The advisory board in family businesses


An important instrument of business management and succession planning

An advisory board can make a valuable contribution to ensuring the quality and objectivity of business management. Approximately 60 percent of German family businesses have set up an advisory board. The Governance Code for Family Businesses (Governance Kodex für Familienunternehmen) recommends it.

Why an advisory board?

An advisory board is a voluntarily established consulting and supervisory body in companies. As an instrument of family business governance, an advisory board can and should exert a positive influence on business management and corporate culture. Companies are increasingly recognizing the advantages of an advisory board.

In family businesses, emotionally driven conflicts among shareholders can threaten the existence of the company. In such cases, an advisory board ensures a neutral view of the company and its bodies – managing directors, shareholder meetings – from an outside perspective. An advisory board can objectively analyse disputes arising from conflicting family interests, mediate between the conflicting partners, and find solutions in line with the companies’ interests at an early stage of the dispute.

The Governance Code for Family Businesses expressly recommends the establishment of an advisory board and states: “Such an entity can help ensure the quality and objectivity in the advice and control of business management.” The Governance Code also states that “family-independent expertise on the part of the supervisory body can improve the quality and objectivity of its work.”

An advisory board can be established both by provisions in the articles of association and outside the articles of association on the basis of a contractual obligation. The establishment of an advisory board is also possible in addition to a mandatory supervisory board. However, the legal responsibilities of a mandatory supervisory board cannot be undermined by an advisory board.

If the articles of association provide for the establishment of an advisory board, its tasks and competencies as well as the details of its composition must be comprehensively stipulated (Section 3.1.1 of the Governance Code for Family Businesses). In general, extensive powers, including original rights of the shareholders, can be transferred to the advisory board. However, the right to make fundamental decisions (in particular amendments to the articles of association) must always remain with the shareholders.

Responsibilities of the advisory board:

Particular attention must be paid to determining the specific responsibilities of the advisory board. The scope and intensity of consulting should be determined based on a thorough analysis of the company in terms of economic and human resources as well as with a view to future-oriented advising and planning.

The following responsibilities, for example, can be assigned to an advisory board:

  • Advising the management (future-oriented),
  • Issuance of instructions to the executive board and approval of certain transactions,
  • Control and supervision of the management (past-oriented),
  • Assumption of an arbitration function in disputes between the shareholders or between the company and the shareholders,
  • Control of the succession process.

An advisory board, which is entrusted with the management and execution of company succession, can provide an important positive impulse that enables the family-owned business to act in times of upheaval. In particular, the advisory board can reduce the risk of paralyzing conflicts and counteract the danger of a dwindling identification of descendants within company. Particularly in the case of a large number of shareholders, the advisory board can facilitate decision-making and ensure a smooth transition of the business by pooling the influence of the shareholders, mediating between the (new) management and the owner families or acting as a neutral authority whose task is to examine which of several candidates from the owner families is suitable for succession management.

Composition of the advisory board:

Members of the advisory board should have a high degree of integrity and professional as well as social competence. It is often advisable to appoint persons to the advisory board who do not have any family or personal ties with the partners or managers of the company. This neutrality creates further trust. In a mixed advisory board consisting of representatives of both the owner family(s) and third parties, the chairmanship should be left to a neutral person. To the extent that advising or supervising the executive board is one of the responsibilities of the advisory board, the members of the advisory board should have technical expertise or at least general entrepreneurial experience in medium-sized and family businesses. If the owners tend to have emotional conflicts, the chairmanship of the advisory board should be transferred to a sovereign and charismatic individual who is able to act as a mediator and to work out reasonable, interest-based solutions.

Recommendation:

As a body of medium-sized family-owned companies, the advisory board contributes significantly to supervising and advising the management as well as solving typical problems of family-owned companies. The mere existence of an advisory board can help to avoid conflicts or increase the willingness to participate in solutions. Particularly in family businesses with a shareholder structure consisting of several family members and/or in succession situations, the implementation of an advisory board is an effective means of securing business management and company succession. However, what the advisory board should and can do must be carefully examined prior to its establishment. When preparing a suitable advisory board model, future developments (e.g. succession issues) must be taken into account in addition to the company’s current situation. The advisory board should be established as early as possible so that it can play a strong and active role in the execution of company succession.

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Tags: #advisory board, #M&A

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