To support the content of this article, we asked APIA Swiss member Grégoire Bouille to share his experience of governance issues in a family business.

Grégoire worked at board level for large multinational companies, until he decided to take over his father’s watchmaking business in 2008. He knew the family business well, having been involved at board level for several years. But the latter was somewhat limited, insofar as there was no outside, independent advisor. To avoid continuing with the typical trilogy (Owner, Boss, Chairman), he built his board of directors by adding an independent director.

The aim: to be challenged and implement a strategy. Alone, we tend to fall asleep when everything’s going well.

An enlarged Board of Directors with external representation also helps to maintain growth and provide advice. When Grégoire decided to invest several million in a new, larger plant, the Board of Directors questioned him, challenged him and enabled him to assess whether the investments were wise, in order to determine and support this decision.

Indeed, in Grégoire’s experience, confrontation is often lacking in family businesses. Important decisions are made quickly or by tacit consent, over an informal meal or during a car journey, etc. But in the end, they can be very substantial, impacting the company’s liquidity and even the wealth of shareholders or family members. That’s why Grégoire, in his current role as an independent director for other family businesses, recommends that board decisions should always be taken rigorously, in accordance with protocol and after structured discussion. Other overriding factors can also have an impact on operations or management, such as a lack of precise reporting (e.g. 13-week cash flows, hedging), complacency in CAPEX management, a lack of strategic vision (e.g. 3-Year plan), a lack of formal governance rules, too little or too much risk appetite, or adjustment measures that can be detrimental to growth, operations or even resale (e.g. processes, share capital structure, adjusted EBITDA). An independent director is there to discuss and monitor these crucial elements.

The independent director also acts as a timekeeper. For example, when Grégoire decided to invest in additional production machinery in 2008 to keep up with the company’s rapid growth and increased orders, his father, who was still on the Board of Directors, took a different view. The latter was thinking short-term and about his exit, while the former was thinking long-term and about the company’s future positioning. Their independent director succeeded in federating these two seemingly contradictory visions of growth and bringing about a family consensus to enable the company’s evolution, while maintaining excellent family harmony and good governance.

What happens when several family members no longer wish to remain involved in the company?

Prior to Grégoire’s arrival, his father had worked with his older sister in the company. When Grégoire’s aunt fell ill, his father wanted to sell everything. But the timing wasn’t right in 2008, as we were in the middle of a recession and subprime crisis. What’s more, Grégoire’s own sister also worked in the business, but couldn’t see herself investing in a takeover. In a spirit of saving the family’s interests, Grégoire offered to take over the company at the end of 2008, but subject to 3 main conditions: (i) he would take over 100% of the shares after the transfer of shares between his aunt and father is settled, (ii) he did not want to become the operational boss of his own sister, so a governance solution had to be found, (iii) there would be a maximum of 3 years of transition with his father, so that he would not remain in operations ad-vitam aeternam, as is all too often the case in this industry… Having agreed to Grégoire’s proposals, a transparent sales process based on market values was put in place so as not to upset or hurt anyone. The independent director played a major role at this point, helping to set the market value, ensuring that everyone was satisfied, etc., and always with a view to the company’s long-term future and profitability.

The role of the administrator is therefore also to be a confidant, because the stakes go far beyond the financial aspects. There’s a whole emotional part to it, and a connection to be made between the various family members. The independent director must ensure that the family roadmap is respected by the Board of Directors. Often, an independent director also sits on the family council, to act as an impartial link between the operational and non-executive parts of the family.

In 2017, the company was sold at the request of an industrial group. The independent director was present beyond the day-to-day work. He took care of everything from preparation to release. The independent administrator provided concrete criteria of the market, the sales process and without the emotional aspect.

In short, why is it better to have an independent director on your Board of Directors?

  • He knows family dynamics and triggers (LT view vs. ST view)
  • He is an excellent negotiator, moderator and facilitator between short-term vs. long-term objectives.
  • He provides independent advice (on investment, transfer, skills, recruitment, business valuation, etc.).
  • He is the guarantor of corporate governance and certain good governance processes.
  • He is the investigator of the family roadmap, of a shareholder pact, of a family pact (possibly with several levels).
  • He implements family rules and regulations (e.g. seed funds for entrepreneurial initiatives, share buybacks, support for studies, hiring criteria, etc.).
  • Participates in business development outside networks and family circle (e.g. abroad)
  • He’s a point of contact / “soft arbitrage” in the event of crisis(ies)
  • He brings diversity, mix and expertise

We would like to thank Grégoire Bouille, APIA member and Independent Director, for his involvement in the creation of this article.

The entire APIA team is here to inform and assist you in choosing a competent independent administrator who meets your needs.

APIA Swiss Team