Author: James Reda
There is much data on director pay for publicly traded companies, little data for private companies, and virtually no data for family-owned business that have a unique corporate governance structure. This article focuses on director pay for family-owned businesses and will provide a guideline on how to structure the oversight entity and pay members, accordingly. It will also provide information on usually difficult situations that may arise as a result of the unique nature of family owned businesses.
Family-owned businesses will benefit from board members that include not only family members but also wellinformed, seasoned, independent directors who may serve in an advisory capacity or as members of the more formal board of directors. The corporate governance structure will evolve in tandem with the company.
As with public companies and non-family-owned private companies, employees of a family-owned business will not receive any additional compensation for board service, whether they are a family member or not. But what about non-employee family directors (which we refer to as "NEFDs")? These cases can be a little more complicated.
It is important to understand the corporate governance structure among family-owned businesses, which can vary by company size (and in some cases, by the number of family generations involved). Typically, there is an evolution of corporate governance to provide the board oversight necessary to maximize the value of the company. In general, there are three major governing bodies at a family-owned business, which are as follows (we collectively refer to this as the "Corporate Governance Structure"):
1. The Family Council ("FC"): This council is the "inner circle" that consists only of unpaid family members who are focused on the coexistence of the business and the family. These family members may be employees or NEFDs. Typically the FC meets on a regular basis to discuss challenges and business strategy. The company founder(s) or owner(s) will usually retain decision making authority over the FC. The FC is generally the first governing body formed and in some cases—particularly at smaller companies—is the only oversight.
2. The Advisory Board ("AB"): The next step that most family-owned businesses consider is an AB. Some companies adopt an AB that can fill in the gaps of knowledge and experience, and members may have certain technical expertise in key areas. The AB typically assists in facilitating communication between generations, monitoring the transition of ownership and succession planning, and objectively assessing family members' abilities and strengths. The AB may include both outside, independent talent and family members. Sometimes, an AB will function as a bridge from an FC to a more formal board of directors. Unlike a board of directors, the AB is not generally subjected to fiduciary duties. Members of an AB are typically paid much less than independent directors that sit on a formal board.
3. The Board of Directors ("BOD"): The final step in constructing a strong Corporate Governance Structure is to create a BOD, which may replace the AB or coexist with the AB. This level of governance introduces independent, outside directors who have no other tie to the company or relation to the family. Generally, the BOD is a mix of these independent directors and some family members. Some companies rotate family members from the more contained family council and onto the BOD (and back).
The processes of the BOD are formalized and operations are similar to that of a public company board. Committees may be formed and there is a focus on objectivity. Board members are exposed to a variety of standards and risk including legislated liabilities, fiduciary and other duties. As detailed in this article, the independent directors that sit on the BOD of private, family owned companies typically receive cash compensation at the same level as the independent directors of publicly traded companies.
Smaller companies and companies that are just starting out will almost always have a FC in place, and will sometimes fill in knowledge gaps with an AB. As companies grow in size and complexity, they are more likely to adopt a BOD. This is particularly important for companies contemplating a strategic transaction, as a BOD provides comfort to potential investors who are used to a more formal Corporate Governance Structure.
Once a company reaches a certain size, it is almost guaranteed to have a BOD in place, and the AB may or may not remain intact. See Figure 1.