How to Create a More Effective Board
By Paul Lucas
Managing Partner, Coleman & Greig
NSW State Sponsor – Family Business Australia

The Board of Directors within a family company can play a crucial role in ensuring the company’s success. Generally, it is the Board’s responsibility to identify a company’s directions and goals and oversee the general management of the company. Specific duties of the Board include approving budgets and large expenses, developing short, medium and long-term goals for the company, ensuring compliance, monitoring financial performance and overseeing reporting functions.

Given these responsibilities, the choice of individuals appointed to the Board is very important. Office bearers, i.e. directors, must ensure that the correct skill sets are met and that the level of experience is appropriate to the role. Many family-owned companies also elect to appoint independent directors, i.e. not involved in the day-to-day management of the company, in an effort to ensure the best possible “mix” on the Board.

It can be particularly beneficial for a family-owned business to appoint an independent director in light of the often emotionally charged environment in which the business operates.

Benefits of Appointing an Independent Director

Companies have different requirements at different stages of their development. All companies should expect that independent directors will generally provide support for the CEO, and many may also:

• bring objectivity to decision making;
• assist in the identification of compliance and corporate governance issues;
• play the mediator role; and,
• bring specialist assistance in areas of need, eg marketing, production, logistics, finance, human resources, systems.

It is important for companies to identify the reason for inviting a particular person to come onto a board, to ensure that the nominee has the skills and experience to meet that requirement and then to agree on the performance requirements for that director.

For example, a family company involved in manufacturing was having a problem with profitability so they engaged an independent director with experience in manufacturing to assist them. From his experience the Director could see that the issue did not arise from the manufacturing process, but from the product range, and suggested changes to improve profitability.

As a member of the Coleman & Greig commercial team, I have personally been involved in a company as a director for the purposes of identifying compliance and corporate governance issues in order to prepare the company for sale or IPO. I was able to identify the company’s intellectual property and that it was inadequately protected. The identification and rectification of these issues assisted in the orderly sale of the business and the certainty of gaining the full sale price.
The performance of a director may vary depending on whether he or she is to be an executive director or a non executive director, but all directors should be accountable for their time and have agreed and appropriate key performance indicators (KPIs).

What will the independent director require?

All directors carry the same legal obligations and responsibilities, no matter how they are described or the extent of their involvement in the management of the company. If the director is to accept the role, they must accept the obligations that come with that position.

In return, an independent director should be seeking certain assurances from the company before accepting the appointment. The primary assurances are generally in terms of compliance with a number of laws which give rise to personal liability, such as occupational health and safety, taxation, trade practices, environmental, solvency and, in many cases, regulation specific to the particular industry. In order to be able to have the benefit of the business judgement rule, the company must also ensure that there are properly qualified people available on which the director is entitled to rely for that work.

Some companies may not be in a position to meet all of an independent director’s requirements, and in those cases, I have known directors who will accept the appointment on the basis that there is some commitment to implement proper reporting and compliance.

Coleman & Greig has significant expertise in advising family businesses on directors’ responsibilities and compliance. For more information contact:

Checklist for appointment of the independent Director

• Be clear on the purpose of the proposed appointment
• Agree on the role and the expertise required
• Agree on the expectations for performance
• Agree to be fully accountable to the director
• Accept the compliance obligations
• Agree on the director’s fee