Family-owned SMEs are a significant and pervasive form of business throughout the world and are extremely relevant to the global economy. Research shows that more than 50 per cent of East Asian firms

and 44 per cent of West European firms are family-owned SMEs. In Africa, the percentage of these firms is estimated at more than 85 per cent. Yet the bulk of research on the role and contribution of ‘outside’ board directors has been largely on publicly-traded companies. This is despite the widely accepted notion that ‘outside’ directors can be decisive in creating value for family SMEs.'In most family SMEs, business life can easily become as important as maintaining family traditions. In these firms, there is either a complete absence of a board, or where it exists, membership is strictly family or comprises very close insiders.  The boards in these SMEs therefore lack cognitive diversity, or a multiplicity of styles in data collection, interpretation and

analysis usually brought in by outsiders. Moreover, the scope of such a board will vary depending on the disposition of the business founder who usually doubles up as the de facto head of the family. The board here is therefore basically a ‘rubber-stamping’ board used to formally approve what the founder, owner-manager and family head has already decided.'There is usually no separation of roles, checks and balances between management, owners and directors. In addition, the duties, responsibilities and privileges of family members are not clearly defined and can often times overrule management decisions. Because the family wants to keep a tight rein on the firm, the concept of outside directors is not welcome, neither is any other external influence. Therefore, the business lacks qualified staff, clear policies, long term planning, external strategic input and a clear succession plan.'However, inclusion of outside directors in family SMEs has been shown to go a long way

in inculcating the development of professional governance practices in the business. The best outside director should be an experienced non-family person trusted by the majority in the family, the dominating family member, the company CEO and by other powerful stakeholders. While individuals with a reputation for rent-seeking behaviour must be shunned, those with a demonstrated ability and willingness to openly and honestly challenge the status quo can be valuable assets to the board and the SME.'Since most family SMEs are closely managed by owner/managers who have detailed insights into internal processes of the firm, outside directors need not be concerned about possibilities of opportunistic behaviour by management. This therefore means that the board can focus less on management control and more on service activities, such as on stewardship and strategic development. Without the responsibility for control over management, the board can be likely to think more ‘outside the

box’ and to recognise potential strategic opportunities open to the firm.'The specific roles of such a family board can be to initiate strategic review and analysis, to formulate strategy and to set corporate direction. In addition, the board can contribute to development of corporate policy by approving budgets, by generally helping to create a healthy corporate culture and by determining a compensation policy for senior executives and family members.'Apart from the assigned roles, a board with outside directors can be a useful link between the company and important stakeholders, which in turn can greatly help to enhance the reputation and legitimacy of the organisation. This can also provide assurance to stakeholders—especially buyers, suppliers and financiers—that the business is able to cope with crises including the dynamics of family succession. These issues can help in shaping stakeholder perception of business continuity—always crucial for creation o

f value.'Management research has identified other advantages enjoyed by family SMEs whose boards include outside directors. Because of the independence and different frames of mind of independent outside directors, they can greatly help in minimising tensions in situations unique to family SMEs. First, because family members have similar value systems derived from similar upbringing, family businesses can easily perpetuate ‘groupthink’, parochialism and in-breeding of ideas. Second, information asymmetry among branches of the family or dominance of one or more family members needs constant monitoring by an independent mind.'Performance of boards in family SMEs can be optimised in several ways. First, board leadership through the chair can determine to a large extent whether outside directors will continue to provide a constructive challenge, and their time commitment. The leadership style of the chair can also play a big role in setting the relationship between the boar

d and management and how the board works as one unified team in decision making.'Second, the board can regularly identify gaps and redundancies in its skills base through a skills matrix. This can also help guide the board as to which skills to focus on in future appointments. Using concrete indicators that can be tracked over time, board members can complete surveys to evaluate and to provide feedback on their board’s effectiveness in carrying out its mandate. Mature and professional boards can routinely conduct peer assessments aimed at providing feedback to individual board members as to how they can add value to the board.'Despite the evidence of value creation by outside directors, several challenges contribute to low adoption rates of this concept in family SME boards.  Most of these SMEs view such boards as costly in both time and money because of the added work in preparing board papers and because of the obligation to pay directors’ remuneration.  '

The selection process of board membership in family SMEs is more often than not fraught in suspicion and family politics with the result that the choice is not always in favour of the “outsider”.  Moreover, some family members hotly oppose this concept arguing that outside directors might misuse sensitive company information while still others fear loss of control and flexibility.'In some cases, family SME owners are fearful of being judged naive or ignorant by the outside directors. They are also fearful of making a poor selection of outside directors and of not knowing what capabilities to look for or how to assess those capabilities. Still, family SME owners are uncertain about how to attract suitable and willing outside directors and how to retain them affordably.'In many cases, families SME boards are formed for the wrong reasons for which worthy outside directors cannot fit. Some of the wrong reasons include using the board as a de facto management committee

or as a mediating body to minimise tensions between family members.'Nevertheless, it would appear from the foregoing that family SMEs can greatly benefit from formalising their boards by including outside board members as early as possible in their growth process. In a nutshell, adoption of this governance concept can help create value in the family SME through improved strategic direction, improved reputation and through elimination of parochialism. Clearly, the advantages of including outside board directors outweigh any costs and challenges.'Dr. Mugo is the Research Partner at Scenario Africa Limited, a Management Consulting and Business Research firm in Nairobi. Email:muragegm'

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