Independent directors for a family business: the most successfully governed family-controlled companies want independent directors who can help the business stand up to outside scrutiny and ensure that the company is on the right path to continued growth and profitability.

• Author: Wood, John
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

FAMILY-CONTROLLED businesses represent nearly 35% of Fortune 500 companies, and many have specialized needs when it comes to building their boards, greatly influencing the state of directorship today. The high profile of family-run or controlled companies from Wal-Mart to Motorola to Ford Motor (with Wal-Mart alone employing 1% of the U.S. workforce) shows that they attract the same level of attention from shareholders, consumers, regulators, and the press as other large public companies--while presenting higher stakes and unique issues for new directors.

Recruiting new directors to any company creates challenges for the nominating committee: Will the director "fit" with other members of the board? Can the newcomer add value to board deliberations? Will the new director have the skills to contribute in an effective and objective manner?

In family-controlled businesses, these concerns are magnified several-fold. The always-complex dynamics of composing an effective governing board can carry more emotional content. Longstanding agendas of different sides of the family--some that may go back for decades--can complicate board service, creating the need for a "voice of reason" to counterweight family factionalism and historical bias. Kenneth Novack, former chairman and current director of Schnitzer Steel, a Fortune 1000 company with roots as a family firm, comments that in private family companies in particular, "Family identity and company identity are intertwined. If you have problems in the company, then you have problems in the family. You can trip on these."

[ILLUSTRATION OMITTED]

The most successfully governed family businesses, whether privately or publicly held, have relied on independent directors to provide objectivity. These companies are jumping on a larger trend toward more independent directors in all companies, driven by both the "push" of regulatory changes and the "pull" from companies themselves who realize the need for some boardroom shake-up. In our work with the leadership of family firms around the world, we have seen a greater interest in "professionalizing" their boards. Companies want independent directors who can help the business stand up to outside scrutiny and ensure that the company is on the right path to continued growth and profitability.

Where are family-controlled firms seeing the greatest value in their independent directors? What are they looking for in recruiting these new board members? How many independent directors should they bring onto the board--and what should outside directors expect from their service? We have found certain commonalities among family companies and have developed best practices around these questions--practices that more and more family companies are adopting as they transform...