Directors are well advised to heed the old adage ‘noses in, fingers out.’ But in family firms, don’t forget about the heart.

“Noses in, fingers out!” That’s the most important advice I have for directors, whether they serve on the board of a public company, a small business or a local charity.

In business corporations, the shareholders elect directors to represent them on the board. Good directors should have sophisticated business experience, good judgment and vision. Wise directors keep their noses in: do their homework, ask searching questions, listen carefully, challenge management in constructive ways.

Directors choose a chief executive officer to manage the company day-to-day. Wise directors tell the CEO where they want the company to go, and they hold the CEO accountable for getting there. They don’t try to tell managers how to do their job. That would be micromanagement – fingers in. Wise directors keep their fingers out of management.

“Noses in, fingers out” applies as well to managers. Most of your subordinates can do their jobs. They expect you to tell them what to do, but resent your telling them how to do it.

The interaction of this three-tier system – shareholders, board of directors and management – is called corporate governance. In some public companies, governance isn’t working very well. Directors tend to be the rich, the famous, the politically well connected and CEOs of other public companies. Look closely: those CEOs are probably directors on each other’s boards. As a result, directors of poorly governed public companies eat the plate that management sets before them – noses out. And now and then, Enron happens.

Misplaced noses and fingers in family companies

But suppose your company is a small family corporation. The owner-shareholder is also the CEO. Who needs a board of directors to hold an owner-manager accountable to the owner-shareholder, if they’re the same person? On paper there’s a board, of course. Every corporation must have one – most likely the owner, his or her spouse and a trusted employee or adviser. If this board meets at all, it’s to pass resolutions required by the bank, or real estate transactions, or the company’s retirement plan. Everyone votes and signs as the owner directs. No one, including the owner, really noses in.

With fingers in everything, and so close to day-to-day problems, an owner-manager can lose perspective, detachment and objectivity. An owner-manager badly needs the benefit of the rich business experience, good judgment and all-important vision that only good outside directors can supply. “Outside” means directors who are outside the family, outside the company and outside the circle of people who can’t afford to disagree with the owner. Only true outsiders can truly nose in.

Suppose several family members own the shares. Some work inside the company, others don’t. Outsiders suspect insiders of plundering the company through excessive compensation, hidden perks and other deviousness. Insiders view outsiders as parasites who demand excessive dividends, too generous with advice and criticism, and too stingy with appreciation and gratitude.

“Plunderer-parasite” board meetings are cluttered with misplaced noses and fingers. In the fray, the board loses valuable perspective, detachment and objectivity. The fractious board badly needs the rich business experience, judgment and all-important vision that only good outside directors can supply. Adding wise outside directors can transform the boardroom from battlefield to level playing field for both plunderers and parasites, and usually realigns noses and fingers.

…and the heart?

An active outside board is a good thing for most family companies. Even if outside directors are advisory only and have no vote, their wise input can be very valuable. Outside directors can bring fresh air into a family company grown stale by recycling its own ideas. Regular accountability to outside directors can have an “astringent effect” on the corporate culture, tightening up management practices gone slack. Outside directors promise a fresh forum for important ideas that have languished on owner-management’s deaf ears.

One caveat: Don’t expect outside directors to mediate contentious family disputes. It’s best to resolve – or, at least, manage – deep family disputes before inviting outside directors aboard. Wise outsiders understand that there may be family differences beneath the surface. But ongoing open family conflict may cause outsiders to resign. Try to keep family open hostilities out of the boardroom.

A gifted outside director on a family board is a rare person indeed. He or she needs all the skills and insights of successful directors of public or non-family companies, plus a heart that resonates positively with the owning family. Nose, fingers …and heart.

Family members need to like their outside directors, to trust them, to feel comfortable with them, to socialize with them, to talk with them privately about company concerns even if the director considers the inquiry inappropriate or out of bounds. Outside directors should be family business diplomats extraordinaire.

Like it or not, know it or not, outside directors often play an emotional role in the business family system. They may become surrogate members of the family, ingredients in its emotional stew. Feeling like “part of the family” may signal the family’s trust and confidence in an outside director. (The family’s lawyers, accountants and financial advisers may likewise become “part of the family.” If so, this discussion applies equally to other close family advisers.)

But there are psychological hazards, such as transference and countertransference.

Transference is a psychological term for someone’s misplaced feelings towards a helper. It can occur in any relationship in which one person is viewed as an authority figure, upon whom the other becomes emotionally dependent. Transference can have a positive or negative impact.

An outside director can be made an emotional stand-in for an important person in a family member’s life – typically a founder, spouse or parent. Transference is the tendency to relive an emotional relationship from the past, and to (emotionally) cast the helper in an inappropriate role. This can create an unhealthy emotional dependency on the director. The family member may come to rely too heavily on the director’s advice instead of making independent informed choices.

Countertransference is a psychological term for some of the helper’s strong feelings directed toward family members. These feelings are linked to the helper’s other relationships (often past), or the helper’s needs and feelings that are not specifically related to family members, or both of the above. As a result, the family may experience an outside director as being overly helpful.

Countertransference is threatening to a director’s relationship with family members because it conflicts with the director’s expected role as an “objective” businessperson. Here are some signs that a director may be experiencing countertransference toward one or more family members:
  • Feelings of discomfort during or after sessions with family members.
  • Carelessness or discourtesy toward the family members – inconveniencing them, being late to appointments, permitting avoidable interruptions.
  • Strong affectionate feelings for family members.
  • Inclinations to boast about the importance of one’s role as director.
  • Avoidance of family members and neglect of their interests.
  • Gossip with others about family members.
  • A tendency to hammer away at minutiae in one’s role as director.
  • Boredom or drowsiness when involved with the family – almost inevitably an indicator of extreme anxiety produced in the outside director.

Beyond awareness

Transference and countertransference both originate in our unconscious, beneath our level of awareness. The unconscious is familiar territory for psychotherapists. They are trained and conditioned to recognize and manage transference and countertransference. For other helpers, this is strange territory indeed …repulsive to some, even scary. Nevertheless, all who undertake to help families, and especially their outside directors, must be aware of the psychological dynamics simmering beneath the boardroom table, unmentioned in the minutes of the meeting.

Noses in, fingers out … of course. But don’t overlook the heart …and its mysterious companion, the unconscious.
This article will be published in the 2008 edition of Family Business Magazine’s governance handbook.

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