The Role of the Board in the Family Company

Most Brazilian family firms lack a Board. The exceptions are those that have grown and gone public, consequently obliged to set up a Board which is a legal requirement for listed corporations. In these cases, the Board generally consists of members of the family and possibly a friend, the family lawyer, or some other close contact.

Typically, this Board never meets. The minutes are often written months late, merely to comply with legal requirements, and Board members with no executive status in the company generally have not the slightest idea of what is going on.

To a certain extent, this attitude imitates what happened until quite recently in large American corporations where Boards - although meeting several times a year - played no real role other than blindly supporting the management.

In the USA and Europe, this is changing rapidly. Dissatisfaction became widespread among major institutional investors in the USA due to the ineffectiveness of the Boards of companies that had suffered severe losses with little reaction from their management. Added to this, the Guinness case in the UK, which ended with some people going to jail, resulted in an overhaul of Board operations. The expression Corporate Governance has suddenly become fashionable.

Corporate Governance (from latin verb gubernare, meaning "to govern") is the system set up by the shareholders to control their investments. Starting with the Shareholders' Meeting, which elects the Board, which then selects the management. From here on, the Board establishes an entire control system that closely monitors management actions, avoiding abuses of power that were once quite common.

“But what” the reader may ask “has this to do with the family business?”

Plenty. Except for companies where the founder-owner is still on the job, taking all decisions and aware of everything, family businesses are generally controlled by a group of siblings or cousins, not all of whom are employees. In this case, in order to avoid dissatisfied shareholders, it is important to develop an appropriate information system.

Shareholders not working for the company should feel that they are being forwarded monthly information that they need in order to keep an eye on their assets. Additionally, they need to feel confident that their relations running the company are doing a good job. On this point, the existence of a Board consisting of some family members and a few high-level outside experts who are trusted by everyone can well be of much help.

The other important point is that a Board can help provide support and backing for the CEO. A handful of outside Board members, skillfully selected for their widely-diversified expertise and differing profiles, will endow a business with their experience of practical life and relationships, all of which can only have positive effects.

Two doubts that immediately spring to mind among the owners of family businesses are:

1. If we are the owners, then why share the power with outsiders?
The reply is: You will not be sharing the power. The power belongs to the owner - that never changes. What you will be sharing is the quest for fast, effective solutions to problems, long-term thinking and discussions over the future courses of the economy, all with people selected for the contributions they can make in these areas.

2. But won't we reveal all our secrets to these outsiders?
Not necessarily. If you invite trustworthy people to sit on the Board, then you should trust them. On the other hand, there are some commercial or financial secrets that do not need to be dealt with at the Board level, which is set up to deal with major issues. Nevertheless, at times there may be some confidential matter that is not handled by the Board as a whole, but rather at a private meeting with one or more members, in order to exchange ideas or seek advice.

Finally, an important factor is that Brazilian Company Law requires a Board only for public corporations. According to this law - and it is the same all over the world - the power lies with the Board. There is another figure called the Advisory Board, which has no power or legal status and can only provide advice. For most family firms, this is the best option - people who are there to provide advice, without sharing the power, which is still held by the owners.