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Beyond the backstabbing and bickering …
How Outside Directors Can Help a Business Family Rise Above the Inevitable Conflicts

By Henry D. Landes
June 2003

Come with me to a meeting of the Walter Smith Manufacturing Co.’s board of directors. Though the names are fictitious, the ensuing dialogue is all too typical of the interaction patterns I have witnessed countless times in my 15 years as a consultant to business families.

The Smith Co.’s board is made up exclusively of family members. At issue is a second-generation family member’s commitment to the company. Sparks have started to fly.

But first, a bit of background.

Walter, the patriarch, started the business 45 years ago. Now in his early 70s, he’s largely retired but still chairs the board and stops by the office a couple of times a week. The oldest child, Liz, is 50 and the company’s vice president of marketing. The oldest son, Mark, is president of the company at 47. Tom, 43, the youngest in the family, is vice president of sales. Tom has been spending three afternoons a week on the golf course, and twice a month he’s gone all day Wednesday on a golf outing with his buddies. Martha, Walter’s wife, is not a director but is present at the meeting as an observer. She tends to stay quietly on the sidelines, but she fervently wishes something could be done about all the fighting in the family.

At the board meeting, we hear that the family directors are at it again:

Mark (oldest son, president): "One of the main agenda items today is how Tom isn’t carrying his share of the load."

Tom (second son, VP of sales): "One man’s opinion." (Laughing.) "Some people can do twice the work in half the time."

Liz (oldest daughter, VP of marketing): "Is this really a time for jokes? Tom, you don’t see the looks around here when you’re in the parking lot loading up your golf clubs for the third time in a week."

Tom: "Well, I have news for you. I’m sick of being the scapegoat for every damn thing that goes wrong around here. The golf course is the only place I can get a little peace of mind anymore—for at least a few hours. Besides, our sales department practically runs itself. Larry’s top-notch, and all of you know it."

Walter (father, founder and chairman): "That’s not the point, Tom. What we’re saying is that an important part of your job is to be on the job."

Mark: "What about that sales seminar you’ve been saying you’d organize for, what, nine months now?"

Liz: "And your last full-scale staff evaluation was three years ago, right?"

Martha (wife of founder, mother of three children): "Tommy, if you could just settle down like Mark …"

Tom: (incredulous laugh) "Am I the only person in this entire room who knows how to have fun? You know, all work and no play make Jack—and Mark—very dull boys."

Mark: (wearily) "Can we get back to the subject?"

Tom: "Yeah, why I’m Attila the Hun."

Mark: "You know what I mean …"

Tom: "I think I do know what you mean. Just because you’re the big brother, you think you’re God’s gift to this company. Know something? You’ll never hold a candle to what Dad did here for 40 years. The last five with you in charge have been—how can I sugarcoat it?—like rowing upstream with one paddle. (Looks around.) My brother’s idea of visionary thinking is ordering out for pizza at 10 in the morning …"

OK, freeze the frame. What’s happening here? And does it sound like anybody you know?

First, it’s clear there’s enough passion, anger and, yes, hurt feelings to go around. But the dialogue also demonstrates that Tom’s parents and siblings want him to succeed and contribute meaningfully to the company. When people of passion care deeply, anger can flare up. Like most families, the Smiths care a lot about each other.

Second, this family isn’t unique. Conflict is inevitable—in all families, to be sure, but much more intensely in business families. The basic architecture of every business family involves three overlapping roles: family, business and ownership. This is complex, and it can be very difficult to juggle and honor all three effectively—especially over the long-term journey taken by most business families. When you add the multi-layered task of running and owning a business together, the potential for family friction increases manyfold.

Third, the family needs to find a way to resolve their underlying issues. Both family legacy and individual livelihoods are at stake. Ongoing conflict, if allowed to simmer unchecked over time, doesn’t just make Sunday dinner tense but also makes coming to work downright unpleasant. Eventually worker morale, company productivity and profitability are adversely affected. People bogged down in conflict don’t work as efficiently. It’s hard to "take care of business" when the brain is inflamed.

Sometimes we think that everyone in our family should have the same point of view. But it’s important to remember that people don’t just pretend to be different—they really are, even if they’re from the same DNA pool. Business families who do well find ways to affirm the diversity in their midst.

Conflict, by definition, is neither good nor bad; it just is. It should come as no surprise that different family members have different perspectives, as the Smiths demonstrate. These differences can create high-octane energy. If not handled properly, this volatile mix can explode—or it can propel the business forward with greater clarity and power.

Objectivity brings insights

What can the Smith family do to turn their disagreement into a productive discussion? It has been my experience that respected, competent "outside" directors—experienced businesspeople who aren’t family members, friends of the family or professionals employed by the family—can help relatives honor their differences … indeed, to "fight fair" when they need to.

Carefully selected directors from outside the family circle often can bring healthy perspective and objectivity to those inside the circle just by showing up. Bringing such outside directors aboard doesn’t happen overnight. It often takes place over time with the assistance of a trusted adviser to the company—generally a family business consultant.

This adviser helps the family create a "board prospectus," which outlines the purpose and structure of the board, including the selection criteria (business experience, values, etc.) that will drive the process of director recruitment. In addition to "outside" business perspective, these directors must have a commitment to the family’s goals and the "people skills" to help family members manage the complexity of being in business together. Ideally, all outside directors will be endorsed by all family members.

Without the benefit of such outsiders, family members tend either to "bloody" each other as they tackle difficult issues (as the Smiths just did) or simply avoid the painful stuff altogether. The presence of outside directors, on the other hand, helps business families attack problems instead of people. (To be sure, a formal conflict-resolution process for the family, preferably one codified in writing, will help the family manage most conflicts before board intervention is required.)

Take 2

Let’s return to the Smith family—with the same cast of characters and the same point of conflict. But four people have been added to the mix—directors from outside the family who, along with four family members, constitute an eight-member board of directors. The four outside board members are Bill, Laura, Duane and Charlie. All four of these folks came aboard, after a selection process, with the support of the key family players. They have proven expertise in key areas that are crucial to the Smiths’ business.

The chairman of the board is Bill, president of a local manufacturing company that makes a different product from the Smiths’. Laura is president of a third-generation, family-owned distribution company. Duane is the recently retired CEO of an international manufacturer. Charlie is managing partner of a private equity firm serving middle-market companies.

Bill (outside director, chairman): "Thank you, Mark, for that thorough report. Our next agenda item has to do with time commitment by key executives to the company. Mark, could you give some background?"

Mark (oldest son, president): "This is a tricky issue because it pertains to work expectations involving my brother Tom. (Takes a deep breath.) I have a growing concern about Tom’s absences from the business due to his golf. Staff morale is being affected, and I thought it was something we might talk about here."

Bill: "What’s your perspective, Tom?"

Tom (second son, VP of sales): "Well, I’ve been hearing this song and dance about my golf for years now. And frankly, I’m fed up with it. I work here; I’m not married to the job. If you guys want to bust your tails 60, 70 hours a week and not have a life, that’s your business. Hey, I’d go stark ravin’ bonkers if I had to live here like some of you."

Laura (outside director): "Tom, I hear you saying that you feel you’re making a significant contribution to this business …"

Tom: "Darn right. We’ve exceeded company sales goals the last three years running."

Mark: "And the rest of us appreciate that. But we also have other expectations of a vice president of sales. Such as training seminars for your sales team—and evaluations of your staff in writing. Those things haven’t been happening."

Bill: (looking at Tom) "Do you think you could make more of a contribution if you spent more time at the office?"

Tom: "I’m not sure. Like I said, I think I’d go nuts. Golf helps me unwind. Then when I do come to work, I’m able to give it my best shot."

Mark: "But not when you’re leaving half the decisions to Larry. And he’s not sure if he has the authority to make some of those decisions. I, for one, don’t know who’s in charge of your department anymore."

Duane (outside director): "What about that, Tom? In my experience, it’s very helpful for the people in any given department to know where the buck stops."

Tom: "I don’t know. I’ll have to think about it."

Walter (founder and patriarch, director): "All we’re asking, Tom, is that you do your part …"

Tom: "I don’t know how to say this, but I don’t think it’s just the number of hours somebody puts in. I think it’s also the quality of hours. And I know golf energizes me—well, at least most of the time—and helps me focus when I am at work."

Charlie (outside director): "I also love to golf, as you well know. But as someone wiser than I once observed, ‘Sometimes strengths, if overextended, can become weaknesses.’ My personal example is verbosity. Sometimes I have trouble shutting up. Can you believe people say that about me?" (Laughter around the table.)

Bill: "Tom, I hear what you’re saying—that golf is good for you and your work performance—but can you hear what’s also being said in this room? Namely, that you’re receiving a full-time salary but not meeting certain expectations of a full-time executive."

Tom: (shrugs, then …) "I guess so."

Charlie: "We had a roughly analogous situation in our firm several years ago. One of our account managers found the silver bullet for six months—and made a lot of money for himself, his clients and the firm. Then, almost without notice, he disappeared to the South Pacific the next six months. Went sailing and God knows what all. We were left in a quandary. While we applauded his contributions, we still needed his expertise during those months he was gone … and out of touch."
After noticing a raised eyebrow from Tom, Charlie adds: "Like I said, roughly analogous." (Smiles.)

Laura: "I’ve been thinking through some possible options … What about this? Tom, suppose you cut out one golf afternoon a week and, say, within the next six months get that seminar in place and finish your staff evaluations? Then if others want to work more than 40 or 50 hours, that’s their business. And how any of us spends our weekends is up to us."

Tom: (heaves a sigh) "I don’t know" … (grins) "I like sailing too." (Laughter … Tom rubs his chin. There’s silence in the room for a long moment; finally Tom looks up.) "Let me talk to the guys at the club. We should be able to work something out." (Relieved looks around the room.)

Bill: "Walter, Mark, Liz? How does this sound to you?" (Nods of affirmation.)

Bill: "I’d like to express my gratitude to Mark and Tom for bringing this issue to the table. Tom, your role in this company is vital, and your contributions are greatly needed and appreciated. I’d like to ask the two of you to discuss this further over the next several weeks and bring a progress report to the next board meeting."

As John Ward, a Chicago-based expert on family businesses, has observed, "Outside directors are one of the richest and least-used resources available to private companies today." Outside directors have many vital duties, but the following three are key:

• Set the mission and strategic direction of the company.
• Advise the CEO on a wide range of issues.
• Help mediate the normal, natural conflict in a business family—and, as they get to know the family system, play a role in reducing the impact of future flare-ups.

Directors in virtually all companies share the first two responsibilities; the third is a particularly important function of directors in a family business. Outside directors are especially helpful in addressing hot-button family business issues like compensation, family member employment/performance and, of course, succession planning.

In the presence of respected outside directors, family members tend to become less reactive and more thoughtful. Through their objectivity (or healthy detachment), non-family directors create a "magnet" that pulls family members toward greater maturity in dealing with each other—and, correspondingly, toward greater effectiveness in running the business.

Appointing outside directors is an unmistakable sign of family strength. It says that we as a family are so confident about our business and the bonds between us that we’re ready to have both objectively assessed by trusted members of our community. Evidently, most business families don’t have this strength—or awareness. Research shows that only about 10% of all family businesses have an outside board.

All directors—family and non-family alike—must "master the courage to interrogate reality" (a memorable phrase from Susan Scott’s book Fierce Conversations) in order to unearth the underlying causes of conflict. Objective outsiders help lift the family members above pettiness. To maximize this resource, I strongly recommend appointing an outside director as chairman of the board. The late Ed Friedmann, a family therapist, put it this way: "The person who can best describe reality without judgment or blame becomes the leader."

Outside directors, on either an advisory or a statutory board, provide a much-needed reality check. They play a key role in determining what is best for the business, not necessarily the individual players. And that can be threatening to some family members. If Mark’s main qualification to be president of Walter Smith Manufacturing is the fact that he’s the founder’s oldest son, then he shouldn’t be in charge. Outside directors are able to see this truth—and articulate it with courage and grace—much more readily than family directors can. As directors, the experienced non-family members will have the power to take action if necessary.

Outside directors are not a panacea, of course. This stratagem must be used in tandem with other mediation resources, such as regular family meetings. It also must be noted that certain situations (such as family members’ deep-seated psychological problems or sustained conflict that has raged for years) go beyond the capacities of even the most caring and competent outside directors and call for consultation with skilled professionals.

Despite the obstacles inherent in the interlocking systems of family, business and ownership, I have seen outside directors help family members claim the underlying love they have for each other—and help them to resolve some of the flash points between them. Such directors don’t ensure the elimination of all discord (or that everyone will become buddies), but in most cases they help make problems more manageable.

Thanks to thoughtful, caring, business-savvy outside directors, family relationships are strengthened, management accountability is improved and return on investment is enhanced.

Not bad for a day's work.

Henry D. Landes is founder and president of the Delaware Valley Family Business Center, Sellersville, Pa.