Independent Boards Help Avoid and Resolve Conflict

This issue of Acredula focuses on avoiding and, if unsuccessful, resolving business conflicts among owners of closely held businesses.

Although the article discusses several different mechanisms, the best way to avoid or resolve a conflict is governance by an independent governing board or, where appropriately structured, an advisory board.

One of my early clients tried this with his two sons. He formed a corporation, appropriately named “Push and Shove Corporation,” and subjected both sons to the overall authority of a statutory governing board composed of the two sons and the parents. Push and Shove was successful in avoiding unresolvable conflicts until the parents were no longer able to actively participate.

A better example is an architectural firm that has successfully succeeded through two generations of owners who were family members and a third and soon to be a fourth generation of owners who are non-family members. The architectural firm succeeded in avoiding unresolvable conflicts because it followed the corporate formalities of being directed by a governing board that had at least two independent members. Because of the presence of independent board members elected by the owners, the board met both of the tests for a mechanism to successfully avoid or resolve conflicts: The board appeared to favor no one over the other in any conflict, and there was a chilling effect of having any matter resolved by the board for reason that, because of the independence of the independent members, no one could predict the outcome.

Another example is a manufacturing firm that successfully succeeded through five generations of owners who were family members. The first generation of owners consisted of two brothers. The second generation consisted of the children of one of the brothers. The third, fourth and fifth generations were children of those children. The business succeeded through each generation because the owners also followed the corporate formalities of being directed by a governing board that had independent members. This included a cradle-to-grave life cycle from being managed by the family as the executive officers, to being managed by outside or professional managers, and finally to being sold to a publicly held corporation.

Although each of my examples involved a statutory governing board, a non-statutory or advisory board can accomplish the same result if the owners and the advisory board members agree at the outset that any conflict will be resolved by majority vote of the advisory board and that the owners will be bound by that resolution. An excellent resource for learning about or establishing an advisory board is Business First’s Advisory Board Exchange. Information can be found at www.advisoryboardexchange.com or by calling 614.461.4040.