Appointing Independent Directors
Appointing independent directors to family companies
Freddy and his daughter Pebbles are sitting down to Freddy's favouring afternoon tea of pikelets with jam and cream. Freddy is very quiet, so Pebbles asks what is on his mind.
“Well, I was helping out at the school calf day and I got chatting to Bob about our family company buying a second farm,” replies Freddy. “Bob reckons if we want to grow our farming business, we need to appoint some independent directors to our company’s board. Bob said one of the best things he and his wife ever did was to appoint an agri-business academic to their board.”
“That is a very good idea, Dad,” replies Pebbles.
“But why would we want to pay someone outside the family to make decisions for our family company?” asks Freddy.
“Well Dad, having independent directors on your board can help preserve your family relationships and grow your farming business,” says Pebbles. “Independent directors bring discipline, objectivity, new perspectives and fresh thinking to the board of a family company. Their job is to act in the best interests of the company and since they are not part of the family, they do not get distracted by family issues.”
“The discipline of formal board meetings where business issues are debated and decisions made promotes the healthy separation between business and family. The family dinner table ceases to be a de-facto business meeting (you and Mum talk business at every meal) and board meetings cease to be a venue for family arguments. This makes for a healthier business and happier family life.”
“As you grow your farming business, the need for robust governance grows too. Independent directors bring fresh thinking around managing risks and taking advantage of opportunities. They can ask the difficult questions (like, is my brother really the best person to manage the new farm?), help you set strategic goals and make changes to your business culture that will help the business grow.”
“Lenders take confidence from the presence of independent directors on the board and as a result are more willing to lend. You will need to borrow a lot of money to buy that new farm, Dad,” says Pebbles.
“Yes,” says Freddy, “Bob said appointing independent directors and establishing a formal board structure enabled his company borrow more money for new farms. Now Bob’s company has seven farms and they do not talk business over family dinners!”
“How much would an independent director cost?” asks Freddy.
“Your farming business is a small to medium sized enterprise so you can expect to pay around $10,000 per year per director,” replies Pebbles.
“Crikey,” said Freddy, “appointing an independent director (maybe even two) is worth thinking about. Pass the pikelets please Pebbles. I need to refuel before I set about considering who we might appoint to our board.”