GUESTS AT THE TABLE?

INDEPENDENT DIRECTORS IN
FAMILY-INFLUENCED PUBLIC COMPANIES
The challenges are especially severe for independent directors, in part because the concept of
independence is poorly defined in this context.
Analyses of the roles and duties of independent directors typically focus on a directors ties to
the companys business and its senior management, not allegiances to particular shareholders.
Moreover, the composition of family-company boards is distinctive because such boards
often include members of the family or directors who are formally designated as family
representatives. Family representation on the board may be formally assured through voting
agreements among family shareholders.
Effective service as an independent director in this context may require buffering senior
management from family shareholders, whether or not they are fellow members of the board,
as well as difficult assessments of the stated preferences of family shareholders in light of the
corporations business situation and the interests of its nonfamily shareholders.
The questions examined in this Article are relevant to debates within the ample scholarly
literature on corporate governance. A focus on family firms with public shareholders
furnishes an oblique and revealing angle of vision into ongoing debates and questions
concerning corporate governance within public companies more generally. Something like a
raking light cast across the surface of a painting or manuscript, this focus illumines features
and limitations otherwise over-looked. Publicly held family firms may be ones in which basic
questions about the corporations overall objectives and their implications for directors are
more difficult to answer. For example, directors are often urged to adopt, as a lodestar, the
maximization of shareholder value. However, in family-controlled firms, the definition and
measurement of shareholder value turns on which cohort of shareholders is relevant. For
family shareholders, value may encompass expectations, commitments, and measures not
relevant to other shareholders. Additionally, a focus on these firms may prompt one to doubt
the wisdom of urging that directors translate shareholders stated preferences directly into
action, given the prospect that shareholders interests may so sharply diverge. Even if viewed
as transitional forms of indeterminate duration as an interlude between a firms IPO and wide
dispersion of its shares-some family-controlled firms endure through multiple generations,
and even those in which the founders or familys interest diffuses more rapidly nonetheless
represent a sizable fraction of public companies in the United States.
Moreover, although it is clear that the possession and exercise of control may benefit
shareholders, the personal benefits of control are diverse. The law legitimates some and
proscribes others. In many ways, the law insulates the infusion of a familys values and
interests into the culture of the corporation it controls, recognizing that such an infusion is
often either benign or beyond the effective reach of the law.

My thesis is that directors who are independent of both management and the founding family
severe distinct functions within the complex environment of a family-influenced public
company. Independent directors are the sole actors at the highest level of firm governance
who have the capacity to bring appropriate detachment to bear in resolving difficult questions
that implicate family ties as well as business necessity, including management succession and
external threats to the firms position and separate existence. Independent directors may help
assure the boards appropriate focus on the corporations business despite the distracting
influence or overhang of frictions internal to the founding family. Additionally, independent
directors, by acting vigilantly, may guard the corporations assets against legally problematic
extractions by a controlling shareholder, whether or not that shareholder acts in cahoots with
senior management.