In this episode of On Boards, hosts Joe Ayoub and Raza Shaikh welcome David Karofsky, a principal consultant with The Family Business Consulting Group and co-author of So, you’re in the Family Business: A Guide to Sustainability.

David brings both professional expertise and personal experience to the discussion, having grown up in a multi-generational family business and later building a family business consulting practice alongside his father. Most recently, his son Adam has also joined David in his consulting practice.

He shares how family businesses operate at the unique intersection of family relationships and corporate governance, where emotional dynamics and business strategy often collide.

The conversation explores the evolving role of governance in family-owned companies, including how boards can help manage succession, create accountability, and ensure long-term sustainability across generations. 

David also discusses why many family businesses resist formal governance structures and how independent board members can help families navigate complex decisions while maintaining healthy relationships.

Key Takeaways

• • Family businesses operate at the intersection of family and business
    • Each system has its own dynamics, and when combined they can create strong alignment and/or significant conflict.
    • Successful family businesses learn to balance emotional family relationships with professional business decision-making.

• Understanding roles is critical to effective communication

• • • Family members may simultaneously act as owners, executives or board members.
    • Recognizing which “hat” someone is wearing during a conversation helps keep discussions productive and focused.

• Governance becomes more important as businesses move across generations

• • • As ownership expands from founders to siblings and eventually cousins, decision-making becomes more complex.
    • Formal governance structures help maintain alignment and clarity as the number of stakeholders grows.

• Independent boards can strengthen family businesses

• • • Independent board members can provide strategic, objective perspectives and expertise that may not exist within the family.
    • A strong board supports management while also representing the interests of the family shareholders.

• Communication is the foundation for long-term success

• • Families must be willing to have open and sometimes uncomfortable conversations about strategy, succession, and expectations.
  • Strong communication allows family businesses to navigate complexity and sustain the business across generations.

Quotes

“Ownership doesn’t constitute a board seat. That goes back to ‘what are the needs of the business’ and let’s make sure we have the right people in the room.”

Regarding a family member serving on the board of a family-owned business “You have to be able to be comfortable being uncomfortable.”

“You’ve got to really find true independents that aren’t going to be yes men or women to the CEO or chairman of the board.”

Regarding the resistance to a board of directors: “The biggest opposition or fear that I have heard… is the fear of loss of control.”

Links

The Family Business Consulting Group

Boards and Family Business: What Could Go Wrong?

Family Business Health check

Book – So, You’re in the Family Business: A Guide to Sustainability

Guest Bio

David Karofsky is a principal consultant with The Family Business Consulting Group, specializing in advising family businesses about the challenges and opportunities inherent to the family business. His client work is focused on building alignment around communication, executing the transition of ownership and leadership, conflict resolution, strategic planning, and forming governance structures for family businesses.

His interest in family business consulting began with his course work in family business dynamics at the Cambridge Center for Creative Enterprise. David’s work helping corporate executives develop superior listening and communication skills was honed by his professional training in executive team building, strategic decision making, effective communication, managing people, matrix management, and performance enhancement.

Prior to working with FBCG, David worked in his own family business consulting practice with his father for eight years. The father-son team are the authors of So You’re in the Family Business: A Guide to Sustainability. In addition, David was vice president of marketing for a software start-up where he helped launch the company and raise over $10 million in funding. David also worked at EMC Corporation for eight years holding various corporate roles including managing operations for worldwide marketing.

The recipient of multiple achievement awards, David has been a guest speaker internationally and is a mentor to current and former MBA students at Northeastern University’s Graduate School of Business and serves on the Marketing Career Track Advisory Board. He is a founding member and former chair of the Boston chapter of the Young Presidents’ Organization’s Young Adult Forum, member of the Family Firm Institute where he holds certificates in Family Wealth and Advanced Family Business

Advising with Fellow status, member of the Board of Directors of the Rogers Foam Corporation and a former member of the Executive Board of Directors for the Men’s Associates at Hebrew Senior Life.

Transcript: 

Joe: [00:00:00] Hello and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. Twice a month, On Boards is the place to learn about one of the most critically important aspects of any company or organization; its board of directors or advisors, with a focus on the important issues that are facing boards, company leadership, and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it means to be an effective board member and how to make your board one of the most valuable assets of your organization.

Joe: Before we introduce our guest, we want to thank the law firm of Nutter McClennen & Fish, who again sponsored our most recent On Boards Summit in their conference center in the Boston Seaport. [00:01:00] Nutter has been an incredible partner with us in every way. We appreciate all they’ve done to support this podcast.

Our guest today is David Karofsky. David is a principal consultant with The Family Business Consulting Group, specializing in advising family businesses about the challenges and opportunities inherent to the family business.

Raza: Prior to working with FBCG, David worked in his own family business consulting practice with his father for eight years, and the father-son team are authors of “So, You’re in the Family Business: A Guide for Sustainability.” In addition, David was vice president of marketing for a software startup where he helped launch the company and raise over $10 million in funding.

Joe: David has been the recipient of multiple Achievement Awards, has been a guest speaker internationally and is a [00:02:00] mentor to current and former MBA students at Northeastern’s Graduate School of Business, and he’s a member of the board of the Rogers Foam Corporation. David, welcome and thanks so much for joining us today on On Boards.

David: All right, guys. Well, thank you very much for having me. It’s a pleasure to be here. I got to say I’m really looking forward to this conversation. It’s been on the top of my mind for a while. I’m frankly honored to be able to sit here and be on this podcast because this podcast is legendary and, I’m excited to be here with you.

Joe: Let’s cut it right now and just publish it. Thank you so much for your really kind words. We really appreciate it and we’re thrilled to have you today. So, among the really interesting things about your background is that you come from a family business. We don’t talk a lot about background so much, but in this case, it’s so relevant to what you’re doing. It’d be great to just talk about you and your father and how you evolved into where you are now and now [00:03:00] with the advent of your son also joining.

David: Sure. So, in fact, my exposure to family business even started before I worked with my dad. So, my father was a third generation family business owner of our family’s wholesale wallpaper distribution business, which started in 1915 in downtown Boston on Summer Street.

Joe: Oh, my goodness. 

David: Yeah, so my great-grandparents, my grandmother’s parents, they were wallpaper hangers. My great-grandfather was a wallpaper hanger in Russia. They came over in 1915, and my great-grandmother was this very entrepreneurial woman, and she opened up a retail wallpaper store, and she sold it and he hung it. Then my grandfather, he was the in-law, but he took it over and turned it into distribution and then my dad joined my grandfather and they turned it into one of the largest wallpaper distribution facilities in New England and they had a couple of distribution facilities in a couple of different locations.

I was always exposed to the [00:04:00] world of family business growing up. As a kid, I would go there and probably sit behind my dad’s desk and goof around, and then as I got older, I worked in the warehouse a little bit. Eventually, the whole industry changed and my dad sold it in 1988, I was 18 years old, so I never really fully worked in it, but he sold that business and then went back to school, got his Master’s in counseling, and then started Northeastern University’s Center for Family Business in 1990.

Joe: So, he was one of the founders of that whole program?

David: He did found it, yes. Northeastern was looking to create a center. The whole world of family business consulting and family businesses was really growing, and so Northeastern was looking to start a center and they got connected with my dad and he founded it, and then he was the director for the first 14 or 15 years.

Then he started consulting as a byproduct of that, he was able to start working and consulting with families through Transition Consulting Group, his business, and then I joined him in [00:05:00] 2008, 2009 after I had a whole career doing a bunch of other stuff. Then he and I had a good 8- to 10-year run together until he retired in 2018 and I merged my practice with The Family Business Consulting Group.

Joe: When did your son join you in your business? 

David: Yeah, so this is really very, very cool. So, Adam is now the third-generation family business consultant. I think he might be the only third-generation family business consultant out there, let alone us being a third-generation family business consulting practice. That I will bet my life that we are the only third-generation family business out there. 

Joe: I think it’s tough to challenge that.

David: I don’t have data, but I’m going to go on a hunch. I think it’s pretty good.

Raza: It’s still amazing. It gives a different meaning to understanding the problem yourself so well that you are able to help people in a meaningful way. Speaking of that, David, talk about what are the type of things that multi-generational family businesses [00:06:00] need that you and your consulting practice is able to help.

David: So, family business, well, it’s been around forever. If you think about Europe or even think about the United States and the farming businesses, and it was all family owned and operated, and the more kids you had, because you need more people working on the farm, and how it is passed down through primogenitor, in the sense of it was always handed down to the oldest son. So, there are generations and generations of stories of family businesses.

What is unique and what really hasn’t changed is we live at the intersection of family and business and take either one independently, it can be difficult, families can be difficult. There isn’t a family that doesn’t exist, including my own, that doesn’t have its challenges, and anybody who says differently is kind of full of it. 

Joe: No one will argue with that last statement.

David: It’s true. We don’t always want to admit it, Joe, but it’s true. It is the fact that it is real. And then you take business alone without family, that has its own [00:07:00] unique set of challenges, and every business has its challenges. When you put the two together, it can be the most amazing thing in the world when the families are all firing on all cylinders and we’re working together and we’re in conjunction and we’re in alignment with strategy and governance and all of that.

It can be extraordinarily difficult when you don’t have that alignment, and that’s kind of the world I live in at times, it’s helping families get aligned on a strategy, get aligned on succession planning; how do we pass this business from one generation to the next and how do we pass ownership down to the next generation, on top of your area of expertise, how do we build governance into family businesses and how do we create boards; either boards of advisors, boards of directors, whatever the family may need, but governance is such a critical component to having a successful family business. So, those are kind of the main areas that I live in, so to speak.

Joe: So, one of the things that you said is that you seek to [00:08:00] facilitate conversations that can be difficult for family members to have without help. I thought that was a great way to talk about it. Why don’t you explain a little more about what kind of conversations you’re having and how you go about introducing it and facilitating those difficult conversations.

David: Whether you go to high school, college, or postgraduate degrees, it’s never in how do you communicate effectively, it isn’t always about the practice of accounting or finance or sales or marketing or operations or whatever it might be, it’s how you run the company.

But at the end of the day, no matter what business you’re in, you’re in the people business, and when you’re with families, learning how to effectively communicate with each other, and I always say we have to wear different hats; am I the CEO? Am I the father? Am I the board member? Am I the owner or am I the brother or the son or daughter or uncle, whatever it might be, and we have to learn how to separate the different hats we wear in order us to be effective in the [00:09:00] business.

One of the things I do a lot with my families is just understanding what hat are you wearing in what particular conversation. If we’re talking a business strategy conversation, I’m not the brother, I’m not the son, I am the CEO or I’m whatever role I’m in. If we’re talking about compensation, I might be a bit of both. If we’re talking about how do we bring in the next generation, I might be a family member. So, it really depends on the type of conversation that we’re having because we have to be able to show up to those types of discussions in the right way.

Also, we have to learn how to, in some ways, separate how we may feel about each other as family members and just think about how we think about it and treat each other as professional people within a company setting. That’s not easy, it’s impossible. Frankly, what I’m asking at times it’s impossible to completely separate the two, but you can manage them effectively, and that’s often where I live, it’s helping these families figure out how do we have these difficult conversations without being [00:10:00] difficult.

Raza: One of the uniquenesses in that intersection of business and family that you mentioned about family-owned and family-held businesses is continuity, longevity, succession, and things that go along with it. And what you alluded earlier, boards and governance then plays a very, very important role in building that.

The other thing that really strikes me always is that the unbundling of things, the separating of things into different buckets, rooms and way of thinking so that the clarity of communication is facilitated by the role and what you’re talking about, I think it’s a really fascinating area. 

David: I agree with you that it is critical, and I’ll talk to the role of governance and why I think it’s becoming a topic that is increasingly growing within family businesses and I’ll tell you why. As you go down the generations in a family business, you go from one [00:11:00] generation down to the second, the third, first of all, often ownership itself gets more distributed. So, you go from a single-owner founder, maybe it’s a father or a mother, maybe it’s a couple, and then you get into the second generation where they bring in the kids and we call that kind of the sibling dynamic, and then you get into the third generation, which we call the cousin consortium.

Siblings grew up in the same house, most likely similar value systems of their parents, so on and so forth. When you get into cousins, they didn’t grow out in the same house. They may not have even grown up in the same town, let alone the same state or country, and you get a distributed model of both values and you also get it distributed in terms of just the sheer number of potential owners and who owns what percentage, and you go from equal percentage with one or two to all of a sudden, there could be 20 or 30 owners, and you get a very unbalanced ownership dynamic in terms of percentage. So, the board has to play a critical role in terms of what’s the voice of ownership [00:12:00] versus what’s the voice of management, and the board sits in between those two and has obviously a fiduciary responsibility, but also has to help management be successful.

Joe: Do you use the three-room, or it could be four-room for some people, model. Do you have some chart that you use as you’re explaining the separation of power, so to speak?

David: There’s a couple. So, John Davis, who’s kind of a legend in the world of family business consulting at Cambridge, came up with the concept of the three-circle model, which talks about ownership, management and family. Banyan, which is another really strong family business consulting firm out Boston, they have this four-room model that they have developed in conjunction with Harvard.

My father and I actually developed a model called the multi-roles model, which looks very similar to the four-room model. It looks at the three circles that John originally created and then we added governance, and so we use the multi-roles model when talking about it because when you add that extra dynamic of [00:13:00] governance, the dynamic exponentially gets more complicated in some ways because you go to actually 15 different possible relationships when you have the four key concepts of family, shareholders, board and management, there’s 15 different potential relationships there.

So, visually, I will use the multi-roles model to help show a client what that looks like, and all of a sudden you might be somebody who’s wearing all four hats or you might be somebody who’s just wearing one of the four hats, so it kind of depends. So, yeah, I use some visuals around that, Joe. 

Joe: Yeah, I think that however you do it, whether it’s the original model, the Banyan model, and by the way, they were on our show a few years ago, too, talking about their book, fantastic book.

David: Yeah. Josh Baron, you may have had, I don’t know. He’s a super, super guy.

Joe: Yeah, Josh and …

Raza: Rob Lachenauer.

Joe: So, Josh and Robert were great. It doesn’t matter which version you use. I think trying to really [00:14:00] communicate the importance of these different roles to me is one of the most fundamentally important things you do. I’m curious in looking at your evolution of family business boards, you have paper board and then you have family-only board. And my question to you, is a board where everyone is a family member actually a board or is it something else like a family council?

David: It’s a great question. We look at governance in kind of two frameworks. There’s the family. I’ll talk about that for a second, not business, but just the family. The governance of being in either a high net worth family or a family in a family business that has multi-generations, we often will create a family council. That is governance and their job is to govern the family. It could be education, could be family assemblies, could be the annual family reunion, who knows what.

Then you’ve got business governance, which is a board of advisors, board of directors that’s there to govern the business of the business, [00:15:00] and that’s a situation where it may start with kind of this paper board, a founder, it’s relatively informal, they make all the decisions, then you get into generation two and all of a sudden you’ve got a couple of family members. So, we start to formalize it a little bit and you’ve got this family board and they’re working together to make some governance decisions.

Then when you start to get into G-2, further down into G-3, obviously, as I said, ownership gets more distributed, gets more complicated, then we start often to look and we work with families who actually want to institute either a real formal board of advisors or an actual fiduciary board of directors, which has a combination of some family members and then obviously independent board members as well, so the kind of the formality of governance evolves as the generations of the business evolve as well.

Joe: I would just say I think any configuration where people are owners getting together to talk about the business can be productive. [00:16:00] I look at a family-only board as really a family council because in my view, until you have outside perspectives, it’s still a family.

And I think it makes it, maybe I’m curious what you think about this, easier to think about the separation when there are outsiders, independents, non-family members on the board so that if you have a family council and the family are the only members of the board, it’s hard to really separate the family stuff from the business stuff because it’s the same people talking about it. What do you think of that?

David: I absolutely agree with you. I do think that in the early, early, early stages of a family business, they look very similar to that, to what you’re describing. When I get hired to start to formalize governance and I ask them, “Are you ready for a board of directors?” And they say, yes, and I say, “Well, let me ask you a couple of questions. One, are you really ready to hear advice from independent people [00:17:00] outside of your business who may not know your business as well as you do and may actually offer different thoughts than you do, are you willing to take that advice? You don’t always have to act on it, but are you willing to listen and hear the advice? Because if you’re not, then frankly don’t waste your time with a board.”

Joe: Right.

David: So, they have to answer and they have to say yes, absolutely. And then the second question I ask is “Okay.” I’m about to age myself so you guys will know my reference, “Don’t go through your mental Rolodex.” My son has no idea what a Rolodex is. “Don’t go through your mental contact list.”

Joe: For our young listeners, it’s a word from the 20th century that doesn’t apply anymore.

David: Exactly, but it’s like, “Don’t go through the mental Rolodex of, ‘Well, I play golf with this guy and he’s great. He runs a company or I served with this guy.” It shouldn’t be necessarily those people. You’ve got to really find true independence that aren’t going to be yes men or women to the CEO or chairman of the board. You truly want independence. And [00:18:00] so, I always start with, “What’s the mission and purpose of a board? Let’s build the charter a little bit. Let’s understand why even create a board? What are the needs of the business today, at what stage? Where are you in the growth and evolution of the business? So, let’s make sure we’re putting the right people on the board to serve the needs of the business and the shareholders.” I always believe it’s important to start with that mindset.

Raza: David, do you find resistance, or let’s call it digestion period and delay, for somebody getting to that point where the answer really truly is yes.

David: I do. And often you’ll hear the resistance of, let’s assume I’m talking to four owners, just to keep it simple, they own the business 25% each just to keep the number easy. All four owners may think they deserve to be on the board because they’re an owner. 

Raza: Mm-hmm.

David: And this is where I go, “Well, hey, time out for a second. Ownership doesn’t constitute a board seat.” Maybe two of the owners work in the [00:19:00] business and two of the owners, they’re just investor owners, they’re not really working the business.

Raza: Yeah.

David: It may not be appropriate for all the owners to sit on the board, so we have to understand that. Like I said, ownership doesn’t constitute a board seat. That goes back to what are the needs of the business and let’s make sure we have the right people in the room and that we’re not pushing ownership agendas in the boardroom because that’s not healthy.

Joe: Great way to look at it really. Let me ask you this, why do you think now family businesses are more fully embracing the idea of board governance and more formal governance generally, what’s driving the trend?

David: I think there’s a couple of things. One, I think family businesses are more open to outside advisors, period.

Joe: Why? Don’t they still think they know it all?

David: I think now it’s the Gen X generation who’s really leading these businesses. I think the generations are more open to outside counsel [00:20:00] than previous generations were. I think their access to resources, obviously, you can’t even compare the two, it’s so significantly larger their access to resources, their access just to intelligence, period, is so much larger.

I think their mindset that “it’s okay to ask for help and we don’t always have to have the answer” is more accepted today than in previous generations, and I think that’s one of the things that’s driving it. And now you take that just from an advisory standpoint, whether it’s a consultant like me, attorneys, accountants, whatever, financial advisors, now you throw that into the governance section and go “If I can take advice from my attorneys, why not create a board and seek advice from truly independent professionals that can really serve the interests of the business?” That’s why I think it’s growing. I think people are more open to third party feedback than they have in the past. 

Raza: Hopefully, it’s also partly the realization that that is an important step for them to have continuity, professionally-run organization, that can go on [00:21:00] for a longer time and they can benefit from it a longer time.

David: Well, Raza, that’s an interesting point. One of the things I’ve been reading a bit more about this whole concept is around these evergreen companies, and family businesses are evergreen companies, they want to last for generations and create legacy.

Not always going to last forever. Like, again, my father made the decision, a difficult one, but he sold our family’s business in a third generation. It was the right thing to do, but he didn’t go into it thinking that he was going to do that. But inevitably, family businesses generally want to sustain generation to generation, to generation, these evergreen companies. In perpetuity, I don’t know, who knows? But the fact is, that they realize that governance can be extraordinarily useful tool in helping to perpetuate a family business beyond two, three, four generations.

Joe: I totally agree. Could you talk about in what important ways do boards, whether they’re boards [00:22:00] of advisors or fiduciary boards, help family businesses survive across generations.

David: I think one thing is if you just look at the governance structure, as I said earlier, boards sit in between ownership and management, so that alone creates a very healthy dynamic between the owner’s voice and what management needs to do to run the day-to-day business. When you are missing the board, all of a sudden, the owners and the management, it collapses in terms of who makes what decisions, who has what voice, who gets to do whatever they may do in the business, where do owners sit.

When you all of a sudden start to implement more formal governance structures, including a board, you’re educating the ownership and you’re professionalizing in some ways the ownership structure as well as the management structure in the board to allow family businesses to understand what lane are they in, and that increases likelihood of success. Just structure alone, forget about who’s sitting on the board. [00:23:00] Structure alone helps perpetuate success there because now owners think of themselves as owners, not as always as operators.

The other piece, when you put in a really strong board, they have two main objectives. One is to represent fairly the entire shareholder group. They’re a fiduciary to the shareholders. Regardless of whether you own 20% or 80%, a good, healthy board is a good fiduciary. So, all of a sudden now ownership feels like they’re being supported by another organization, an entity within the structure.

Number two, their job is to support and help and allow the management team to be successful, and so the management team in a healthy board, you’ve got the CEO. Ideally, he or she, they’re calling the board not weekly per se, but they’re talking to them hopefully a couple of times a month and maybe it’s a couple of specific board members. It could be the chair who may be the same person, it depends, but they’re [00:24:00] interacting with a set of people that isn’t management, and you guys all know that being a CEO can be a very, very lonely place to be. It can be one of the most lonely places to be in a business, period.

You can’t always turn to your management team when things are going wrong because it might be with the management team where the struggle is. So, to have a board as a resource to be able to bounce ideas and think about strategically with is hugely beneficial and they hold a level of accountability. The board’s job is to hold management and the CEO, in particular, accountable, and so you’ve got some checks and balances that without a board, it’s a little looser than what you might want to have.

Joe: The accountability factor is absolutely critical, and it doesn’t exist really if you only have family, it’s just hard to hold your brother, your sister, your son, whatever it might be accountable. It’s easier for outsiders in the right circumstances to do that.

Raza: And I think in implicit in this, maybe the board does also feel it is part of their job [00:25:00] to keep this organization, this business be sustainable, running, growing healthy for a long time. Implicitly, it also becomes their thought process as well.

David: Yeah. We call them a performing board, not necessarily a healthy board. A performing board, every family business in terms of what decisions a board makes is going to be different. Some family, some boards have kind of a lot of decision-making power. Some boards have less decision-making power, and that’s okay. I always say there’s no right or wrong in a family business. You got to do what feels right to this family, to this business, and to this ownership group.

But boards often will make decisions on strategy, on budget, on distributions, and on various pieces, certainly hiring and firing of a CEO, particularly if it’s an independent CEO versus a family CEO, performance metrics. They’re there on that accountability factor, but they’re also there to help make good decisions [00:26:00] and set policy that creates a healthy business.

For example, take a distribution policy, there are many family businesses where the business is there to kind of feed and provide for the family, and there’s nothing wrong with that, like it’s all the more power to you. 

Joe: It’s a good thing. It’s a beautiful thing. 

David: And also understanding that it can’t be the family’s piggy bank either, that we have to know that we got to have a certain level of operating income or operating expenses. They have to be able to manage the operations of the business. Some businesses are more capital intensive than others and need more cash available. Some are less. It all depends.

Healthy distribution policies, for example, can be set based on a certain number of metrics, based on profitability, based on cash needs of the business, whatever it might be, and to set a good distribution policy that the board adheres to and kind of holds the family and the ownership accountable to, in many ways can be a very good thing because now the decision sits on the board. It’s not sitting [00:27:00] on any one family member, and it’s not sitting in the ownership seat, it’s sitting at the board seat, and some families want that because it almost protects the relationship side and takes the family out of it. It’s a business decision. Just like you would in a publicly-traded company and whatever firm a publicly-traded company is in terms of what they’re doing for distributions, guarantee you there’s a formula to it. They’re not just doing it willy-nilly, that’s for sure.

Joe: So, given all of the things you’ve said, which I agree with, as to why governance is so impactful in family companies, why aren’t more families willing to do it? Because you can look at your friend’s company or whatever your neighbor’s company, you could see it happening, if they’re fortunate to have someone as good as you come in and talk about this, and yet a lot of families just decide, “Well, we’re going to leave it the way it is,” despite the compelling evidence.

David: Well, I think it’s growing. I can confidently say that probably less than 50% of [00:28:00] family businesses today have an actual fiduciary board in place, and that’s a pretty easy stat to throw out. It’s definitely less than 50%. I do think it’s growing. To me, the biggest opposition or fear that I have heard, I’ll talk about opposition, is the fear of loss of control, “i don’t want some group of people telling me what I can and can’t do. This is my business. I founded it. We’re doing it. No one’s going to tell me how I run this company.” That’s the number one piece.

I will say it is a perceived loss of control. It is not an actual, and the reason why I say that is at the end of the day when everything is said and done, the shareholders are the ones who choose the board and the shareholders have the right to hire and fire board members. It’s not that they’re not yes people, but if they’re not performing, you can manage them out. You can manage them off the board. At the end of the day, the shareholders have the ultimate control. You get to choose A, who’s on the board, and B, the ultimate decision, do I sell or not to, that doesn’t sit with the board. The board may [00:29:00] advise on that, but that’s going to sit with the ownership most likely.

Joe: As you know, you can add to the shareholder agreement other limitations on what the board can do. Your point is, the family can decide exactly how much power or how little, what restrictions it wants the board to have. So, one size doesn’t fit all, especially in a family, but to say it’ll control my company or people are going to tell me what to do, it’s unfounded fear. I agree with you.

David: Yeah, it’s an unfounded fear, but it’s real and it’s understandable. I think there’s this play for control. I always ask often in a family business, like what does ownership even mean? Particularly, if you’re not getting distributions, it’s not creating any kind of liquidity or cash infusion into your life, what does ownership even mean? Because the only time, theoretically, that you might get a return on the investment is if the asset sells, so now it is not about equity, it’s not about money, it’s about [00:30:00] control.

Understandably, in many circumstances, people don’t want to have that loss. That’s perceived, again, loss of control, which ties to the fear we’ve been talking about, and I think sometimes this concept of relevance comes up a lot in my work, particularly when I’m doing succession planning and I’m helping a business or family pass it from one generation to the next, the idea of relevance for the leading generation who’s starting to kind of exit out, they don’t want to lose that. It’s often their identity and they don’t want to lose that.

So, does a board potentially impact that? Yeah, maybe that’s the place for them to go too, like maybe the opportunity is create the board and now they still have a place to go. Who knows? But those are the kind of the big reasons. Joe and Raza, where I hear angst or hesitancy around starting a board. They don’t want to hear the advice of others, they’re not ready for that, and this fear of loss of control.

Raza: David switching gears a little bit, [00:31:00] now, let’s imagine that it has been actually very successful and now we’re at G4, G5, G6. The law of multiplicity says that now the number of shareholders, children’s family members, is kind of growing exponentially, especially if everybody has a lot of kids. Talk about those scenarios and what matters in those like really successful and longer running generational family offices.

David: So, some family businesses, it kind of depends on even what the shareholder agreement says in terms of how ownership might even get passed, because the oldest family business of record is the Avedis Zildjian family that’s actually in Norwell, Massachusetts, 15 generations. They don’t have oodles and oodles of owners. They have I think two or three, four owners right now because they have done what we call pruning the family tree. They have constantly pruned that tree. So, the ownership is not really as distributed. That is rare in my experience. [00:32:00] Often you may see more of the very large distributed business.

I’ve worked with families that have literally hundreds of shareholders. The challenge around that is what is the role of a shareholder, both in terms of voting control, are they voting per person versus kind of percentage of ownership. That’s a big topic that needs to get talked about, particularly when you get into large ownership and very distributed. Some owners may own 10%, some owners may own 2%.

There’s kind of the control, what is the role of an owner has to be really clearly defined, so a lot of the work I do with these five, six, seventh generation business is really understanding what’s the role of ownership and how do we allow owners to perpetuate the business and be stewards of the family business, which is so critical, yet not impact the business to allow it to do what it needs to do to operate. 

Raza: David, what would be the best advice for looking at the [00:33:00] next 20 years for what a successful family business might look like?

David: So, I think it’s a great question. The bottom line that I always tend to start with a family and I end with a family, is it comes down to communication. Real estate is like location, location, location, family business, communication, communication, communication. You’ve got to be able to have and be comfortable having difficult, not every conversation’s difficult, but you got to be able to be comfortable being uncomfortable is what I say and learn how to have at times challenging conversations. Because if you’re communicating well, and it doesn’t mean you’re always agreeing with each other, but if you’re communicating well, that is such a foundation to allow a family business to be able to have more and more difficult conversations as the business gets more and more complex.

Raza: Very well said.

Joe: David, I couldn’t agree more. Communication is king. Thanks so much for being with us today. It was a great conversation.

David: Well, [00:34:00] thank you guys. It was my pleasure. I have been waiting to get on this for a while. I’ve been following you guys for years and I’m just so excited that I had the opportunity to be able to have a conversation with you guys today. I had a blast and thank you so much for being able to do this.

Joe: Thanks David, and thank you all for listening to On Boards today with our guest, David Karofsky.

Raza: Please visit our website at OnBoardsPodcast.com. That’s OnBoardsPodcast.com. We’d love to hear your comments, suggestions, and feedback. And if you’re not already a subscriber, please be sure to subscribe at Apple Podcast, Spotify, or wherever you get your podcast and remember to leave us a five-star review.

Joe: And please tune in for the next episode of On Boards. Thanks.