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A non-exec director can destroy a family business

Aug 14, 2017
A non-exec director can destroy a family business

The benefits of an independent board of directors are numerous. You enjoy discipline, outside thinking and you enjoy a level professionalism and accountability to the family business.

This is near impossible to do if your advisory board, at either a family level or a family business level only consists of family and and operational staff.

Our own advice business has independent advisor’s on our board and we also act as directors and chairs for our family business clients. So yes we think it is a great benefit.

Do we get great value every time? No. We sometimes wonder if there was any value at all in Sam or Lyn and that feeling can go on for a few months like that.

Then somebody will voice an intelligent question that will change the future direction of your business. And that moment is gold. It is why we have an advisory board and it is why we do it for families we help. We walk the talk so to speak.

So how does it go wrong?

An independent director is typically acting alone. They do not provide heavy equipment. They do not have a bundle of staff that are doing work behind the scenes. If the business suffers a downturn the directors are affected: but they are not the owners. The owners suffer the loss.

In short the independent directors are employees. They are not contractors – even with an ABN. The family business is obligated to pay superannuation on their salary and also pay payroll tax on what they take home – including bonuses. If you are unsure look at Reveue Ruling PT 6 in the WA Department of Finance website.

This additional costs can be significant and typically add another 15% to the cost of an independent director. Simply writing up a contract and opting out of these costs with an ABN does not do the trick. The obligation to pay superannuation and payroll tax are statutory.

But why stop their? Is this person an “employee” within the ordinary sense of the word and are they entitled to annual leave? Has the current family owners checked the contracts with their lawyers? We know that you cannot simply negotiate with staff to opt out of annual leave and LSL.

So the cost of our advisory board is now 25% higher than original estimated. And that cost is accumulating each year. And while your family business clearly trusts the person: things can change – happy directors can become unhappy. The can lodge claims for termination and underpay.

Of course their are exceptions. If your newly appointed director or chair is running a business (so a real office away from the private home, real support and technical staff and so forth) – that person can invoice through their business. Each case in this instance must be considered separately – but a home office, engaging a spouse and a motor vehicle is not enough to be a business.

Will it “destroy” the family business?

So this cost (extra 25%) would clearly hurt if you had to pay it: but would it “destroy” a family business? Really?

Well by itself no. However the non-executive director, or independent chair, is their to increase the corporate governance of the company. A directors first act should be ensuring their own employment cost and relationship with the new company should be tied down and compliant with the law.

If the director deliberately (or negligently) tries to create an “elephant in the room” about their relationship with the company it becomes difficult to recover from that. Senior staff (at least from accounting) will be aware of the issue regarding superannuation and payroll tax and they will wait to see what happens. The auditors, tax advisors and others in the organisation will ask about the issue.

Sadly some non-exec directors we see refuse to acknowledge their relationship with the board. This is not a good foundation.

The top of the organisation is corrupted before they start it becomes very difficult to set the moral high ground from there on in. The culture of your business is starting to change in ways that you do not want it to change.

So what is the answer?

When you set-up a board, or advisory board, for your family business slow down. Plan the process and write the process down on paper. Write up a list of the overall reasons why you are looking for for an outside person. Look at the different roles and responsibilities you will have for the business advisory board and for the family advisory board. Cast your net wide for a quality person to step up and have a robust and disciplined approach in recruiting a person. And ask the family for their opinions as to how things should go down (in the correct environment and with empathy).

When you get a board established make sure the basic corporate governance matters, at board level, are managed correctly from day one. Properly understand the cost of an advisory board. You are better off to not have a board rather than to start one, run it for 9 months and then cancel it due to costs. That would be a disastrous outcome and reflect badly on the culture you have developed over decades in your own family and in the businesses your family run. Contact our experts today for expert strategic advice and business succession planning,



Category: Family Owned BusinessPopular

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