Could non-family Non-Executive Directors be the way forward for family businesses?

Navigating the dynamics of a family business can be particularly challenging, with a number of unique factors differentiating them from other types of businesses. These include potential family conflicts, succession planning, as well as clearly defined strategies for recruitment.

Therefore, effective leadership for these enterprises has to start right from the top through the Board of Directors.

However, the boards of many family businesses are comprised of – you guessed it – family members.

While this helps ensure control of the business is kept within the family, it can also have major repercussions, particularly through the lack of an outside perspective.

Nadia Pace, a seasoned Executive Mentor and Non-Executive Director (NED), reflected on this issue recently, highlighting the benefits that boards can gain from an independent thinker.

In a blog post, she strongly advocated for the appointment of non-family NEDs, which help give a new angle to the businesses’ operations, opportunities, as well as challenges.

She remarked that a common concern among family businesses is the perception of a non-family NED as a threat, with this view stemming from “the fear that an outsider might ‘breathe down their necks,’ imposing changes and exerting control over operations.”

“Family businesses, often deeply rooted in tradition and familial governance, might feel uneasy about having to report to an external party regularly. The introduction of a non-family NED can be seen as an intrusion into the closely-knit family dynamic, potentially leading to resistance and friction,” Ms Pace continued.

She added that family businesses are often entrenched in the challenge of seeking to balance operational and governance issues. While family members can manage day-to-day operations, there has to be robust governance in place, especially when the business is seeking external financing or future sustainable growth.

“A non-family NED can bring a fresh perspective and help address governance issues effectively. However, the challenge lies in integrating this new role without disrupting the existing operational harmony,” Ms Pace affirmed.

The case for independent NEDs has been made by numerous business consultants and industry specialists over the years, as these executives can help provide a business with insights on how they can develop further, especially in cases when they are witnessing a growth spurt.

Despite this, family businesses with NEDs on their boards are still relatively rare. Recent data from The Malta Chamber of Commerce, Enterprise and Industry highlighted that the introduction of independent NEDs is still very far down in family businesses’ priorities.

In her blog, Ms Pace noted that the key to gaining all of the benefits that a non-family NED has to offer is to have a “structured and thoughtful” onboarding process, allowing the individual to contribute effectively while respecting the family dynamics.

Following this, she highlighted a number of key objectives that family businesses have to aim for when onboarding an external NED.

Firstly, family businesses need to recognise the value of having fresh perspectives. External views can allow management to introduce best practices, innovative methodologies, as well as effective risk management strategies.

“By being outside the family dynamics, they can objectively assess the business’s operations and provide unbiased advice,” she said.

Ms Pace also stated that family businesses need to take a gradual approach when it comes to introducing innovation and change.

A non-family NED needs to focus on delivering small, yet credible improvements from one board meeting to the next, thus enabling the Board of Directors to build trust in them and value their guidance.

Additionally, NEDs need to question the status quo, challenging certain ideas that have been commonplace for a notable period of time.

“Their external viewpoint helps to identify and address issues that might be overlooked by family members accustomed to the business’s internal culture,” she added.

NEDs are also crucial when it comes to succession planning. As Ms Pace stated, their objective stance allows them to “navigate the complex dynamics and relationships within the family, ensuring that succession plans are realistic and aligned with the business’s future needs.”

“By mapping current competencies against strategic requirements, they can identify training and mentoring opportunities for family members, ensuring a smooth and effective transition,” she stressed.

Family businesses with non-family NEDs can also have an enhanced level of professionalism as well as clear governance practices, preparing the business for future growth.

Through their external perspective, NEDs can also facilitate a balance between family interests and business priorities.

“They act as an empathetic, yet objective mediator, ensuring that business decisions are made in the best interest of the company’s long-term sustainability,” Ms Pace stated.

This is also essential in terms of maintaining objectivity in decision-making, as their independence allows them to challenge assumptions, offer constructive criticism, and also make unbiased recommendations.

“Regular external reviews of the board’s performance can help maintain this objectivity and ensure that both family and non-family members are effectively contributing to the business’s success,” she continued.

In addition to this, having a non-family NED also enhances the credibility of the family business with external stakeholders, reassuring them that decisions are based on “sound governance principles rather than emotional or familial biases.”

Ms Pace remarked that hiring a non-family NED can be a “transformative step” for a family business, and if they are integrating well, these individuals can lead to significant benefits, such as improved innovation, professionalism, as well as stakeholder trust.