ILMA Compoundings August 2016 - 31

FAMILY BUSINESS Should We Separate the Chair and CEO Roles in Our Family Businesses? Steve McClure, Ph.D. I n family businesses, it is common for a single individual to hold both the CEO and chair of the board positions generation after generation. This combined role is usually a result of a board needing a chairperson and finding no reason to look beyond the well-qualified leader of the business. The business's performance benefits as operational and governance functions more easily align to efficiently support business agility. We see many family firms default to a combined function as generations and business circumstances change without questioning the arrangement, unless there is a significant leadership change such as the appointment of the first nonfamily CEO. Further, in situations where shareholders are concerned with business performance and the two roles are combined, there will often be a push for nonoperating shareholder participation on the board. The result may be an ineffective board, especially if nonoperating shareholders have little business experience or lack the governance skills the business needs. Many consider it a waste of a resources if the board primarily becomes a management oversight function. By splitting the roles, many have found that the chair can focus on good governance, including utilizing independent directors and populating the board with those who most add value to business success, while providing management oversight. Yet, when the CEO position is held by a family member, is a combined CEO/chair function always the right structure? The answer becomes complicated in later generations, for bigger families, for those with more complex businesses and when governance is formalized. The opportunity to challenge tradition is while you are planning a leadership change or making significant changes to the board, such as increasing formality as with the addition of independent directors. It should also be a key question in your emergency succession plan. When to Separate and When to Combine We have no hard and fast rules for when to separate the roles of chair and CEO and when to keep them combined. However, one of the most common reasons to split the roles is to increase the confidence of shareholders to provide greater alignment between owners and management. We see this when trust has fallen below a threshold and also with larger families who are geographically dispersed or disconnected from the business. A single family member holding both positions can understandably appear like a conflict of interest to nonoperating shareholders. They reason that since a key purpose of the board is to ensure effective management, it becomes more difficult to hold a CEO accountable if that person is also leading the board of directors. Compoundings August 2016 * 31 * Vol. 66 No. 8

Table of Contents for the Digital Edition of ILMA Compoundings August 2016

FROM THE CEO
FROM THE PRESIDENT
BOARD BRIEF
NOTES FROM NLGI
THE HEART OF ILMA
In Memoriam Mike Ryterski (1920–2016)
Radco Industries Promotes Brian Finch
Manufacturing Day is Coming! October 7, 2016
THE EVOLUTION OF GROUP II
VOICES & VIEWS
INTERNATIONAL INSIGHT
FOCUS ON ETHICS
FAMILY BUSINESS
RULES & REGS
POWER PLAY
LEGAL EASE Preparing for Brexit
THE WHITE PAPER

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