirement for which
family members or close advisors are
perfectly adequate.
It’s true that often there is little agency
cost for the board of a family business to
counter, but there are other reasons to
professionalize the board by adding
independent members. In the case of
Paraíso Verde, non-family board members
could provide more seasoned counsel
and mentoring to Claudio, the CEO; they
could be valuable role models and
resources for next-generation family
members; and they could positively
influence the family’s decision-making
style beyond the boardroom. Perhaps
most importantly, the perspective of
independent members can be particularly
helpful in succession planning, risk
management, compensation policies
and in mediating conflicts that can arise
between the family and non-family
management. All of these would be
clear benefits to Paraíso Verde.
Before a family business adds
independent directors, however, it is
important to assess the current state
of the board and identify areas where
governance might need to be strength-
ened. Failing to do so, sets the new
members up for failure and will make
the experience a frustrating one for all
involved. There are three areas of
particular importance that Paraíso
Verde’s leadership should consider:
composition, culture and process.
Where composition is concerned, it’s
important to begin with an assessment of
the current board. Do its members have
the skills and experience to advise
management on the key strategic issues
the business faces, or does the board exist
primarily to protect the interests of the
owner family? Let the gaps in boardroom
capability drive the search process for
independent directors. It’s unlikely that
you’ll be able to find everything you are
looking for in one person—but then again,
family boards should consider adding
more than one independent director over
time. It is also important to remember that
it will be difficult to attract quality, indepen-
dent directors if the role is a token one.
As for culture, independent board
members cannot be effective unless they
have the same access to informal
discussions and key information as family
board members. The board chair, in this
case Federico González, needs to ensure
the board operates with trust and
openness. Independent board members
should be expected to have different views
than family members—that is part of the
value they add.
Finally, adding independent board
members is a critical step in professional-
izing the board, but that profession-aliza-
tion needs to extend to other aspects of
governance. Committees should have
strong, experienced chairs and clear,
unambiguous charters. There should be
mechanisms to ensure that risks are
evaluated, past decisions reviewed and
that issues with longer time horizons (such
as strategic planning, board performance
and CEO and board succession) don’t get
squeezed off the agenda.
There is no doubt that adding independ-
ent directors to the board of a family
company is challenging—it forces the
family out of its governance comfort zone
and into a higher gear. But precisely for
this reason, adding independent directors
is one of the most beneficial steps a family
board can take.
57
NO. COMPANIE S
WITH $1BN
RE VENUE S
2010
2020
Emerging market
family businesses
5,608
1,286
Other emerging
market companies
1,338
858
All developed-
market companies
8,057
5,797
SOURCE: Adapted from
'The family-business factor in
emerging markets’, By Åsa Björnberg,
Heinz-Peter Elstrodt, and Vivek Pandit,
McKinsey Quarterly, December 2014.
Data: Bloomberg; EXAME magazine’s 2013 Melhores
& Melhores list; Jeune Afrique magazine’s Top 500
African companies; Kisvalue; Mexico’s Secretariat of
Finance and Public Credit; PRIME new agency’s
rating of Russian family-owned businesses;
Prowess; Zawya; company websites; McKinsey
Global Institute analysis.
SONNY IQBAL is a Mumbai-based
consultant and Global Co-Leader of the
Family Business Practice at Egon Zehnder.
RICHARD STARK is a consultant based in
Egon Zehnder’s London office. »
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