Often, the death of the owner-operator of a family business can disrupt business operations (or can even lead to business failure), particularly if there is confusion or discord among the next generation owners. A thoughtfully composed governing board, including independent directors, can mitigate this disruption and help the business maintain its value as it adjusts to new leadership. Therefore, the estate plan for a family business owner should include amendments to governing documents and owners’ agreements to provide for an appropriate governing board to direct the family business when ownership passes to the next generation.

Many family businesses are led by a single founder or other senior family member who directly or indirectly controls the voting stock and serves as chief executive officer (for purposes of this article, the “Principal”[1]). When the Principal exits the business, especially if the exit is unexpected, the business may struggle to maintain successful operations during the transition to new leadership. This is particularly true when ownership passes on to multiple family members who may be unprepared to lead the business. However, a well-constituted governing board can steward the family business through succession and make it possible for multiple owners in the next generation to participate in the business or otherwise benefit from the family venture. Therefore, every time you create or update an estate plan for a family business owner, especially when you are working with a family business Principal, you should review the business’s governance structures and the documents that control them.

A.   The Disruption of Succession.

When a family business leader exits ownership, the exit can be disruptive, even if it is a planned exit. Family business Principals and other strong senior leaders can leave a power vacuum when they retire, and sometimes the successor owners disagree strongly about the business’s future. Consider the public succession dispute currently affecting the Murdoch Family and News Corporation.[2]

A family business Principal can be hard to replace. Often, they have a unique role in the family and in the business. In many cases, they have spent decades developing their knowledge of the industry, solving problems, evaluating opportunities, building relationships with stakeholders, and making decisions about how family members participate in the business. When they retire, the business and its owners need time to adjust to new executive leadership.

The disruption can be even worse if the Principal’s exit is unexpected. For example, if the Principal suffers a decline in mental faculties, a conflict may arise in the family about whether the Principal should be forced into retirement and who may exercise the right to vote the Principal’s stock. The disputes that arose when Sumner Redstone announced his retirement from Viacom in 2006 involved some of these issues.[3]

If the Principal dies unexpectedly, his or her death may have additional implications for the business. For example, it may trigger acceleration of business loans or loss of franchising or distribution contracts. The business also may have to help the family raise cash for payment of estate taxes. When Dhirubhai Ambani, the founder of the Reliance Group, unexpectedly died in 2002, his sons engaged in a decade-long battle for control that created many problems for the business over the years.[4]

B.    Succession Planning is Estate Planning.

When a family owns a business, it often is the family’s most valuable asset. When you assist the Principal with estate planning, you should be thinking about how to preserve that value as ownership passes under the plan, either during the Principal’s lifetime or after the Principal dies.

Sometimes, it might seem that succession planning is premature, especially if the next generation family members are still minors. Much estate planning, however, is predicated on the idea that it is best to plan for an untimely disability or death because a person cannot be certain that he or she will live to retirement age or statistical life expectancy. In fact, if a family business Principal has minor children, it is even more reason to ensure that the business can maintain its value upon an unexpected succession event (i.e., the disability or death of the Principal).

At other times, it may be tempting to assume that the family or the business is working out a succession plan on their own. For example, it seems like the Principal is in the best position to identify successors and train them to take over. Unfortunately, entrepreneurs and successful CEOs rarely do that.

As the estate planner, therefore, you may be the only person who will initiate a succession planning conversation for a family business and then remind the Principal to update and improve the succession plan over the years to come.

C.   The Benefits of a Governing Board.

A governing board (i.e., a board of directors, if the business is a corporation, or a board of managers, if the business is a limited liability company) may be the single most effective succession tool you can suggest. This is because managing risk and planning for leadership succession are core responsibilities of a governing board. Further, if there is an unexpected succession event, the board will be responsible for appointing and overseeing an interim or permanent successor leader.

1. Role of the Board.

Sometimes, you may have to remind family business owners how a board fits into corporate governance. Under the corporation law statutes of most states, “[A]ll corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation.”[5]

The size of the board is mandated in the articles of incorporation, the bylaws, or in a resolution passed by the shareholders. Typically, the shareholders meet once per year to elect directors and grant each of them a one-year term. In practice, the board appoints the officers and key executives and grants them authority to manage the company’s day-to-day business. Thereafter, the board meets four to six times per year (more often in a crisis) to oversee the officers and executives who are managing the business.

The board is primarily concerned with annual performance; longer-term objectives, concerns, and economics; and transactions that arise outside the ordinary course of business. For example, the board approves annual budgets and assesses financial results at the end of each year, approves long term business planning, ensures that staff is addressing risk management, holds corporate leadership accountable, and manages the corporation’s leadership succession planning.

Although the statutory models for governance of LLCs are less formal and permit governance and day-to-day management to be collapsed into the role of “manager,” LLC owners may adopt a corporate-style governing board that is separate from the managers of the company’s day-to-day business. By doing so, the LLC owners can make available to the company the benefits of governing boards described in this article.

2. Effect of the Board.

A good governing board can provide benefits to the family business in every part of its life cycle. At all times, a governing board can help the Principal and his or her executive staff be more disciplined and engage in best practices with respect to business management, business planning, analyzing financial results, managing human resources, managing risk, and planning for leadership succession.

When the Principal’s children are minors, the board can provide important leadership if the Principal suffers a disability or dies unexpectedly. In such cases, the board can respond to the crisis by appointing and overseeing non-family executives who will manage the business until it can be sold or until the children are old enough to decide whether they wish to continue to own the business as adults.

If the Principal’s children are old enough to start working in the business, they can serve as board observers or junior directors who attend board meetings and learn about key elements of the family business and how business decisions are made and evaluated.

When the children become co-owners, the board can help them make decisions that are fair to the whole family, can help hold them accountable for their responsibilities within the business, and can help them resolve disputes that might arise among them.

3. Who, How, and When?

Many family business Principals serve as a one-person board of directors and tend to oppose the idea of answering to a governing board of other people. They especially do not like the idea of independent directors “telling me what to do.”  They talk about the importance of having a single decision maker who is free to pursue his or her vision for the business. They consider boards to be inefficient and ineffective, and they sometimes cite the joke about a camel being a horse that was put together by a committee. At best, they wish to defer formation of a governing board until they are ready to exit.

Unfortunately, forming a governing board after the Principal exits the business will not address the disruption or crisis that may arise when the Principal exits the business (and it is not possible to say when that will be). Having a governing board in place and familiarized with the business well before a succession event occurs will be the most effective business continuation tool in a family business. Although this article refers to the disruption and litigation arising out of the exits of founders at News Corporation, Viacom, and the Reliance Group, those businesses might not have survived their crises if they had not had a governing board composed of experienced and independent board members who could continue to oversee business management while the family members were fighting for control.

It may help to remind the Principal that the governing board serves at the pleasure of the owners.  If the Principal controls the voting rights, the Principal can remove any or all the directors. After the Principal exits ownership, the next generation owners, collectively, will have authority to remove and replace directors. If the owners conclude that the board is unnecessarily constraining the leadership, creativity, and visionary talents of the chief executive, they can remove or reconstitute the board.

i. Independent Directors.

Sometimes family business owners are reluctant to involve independent directors. Thery do not want to incur the cost, and they are concerned about maintaining their privacy. These concerns can be overcome, and they do not outweigh the benefits that the right independent directors can bring to a family business.

Independent directors can provide new perspectives and diverse talents. Independent directors can open new networks or markets, and they can help elevate the credibility of next-generation leadership. Most important, independent directors can make decisions that are fair and objective about issues that directly involve individual family members. When owners are at odds, independent directors can help mediate the conflict, or, as illustrated by the examples cited above, maintain stability in the business while the owners seek to resolve their differences in court.

When a family business pays board fees to well-chosen independent directors, it usually realizes greater value in return, given the innovative ideas and relevant expertise independent directors can offer and given their ability to quite literally help save the business in a crisis. Also, directors have a fiduciary duty to keep board business confidential, and many independent directors will be willing to sign a nondisclosure agreement.

ii. Advisory Board vs. Fiduciary Board.

Often, a family business Principal will be more comfortable appointing an advisory board, rather than a “fiduciary” board (i.e., governing board[6]). Perhaps they like the idea that they can make decisions without obtaining the advisory board’s approval, and they can choose not to disclose sensitive information to an advisory board.

Unfortunately, an advisory board usually is not as effective as a fiduciary board. Advisory board members do not have a fiduciary duty to take their role seriously or to try to do their best, so advisory board members tend to be less prepared, less informed, and less committed to their role. Further, because an advisory board’s decisions are not legally enforceable, family members may be inclined to ignore them. An advisory board will be less helpful in a leadership crisis because it does not have the power to appoint a successor CEO or to offer compensation, stay bonuses, or other economic incentives to attract or retain key executives.

If you are working with a Principal who opposes use of a governing board until he or she exits the business, you could suggest a compromise position: The Principal could assemble and appoint an advisory board that will become a fiduciary board upon the Principal’s retirement, disability, or death.  In the event of a succession crisis, the governing board will spring into existence, but it will be composed of directors who have been carefully selected and who are familiar with the business and the family through their service on the advisory board.

D.   Mechanisms for Establishing and Maintaining a Governing Board.

For a corporation, the provisions that may affect the composition and authority of a governing board will be in the articles (or certificate) of incorporation, the bylaws, and the owners’ agreements (which may include shareholders’ agreements, voting agreements, or voting trusts). For an LLC, most of the provisions relating to a governing board will be in the operating (or LLC) agreement. These are referred to as the corporation’s or LLC’s governing documents.

To start the discussion about board composition with a family business Principal, it is sometimes most helpful to ask how the Principal thinks the board should be composed after ownership has passed to the next generation. Ask what combination of family board members and independent board members would be most helpful to support the next generation leaders and to protect the interests of the owners collectively. The Principal’s answer may change over time but that should not be a reason to delay decision making. The Principal can learn a lot about the utility of a board, and who should serve on it, by installing a board and experimenting while the Principal is running the business. (The Principal also should be encouraged to sit on the boards of other businesses to get a deeper understanding of how boards can operate successfully.)  The Principal is free to change the board provisions in the governing documents if he or she holds the voting stock.

In addition to considering board composition, the Principal should think also about who should have power to elect the board members. Under the statutes of most states, each director serves a one-year term, and each director is elected (or re-elected) by a plurality of the vote. [7]  This means that whoever holds a majority of the voting stock (either individually or as a voting block) may decide who sits in each seat on the board.  Under these default rules, the minority shareholders would have no say as to who sits  on the board.

For example, when the senior owners of a family business pass their shares to their children equally, they may vaguely believe that this will give them all some kind of pro rata representation on the board, but that is not how it works under the default provisions of most  states’ business corporation statutes.  Rather, children who form a voting block of more than 50% of the voting shares will be able to monopolize the board, or if opposing factions hold equal percentages of voting stock, they may be deadlocked and unable to elect directors.

To avoid these extreme results, the Principal can amend the company’s governing documents to do any of the following:

• Permit cumulative voting (i.e., rules that permit shareholders to aggregate all their votes onto one or two open seats, thereby ensuring that minority shareholders will be able to elect a minority of directors).
• Classify board seats to permit family branches or other constituencies (such as nonvoting shareholders) to elect directors to fill the classified seats.
• Permit any person who holds a threshold level of shares (such as 20%) to fill a board seat.
• Designate some seats to be filled by directors elected by the independent directors on the board.
• Establish a voting trust that authorizes one or more fiduciaries to exercise the shareholders’ voting rights.

In short, there are many ways to construct a governing board and design shareholder voting rights to satisfy the Principal’s wishes or best judgment for governance of the family business. Each time the Principal updates his or her estate plan, you should review the board provisions in the company’s governing documents and update them if the Principal has changed his or her ideas about succession. Also, make sure that the provisions of the Principal’s estate plan, such as whether voting shares will be held in trust and who will serve as trustee, are consistent with the company’s governing documents.

E.    Conclusion.

As the estate planner for a family business Principal, you are in a unique position to ensure that the family business has an effective business succession plan. One of the best ways to do that is to help the Principal establish a governing board and elect well-chosen individuals to that board, including independent directors or managers.

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[1] Unfortunately, there is no one word in daily business parlance that neatly describes this role, so this article uses “Principal” as a defined term.

[2] See, e.g., Jim Rutenberg and Jonathan Mahler, “Six Takeaways About the Murdoch Succession Fight,” The New York Times Magazine (Feb. 13, 2025). 6 Takeaways About the Fight for Rupert Murdoch’s Empire – The New York Times

[3] See, e.g., Anna Sulkin Stern, “Pre-Death Litigation Plagued the Estate of Sumner Redstone,” WealthManagement.com (Aug. 19, 2020). Pre-Death Litigation Plagued the Estate of Sumner Redstone

[4] See, e.g., Mamta Badkar, “The Full Story of the Massive Feud Between the Billionaire Ambani Brothers,” Business Insider (May 26, 2011)

[5] Model Bus. Corp. Act §8.01(b).

[6] The terms “fiduciary board” and “governing board” can be used interchangeably. In this section, the article uses the terms “fiduciary board” to highlight the fact that an advisory board operates without fiduciary duties to the company or its owners.

[7] California’s corporation law statutes offer a notable exception because cumulative share voting for board seats in closely-held companies is the default rule. See, Cal. Corp. Code § 708. In most states, a corporation would not have cumulative voting unless it opted in.