A True Test for Family Companies

by Roy Richards, Jr. is Adjunct Professor of Strategy at IE Business School.

COVID-19 is wrecking markets and will push many European and North American companies to the limits of endurance. Never has it been more important for family companies to get the very best advice they can about the future from independent boards of directors.

Most family companies treat governance as an afterthought: something to address in a brief annual meeting, followed by a long lunch with family and friends. The meeting is often an informal affair, long on approvals and short on objective discussion about business performance. Family company boards, especially in the first generation, are often “watching” boards, a bare handful of old friends and advisors. They are more audience than judges, and their role rarely requires them to take responsibility for the future of the company.

But the last few weeks have changed everything. The future of many companies, like a soapy bubble, has burst right before our eyes, leaving us with empty order books and laid-off staff. COVID-19 has done that.

Without warning

In my own family company, our board met in early March—after the Wuhan outbreak but before the virus hit Spain—and approved a budget for 2020 that saw modest growth in turnover and profitability from a strong 2019. No drama, just continued growth in a good economy. It was almost business as usual. Sure, we were alert to the virus and doing what we should to protect our staff, but we had few concerns beyond that.

But just one week later, the CEO reported that April bookings were down and that our clients were laying off staff. Today, two weeks after that, our phones have stopped ringing and we are worried about receivables from clients who suddenly cannot pay. In 35 years of business, never have I seen markets turn so bad, so quickly. What looked like a sunny 2020 now looks like an apocalypse.

These markets can break companies. Government support will be helpful, yes, but many companies just will not make it. Corporate survival will require our best-ever strategy and execution.

A strong board

Now is the time to gather together the board, not to talk about how the business was, but to talk about how it will be. We are fortunate to have a half dozen independent, professional, highly experienced directors on our board. Our agenda will be simple: What does the rest of the year look like, and how should we get ready for it?

Now, our directors aren’t wizards and they certainly cannot predict the future. But these men and women bring more than 150 years of combined business leadership experience to our company. They don’t come to help run it, but they do come to give advice. The CEO will be listening carefully, and together with the board will create a new plan for 2020 that reflects the harsh new realities of corona-crashed markets. We’ve got a great CEO, but he sure doesn’t have 150 years of experience. I think he will be grateful for the input.

Never has it been more important for family companies to get strong advice from independent board members: men and women with zero commercial connection to the company, and whose chief responsibilities are to judge performance in the present, plan for the future, and steward the company for the benefit of all shareholders. In turbulent times like these, all CEOs—including family company founders who are used to making all the big decisions themselves—become more effective leaders when supported by powerful advisors.