Shanel O.

Villaluz BSA 5
COMPARISON BETWEEN COMPANY’S BOARD OF DIRECTORS
COMPOSED OF FAMILY MEMBERS AND NOT

The role of the board of directors in a family-run company has certain similarities
to boards of publicly-owned corporations. The board’s roles in publicly held companies
are the selection, evaluation, and rewarding of CEOs; monitoring of the officers’
compliance with national and state laws, IRS policies, and SEC rulings; and other
supervisory functions. Boards of public companies likewise approve corporate
strategies, assess these strategies periodically, and undertake CEO evaluation and
board performance self-evaluation on a regular basis. They provide advice and counsel
to the officers and to the organization at large, lend their reputation to the firm, and, at
times, use their social, professional, and political networks to further the company’s
interests. Since these directors may also be directors in other large firms, they are able
to bring with them vast amounts of corporate wisdom and experience.

Family business boards with independent directors have similar qualities to

independent boards of publicly-held companies. However, insider boards are a different
story because the owners are usually the managers themselves. For very small
operations or sole proprietorships, the husband or the wife is the sole owner and
manager, the children perform some work, and they employ one or two employees.
They may not even have a board. If they do, it is most likely composed of a brother, a
sister, and everyone else working in the business. These boards might be paper-only
boards to satisfy government requirements for incorporation.

In the case of publicly-held companies, directors in family businesses have

certain fiduciary duties to the shareholders and the corporation. They must exercise
their duties in good faith, with the care that a typically prudent and responsible person in
a similar position would do under similar circumstances, and in a manner that the
directors (even non-family, minority directors) believe is in the best interests of the
corporation.

In both family businesses and publicly-owned corporations, directors may be

classified as insiders, grey, or independent. For family businesses, insider directors are
family members who run the businesses, such as the CEO or a kin who is the Vice-
President. Grey directors are not fully independent directors as they have significant
business or relational ties with the company, yet were still considered as “outside”
directors in the past. Independent directors, on the other hand, are non-aligned, neutral
directors who have absolutely no ties with the business by themselves or through their
next of kin, do not have existing or previous contractual arrangements with the
corporation, and have never been an employee or officer